Telefonica Told by Brazil to Engineer Tim Sale or Undo Deals

Telefonica SA must reduce its influence in Brazil’s phone business, the country’s antitrust regulator said, either by reducing its holdings or by persuading partner Telecom Italia SpA to sell its local unit.

The regulator, known as Cade, said yesterday it seeks to reduce Madrid-based Telefonica’s position in the market to its pre-2010 level, when it held half of wireless carrier Vivo and a minority stake in Telco SpA, the company that controls Telecom Italia. Telefonica acquired full ownership of Vivo in 2010 and agreed in September to a deal that would let it take over Telco.

Cade aims to contain Telefonica’s power because Telecom Italia’s Brazilian unit, Tim Participacoes SA, and Vivo together control more than half of the nation’s wireless market. If Telefonica can’t undo its transactions, Telecom Italia could address Cade’s concerns by selling Tim, the agency said.

That option could play into the hands of Telefonica. The company already favors a sale or breakup of Tim, people with knowledge of the matter have said. Tim, based in Rio de Janeiro, has a market value of $11.5 billion, and its parent Telecom Italia has struggled with debt.

The regulator’s order “will simply accelerate the timetable for a bid for Tim,” Robin Bienenstock, an analyst at Sanford C. Bernstein & Co. in London, said today in a note to clients. “Telefonica has a strong interest in seeing Tim Brasil broken up.”

Telefonica shares fell 0.3 percent to 11.65 euros at 9:31 a.m. in Madrid. Telecom Italia declined 1.8 percent to 67.3 cents in Milan.

Fine Maintained

Cade accepted a recommendation from its attorney general to fine Telefonica 15 million reais ($6.3 million) for violating an agreement it signed in 2010 to preserve competition in the Brazilian telecommunications market. Cade also fined Tim 1 million reais.

The agency said Telefonica should find a replacement for Portugal Telecom SGPS SA, its former partner in Vivo, unless it can get Telecom Italia to sell Tim. Similarly, it said it must reduce its stake in Telco unless Tim is sold.

Spokesmen for Telefonica and Telecom Italia declined to comment. Vivo and Tim are analyzing the ruling before they make statements, press officials for both companies said.

‘Gravest Offenses’

Government officials such as Communications Minister Paulo Bernardo have said they’re wary of any transaction that could reduce the number of competitors in Brazil’s phone market -- making it difficult for Vivo or smaller rivals America Movil SAB and Oi SA to buy Tim, or to split it up between them.

While Telefonica has held a stake in Telco since 2007, giving it influence over Telecom Italia, it has operated under an accord with Brazilian regulators to keep the operations of Vivo and Tim separate.

In September, Telefonica bought additional shares of Telco, which owns 22.4 percent of Telecom Italia. The Spanish company defended the move since the increased participation in Telco, to 66 percent from 46.18 percent, didn’t include voting shares.

Telefonica said in its response to Cade’s inquiry this year that the second stage of the plan would convert its Telco stake to voting shares, followed by the purchase of additional shares, giving it 70 percent ownership of Telco. The last stage would give Telefonica the option to buy the entire holding company.

The recommendation accepted by the Cade tribunal yesterday said completing this deal “would represent one of the gravest offenses imaginable” of the agreement it signed with the regulator.

Raising Cash

Tim controls 27 percent of the country’s wireless subscribers, according to government statistics. Vivo has 29 percent. Mexico City-based America Movil follows with 25 percent, and Rio de Janeiro-based Oi has 19 percent.

Rodrigo Abreu, Tim’s chief executive officer, said in an interview this week that Telecom Italia has no plans to sell its Brazil operations, which represent growth opportunity in an emerging market.

In November, Telecom Italia CEO Marco Patuano unveiled plans to dispose of assets including wireless towers, a broadcasting unit and a mandatory convertible bond. Telecom Italia also agreed to sell its Argentine business for $960 million.

Those measures, projected to bring a total of 4 billion euros ($5.4 billion) in proceeds, would ease pressure on the carrier to conduct a share sale previously under management consideration.

Patuano has been pushing to trim Milan-based Telecom Italia’s debt, which was cut to junk by Moody’s Investors Service and Standard & Poor’s. The CEO told Bloomberg News Nov. 19 that the company can return to investment grade within three years by reviving its domestic business and cutting its $38 billion in net debt.

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