Nov. 6 (Bloomberg) -- Telecom Italia SpA, Italy's largest phone company, reported an unexpected increase in third-quarter profit and said it received an offer for its Brazilian mobile- phone unit.

Net income rose 3.5 percent to 880 million euros ($1.12 billion) from 850 million euros, the Milan-based company said in a stock exchange statement today. Sales gained 4.6 percent to 7.77 billion euros. Analysts had anticipated profit would fall to 767.5 million euros on sales of 7.72 billion euros, according to a Bloomberg survey estimates. Results benefited from financial income of 721 million euros, compared with 345 million euros last year.

``There's a little relief on margins in the mobile business'' and the offer for the Brazilian unit ``takes away a bit of uncertainty on that front,'' said Emanuele Vizzini, who oversees about $1.2 billion, including Telecom Italia shares, at Investitori Sgr in Milan.

Telecom Italia's expansion has focused outside Italy as its home market slows. It also runs fixed-line and wireless networks in Brazil and broadband Web units in France and Germany. Telecom Italia agreed to buy Time Warner Inc.'s AOL Germany unit in September, becoming Europe's largest broadband access provider, according to Milan-based researcher e-Media Institute.

New Services

To counter a decline in revenue from traditional phone calls in Italy, Telecom Italia is selling new services, such as the announced ``Super SMS'' messaging service that runs on cellular phones and computers.

Before today, its shares had declined 3.2 percent this year. The stock was the third-worst performer on the 24-member Bloomberg Europe Telecommunication Services index, which has gained 8.9 percent over the same period.

``In view of a very recent, unsolicited acquisition proposal the board has mandated senior management to negotiate the possible sale of the group's mobile activities in Brazil,'' Telecom Italia said in the release. The sale would ensure ``the financial flexibility needed to pursue its already announced industrial policies and, in particular, the opportunity to develop in the European market and to realize the new generation network at the domestic level.''

Management Reshuffle

Carlo Buora, chief executive officer and director general of Pirelli & C. SpA, resigned today to focus on his job at the phone company ``at an important time for the group's business.''

Pirelli & C. controls 80 percent of Olimpia SpA, which has an 18 percent stake in Telecom Italia. Last month Pirelli & C., Mediobanca SpA, Assicurazioni Generali SpA and the Benettons agreed to pull together their holdings in the phone company, becoming its biggest investor group with a 23 percent stake, to ``to ensure (Telecom Italia's) continuity and stability.''

Buora, 60, was named executive vice chairman of Telecom Italia in September, taking over most of former Chairman Marco Tronchetti Provera's organizational responsibilities. Guido Rossi was appointed chairman replacing Tronchetti Provera, who resigned after his plan to split off and possibly sell Telecom Italia's wireless division was assailed by the government and unions.

The plan marked a shift in strategy after Telecom Italia spent $26 billion to buy back its wireless unit last year. The integration yielded cost savings of more than 1 billion euros in 2005 and in the first six months of 2006, Telecom Italia said.

``Convergence between fixed, mobile telephony, broadband Internet and media content remains our strategic goal,'' the company's statement said.

The former state-owned monopoly said Oct. 25 it will shift the fixed-line access network into a separate unit. A plan to separate the domestic wireless business may have been shelved, analysts said.

Content Focus

Telecom Italia is seeking to increase its focus on Internet and media content, after signing deals with Sony Corp. and News Corp.'s 20th Century Fox to increase the offering available to its Internet and Web-based television clients.

In July, it hired JPMorgan Chase & Co. to seek buyers for its Brazilian fixed-line division. The phone company transferred its holding in Brasil Telecom Participacoes SA to a trust managed by Credit Suisse Group, in preparation for the stake's sale. Telecom Italia owns 38 percent of Solpart Participacoes, a holding company which controls Brasil Telecom with a 51 percent stake. The company isn't planning to sell its stake in Telecom Argentina SA, the country's second-biggest phone company, co-CEO Riccardo Ruggiero said in a conference call.

Profit

The shares fell 0.4 percent to 2.37 euros in Milan, valuing the company at 43.9 billion euros.

Earnings before interest, tax, depreciation and amortization rose 1.5 percent to 3.27 billion euros, beating an analysts' forecast of a 1.1 percent gain to 3.25 billion euros. The gross margin, or the percentage of profit remaining after costs are subtracted from sales, fell to 42.1 percent from 43.3 percent last year.

At the end of September, the company had over 6.5 million fast Web customers in Italy, and 1.7 million subscribers in France, Germany and the Netherlands. With the acquisition of AOL Germany, which may be completed in the first quarter of 2007, Telecom Italia will reach a total of 9.3 million accesses.

Telecom Italia had 31.5 million domestic wireless customers at the end of September, up from about 30.4 million at the end of June. Its Brazilian unit added 1.7 million clients, bringing the total number of subscribers at the end of September to 24.1 million.

Telecom Italia had 39.5 billion euros of debt at the end of September. Telecom Italia, which had debt of 41.3 billion euros at the end of June, aims to cut borrowings to 38 billion euros at the end of 2006. The company said it aims to cut debt to 33.5 billion euros at the end of next year, Chief Financial Officer Enrico Parazzini said during a conference call today.

``Telecom Italia is financially sound,'' Rossi told analysts and reporters on the call.

To contact the reporter on this story: Chiara Remondini in Milan at cremondini@bloomberg.net

Last Updated: November 6, 2006 15:24 EST