Feb. 28 (Bloomberg) -- Tele Norte Leste Participacoes SA, the phone company considering a takeover of rival Brasil Telecom Participacoes SA, said fourth-quarter profit increased 49 percent as borrowing costs fell.

Net income climbed to 911.5 million reais ($544.5 million), or 2.39 reais a share, from 613.3 million reais, or 1.61 reais a share, a year earlier, the Rio de Janeiro-based company, which does business as Oi, said today in a statement.

Oi, Brazil's biggest phone carrier, used cash to cut debt 45 percent, while record-low interest rates also reduced borrowing costs. Tele Norte's parent company said this month that it may spend as much as 5.2 billion reais to buy a controlling interest in Brasil Telecom, the third-biggest carrier.

``Our debt levels are now below the optimum level,'' Chief Financial Officer Jose Luiz Salazar said today on a conference call. ``We are being cautious because we want to be ready to take on more debt if any opportunity for acquisition comes up.''

Net debt dropped to 2.68 billion reais, while net financing costs declined 74 percent to 65 million reais. Revenue rose 0.9 percent to 4.48 billion reais at the carrier.

Oi's preferred shares rose 5 centavos to close at 44 reais in Sao Paulo trading. The stock has climbed 29 percent this year, compared with a 2.6 percent gain in the Bovespa benchmark stock index.

Billions in Investments

The company said it plans to invest 4 billion reais this year to modernize and expand existing land-line and wireless networks. That figure doesn't include acquisitions. The company had 6.7 billion reais in cash at the end of the quarter.

More than a third of the total investment will be used to start offering mobile services in Sao Paulo and to upgrade the existing wireless network to accommodate video and high-speed Internet, Salazar said. About 2.3 billion reais will be used to modernize and maintain networks, he said.

Acquiring Brasil Telecom would leave Telemar Participacoes SA, which controls Oi, with almost two-thirds of Brazil's land lines. Brazilian President Luiz Inacio Lula da Silva wants to create a phone company big enough to compete with Spain's Telefonica SA, Brazil's No. 2 land-line operator, and carriers controlled by Mexican billionaire Carlos Slim.

``The company has very strong cash generation,'' said Alex Pardellas, an equity analyst at Banif Investment Banking in Sao Paulo, who advises buying the shares. ``It's certainly getting prepared to make other investments.''

Net Beats Estimate

Net income exceeded Pardellas's estimate of 601.5 million reais. Earnings before interest, tax, depreciation and amortization rose 2.9 percent to 1.55 billion reais, trailing his estimate by 8 percent.

The number of land lines in service fell 1.2 percent to 14.2 million, Oi said. Mobile-phone subscribers rose 22 percent to 16 million, while high-speed Internet users increased 35 percent to 1.52 million. Operating costs fell 0.1 percent to 2.94 billion reais.

``The land-line business is stagnant and costs came in a bit higher than expected,'' said Luis Fernando Azevedo, an equity analyst at Bradesco Corretora in Sao Paulo.

Mobile users will rise to 18 million by year-end and high- speed Internet subscribers will climb to 2.1 million, the company said. Land-line customers will fall to 14 million this year, it forecast.

Brazil is considering changing its phone regulations to make way for the purchase of Brasilia-based Brasil Telecom, regulators said Feb. 19. Current law bars phone companies operating in different areas from having the same controlling shareholder.

Tele Norte operates mostly in Rio de Janeiro and the northeast and northern states of Brazil, while Brasil Telecom operates in the midwest and south.

To contact the reporter on this story: Romina Nicaretta in Sao Paulo at rnicaretta@bloomberg.net

Last Updated: February 28, 2008 16:53 EST