Exclusive: Telecom Italia, Oi in talks as Brazil may ease rules - sources

Thu Jan 7, 2016 6:46pm EST
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By Guillermo Parra-Bernal, Tatiana Bautzer and Leonardo Goy

SAO PAULO/BRASILIA (Reuters) - Oi SA (OIBR3.SA: Quote), Brazil's most indebted phone carrier, has started talks with the controlling shareholder of rival TIM Participações SA over a merger, with discussions initially focusing on governance issues, two sources with direct knowledge of the matter said on Thursday.

The board of Telecom Italia SpA (TLIT.MI: Quote), which controls TIM (TIMP3.SA: Quote), and Oi Chief Executive Officer Bayard Gontijo are leading the talks, which are also centering on possible changes in Brazilian telecommunications industry rules that could favor a tie-up, said the sources, who requested anonymity to discuss the issue freely.

Oi is seeking a merger because it lags behind its three major rivals in Brazil's fiercely competitive wireless market, with 18 percent of subscribers. Gontijo has streamlined operations, cutting everything from payroll to air conditioning and selling a Portuguese unit to cut the company's 35 billion reais ($8.7 billion) in net debt.

In contrast, Telecom Italia has remained wary of selling or merging TIM, a strategic asset that contributes about a third of its revenue. A merger between the two would create Brazil's No. 1 wireless carrier and relieve pressure in a crowded market suffering from the nation's worst recession in a quarter century.

None of the sources said when the discussions between Telecom Italia's board and Oi began. The talks could establish the basis for a final proposal to merge TIM and Oi, although the value of a possible deal has not been discussed, the two sources added.

A third and a fourth source said that Oi's adviser on the process, Grupo BTG Pactual SA, could present a merger proposal for both companies before the end of January. The plan would entail the participation of billionaire Mikhail Fridman's LetterOne Holdings, through a $4 billion cash injection into Oi, the same sources said.

Whereas Oi and BTG Pactual (BBTG11.SA: Quote) want LetterOne to become a shareholder of the combined entity, Telecom Italia does not see the investment firm's involvement in the deal as necessary, the first source said. LetterOne has a seven-month exclusivity period for the Oi-TIM deal that expires in May.

Fridman, who made a fortune in Russia after the Soviet Union collapsed in 1991, has been actively investing in a number of industries recently, from telecommunications to energy. LetterOne oversaw $25 billion at the start of last year.   Continued...

People walk in front of a Telecom Italia Mobile (TIM) store in downtown Rio de Janeiro August 20, 2014. REUTERS/Pilar Olivares