Jan. 10 (Bloomberg) -- Telemar Participacoes SA, the owner of Brazil's largest fixed-line phone carrier, said it's in talks to take over Brasil Telecom Participacoes SA to gain control of almost two-thirds of the country's land lines.

Negotiations with controlling shareholders of Brasil Telecom, which has a market value of 13.8 billion reais ($7.85 billion), ``intensified'' recently, Rio de Janeiro-based Telemar said today in a regulatory filing. No agreement has been reached yet, and the price will depend on how the transaction is carried out, Telemar said.

The acquisition would create a company with 27.2 billion reais in sales and fulfill President Luiz Inacio Lula da Silva's ambition to create a Brazilian-owned business big enough to compete with Spain's Telefonica SA and phone companies controlled by Mexican billionaire Carlos Slim.

``It is a great opportunity for the company, making it more robust, competitive, with better muscle and scale,'' said Regis Abreu, a fund manager at Mercatto Gestao de Recursos in Rio de Janeiro, who manages 2 billion reais in stocks and bonds and doesn't own shares in the two companies or their units.

Morgan Stanley raised Tele Norte Leste Participacoes SA, a unit of Telemar, to ``overweight'' from ``underweight,'' citing a ``likely'' change in the company's share ownership structure and potential acquisitions.

Big Gains

Tele Norte preferred shares rose 5.28 reais, or 14 percent, to 44.10 reais in Sao Paulo trading, the biggest one-day gain in almost nine years.

Brasilia-based Brasil Telecom's preferred stock fell 1.73 real, or 6.1 percent, to 26.55 reais.

Combining with Brasil Telecom, the country's third-biggest fixed-line carrier, would also give Telemar national mobile coverage and let the company cut costs, Alex Pardellas, an equity analyst at Banif Investment Banking in Sao Paulo, said yesterday. Together, the companies would be worth as much as 30 percent more than the sum of their current market values, he said.

Debt reduction and a drop in borrowing costs are driving earnings for both Telemar and Brasil Telecom. Profit at Telemar has risen 35 percent in the past five years, compared with 7.4 percent at Brasil Telecom, according to Bloomberg data. Recently streamlined operations and a new mobile service allowed Brasil Telecom to more than double profit in the first nine months of 2007 from a year earlier.

Telefonica, Embratel

Earnings at Telecomunicacoes de Sao Paulo SA, Telefonica's Brazilian land-line unit, grew 13 percent in the same period, while net income at Slim's Embratel Participacoes SA, which mostly sells long-distance service, climbed 19 percent. Telefonica is the second-biggest land-line carrier in Brazil.

Telemar, which sells services under the Oi brand, offered 4.8 billion reais for Solpart, the holding company that controls Brasil Telecom, the newspaper Valor Economico reported today, citing unidentified people familiar with the negotiations. Citigroup Inc., Opportunity Asset Management and Brazilian pension funds control Solpart, the newspaper said.

The prices being discussed during the negotiations are only ``indicative,'' Telemar said in today's statement. The company didn't mention any figures or describe how a deal might be structured.

``How the acquisition will happen will determine whether this is good for investors,'' Abreu said. Both companies have complex share structures, and there are several ways the transaction could be arranged, he said.

Restructuring Scenarios

The most likely scenario is that Telemar will purchase Solpart, said Daniella Marques, another fund manager at Mercatto. To absorb Brasil Telecom, Telemar could buy out its minority investors by issuing shares to exchange for theirs, she said.

The two companies may reduce the types of shares they list, creating a single class of stock for each carrier, which will then be swapped, Marques said. They currently have at least nine classes of shares between them.

For the deal to go through, Lula must issue a decree changing the law that bars companies operating in different parts of Brazil from having the same controlling shareholders, Helio Costa, Brazil's telecommunications minister, said last year.

``The government will probably be doing this before the end of the month,'' Marques said.

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

Last Updated: January 10, 2008 15:56 EST