April 25 (Bloomberg) -- Telemar Participacoes SA, owner of Brazil's largest telephone company, agreed to buy the parent of Brasil Telecom Participacoes SA for 5.86 billion reais ($3.5 billion), creating a carrier that controls almost two-thirds of the country's land lines.

Telemar is paying 72.3 reais for each share of the parent company Invitel, or 44 percent more than yesterday's closing stock price. The purchase of the country's third-biggest fixed- line phone company would add 8 million land lines in service and 4.6 million mobile users. The new company will be called Oi.

The transaction, Brazil's biggest telecommunications deal since it sold off its telephone monopoly a decade ago, fulfills President Luiz Inacio Lula da Silva's ambition of having a Brazilian-owned business big enough to compete with Spain's Telefonica SA and phone companies controlled by Mexican billionaire Carlos Slim. The combined carrier would have 28.6 billion reais in sales and 22.2 million land-line customers.

``It creates a mega-company that will have a monopoly of several services in the areas it has concessions to operate,'' said Ronaldo Sa, a telecommunications analyst at Brasilia-based consulting firm Orion Consultores Associados. ``It will be good for investors, but not for consumers because they will lose one competitor.''

Ownership Plan

Under the plan, Brazil's Development Bank and three pension funds of state-controlled companies would own 49.8 percent of the new company, Telemar said today during a news conference in Rio de Janeiro.

Preferred shares of Tele Norte Leste Participacoes SA, a unit of Telemar, fell 1.34 reais, or 3.1 percent, to 41.80 reais in Sao Paulo trading. It was the stock's biggest one-day loss in almost two weeks. The Rio de Janeiro-based parent company isn't publicly traded. Brasilia-based Brasil Telecom's preferred stock dropped 2.32 reais, or 8.5 percent, to 25 reais.

Telemar agreed to buy 60.5 percent of Brasil Telecom Participacoes' voting shares, which comprise 22.3 percent of the company's total capital. It also made a voluntary offer to acquire as much as a third of Brasil Telecom's preferred shares, at a premium of 32.6 percent over the average price in the past 90 days of trading.

``The market didn't expect the voluntary offer,'' said Alexandre Garcia, a media and telecommunications analyst for Raymond James Brasil SA. ``Telemar will spend more to buy a larger stake of Brasil Telecom.''

Investors are adjusting the price of preferred shares to account for Telemar's offer and an interest payment due when the deal is complete, which may happen by year-end, Garcia said.

Seeking Approval

Telemar said it agreed to pay a 490 million reais penalty in case the transaction isn't approved by Brazil's telecommunications agency, known as Anatel. The company also offered Brasil Telecom stockholders 315 million reais if they agree not to file any complaints about the acquisition.

For the deal to go through, Brazil must change a law that bars companies operating in different parts of the country from having the same controlling shareholders. Luiz Eduardo Falco, president of Tele Norte Leste Participacoes, said on April 8 he expects the new rules to be ready in about two months.

The government also is likely to bar foreign investors from acquiring the company, said Orion's Sa.

Nationwide Coverage

Combining with Brasil Telecom gives Telemar national coverage. The new company will be big enough to negotiate lower prices with suppliers, Sa said. Together, the companies would be worth 10 percent to 25 percent more than the sum of their current market values, he said.

Brazil's antitrust regulator may impose restrictions on the purchase to protect competition, Sa said. ``The impact of the acquisition on competition will be the biggest problem,'' he said.

Falco said today that any gains in productivity ``will be passed on to the consumer.''

The new company's mobile-phone users will increase to 38 million in five years, Telemar said today. It also will raise the number of its high-speed Internet users to 12 million and its cable TV subscribers to 8 million.

Telemar currently operates in 16 Brazilian states under the Oi brand. It has 14.2 million land-line subscribers and 16 million mobile-phone users. Brasil Telecom operates in nine states and the federal district.

The new Oi also may expand outside Brazil. It expects to have 30 million customers in South America, Africa and Europe by 2013.

Telemar would remain the fourth-biggest mobile-phone company in Brazil after the merger. Vivo Participacoes SA, controlled by Telefonica and Portugal Telecom SGPS SA, is the country's largest wireless carrier. Tim Participacoes SA ranks second, followed by Claro, the mobile-phone unit of Slim's America Movil SAB.

To contact the reporter on this story: Heloiza Canassa in Sao Paulo at hcanassa@bloomberg.net

Last Updated: April 25, 2008 19:59 EDT