Telecom Italia Said to Weigh Oi Bid to Challenge Telefonica

Telecom Italia SpA is evaluating a potential acquisition of Brazilian carrier Oi SA to challenge Telefonica SA in the largest phone market in Latin America, according to three people familiar with the matter.

The Milan-based carrier has spoken to advisers about using its Brazilian unit Tim Participacoes SA to buy Oi, said the people, who asked not to be identified because the discussions are private. No approach has been made, they said. Any transaction would need Brazilian regulatory approval.

Oi shares jumped 2.4 percent in Sao Paulo, adding to yesterday’s 8.6 percent gain and giving the smallest of Brazil’s four wireless carriers a market value of 14.6 billion reais ($6.2 billion). Any acquirer would also have to take on Oi’s almost $20 billion in net debt. In a deal, Tim, the second-largest mobile-phone company in the country, would gain Oi’s fixed-line network to sell broadband services after losing out to Telefonica of Spain in a bid to merge with another local landline provider, GVT.

“Telecom Italia is obliged to make a move in the Brazilian market after the GVT deal fell through and targeting Oi makes sense if they want to build a stronger carrier,” Carlo Alberto Carnevale Maffe, a professor of business strategy at Milan’s Bocconi University, said in a phone interview.

Tim Brasil can afford a leveraged deal for Oi, partly financing it with its own stock, Carnevale said. While Telecom Italia’s net debt is about triple its earnings before interest, tax, depreciation and amortization, the Brazilian unit’s net debt is about 0.2 times Ebitda, giving it room to borrow for a potential deal.

Financial Flexibility

A bid by Telecom Italia could head off Oi’s plans to go after a stake in Tim. Last month, Oi hired Banco BTG Pactual SA to help it acquire a stake in Tim from Telecom Italia.

Oi is open to any offer that reduces the number of major wireless carriers in Brazil to three from four, said a person familiar with the matter, who asked not to be identified because the information is private.

In a filing today, Tim said there are no ongoing discussions involving any transaction between Telecom Italia and Oi. Tim has a market value of about $14 billion, and Telecom Italia owns 67 percent of the Brazilian operator.

“We’ve always made clear that our financial flexibility is one of our strengths,” Tim Chief Executive Officer Rodrigo Abreu said in a Sept. 11 interview in New York, when asked whether the company was willing to take on debt to finance expansion. “We’re a company with a very low level of debt. We could make a move when an opportunity arises, as was the case when we made previous acquisitions.”

Shares Gain

A spokesman for Telecom Italia had no comment. A representative for Rio De Janeiro-based Oi didn’t respond to an e-mail request for comment.

Separately, Oi said today it will seek to sell its holdings in African telecommunications companies. Oi values those assets at about 5 billion reais, said the person familiar with the matter.

Telecom Italia shares rose 1.6 percent to 91.4 euro cents at the close in Milan, giving the company a market value of 16.7 billion euros ($21.5 billion).

Portugal Telecom SGPS SA, the carrier that’s merging with Oi, gained 1.1 percent at 1.80 euros in Lisbon. The stock jumped 6.1 percent yesterday after Bloomberg broke the news.

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