Telecom Italia Directors Said to Impede Brazil Unit Sale

Jan 03, 2014 1:52 pm ET

(Updates with Consob request in eighth paragraph.)

Jan. 3 (Bloomberg) -- Some Telecom Italia SpA directors are attempting to make it more difficult for investor Telefonica SA to sell the company’s Brazilian business, according to two people with direct knowledge of the matter.

The directors, backed by Chief Executive Officer Marco Patuano, are proposing a motion so that any potential offer for the Brazil unit would be scrutinized by a special committee, said the people, who asked not to be named because the plan isn’t public. Telecom Italia’s board is set to vote on the motion in a Jan. 16 meeting, the people said.

The directors are trying to prevent Madrid-based Telefonica from arranging a forced sale of a division that’s growing while the company’s Italian business shrinks. Telefonica favors a sale or breakup of the unit, Tim Participacoes SA, people with knowledge of the matter said last year. A sale would help Telefonica address regulator concerns that it has too much influence in Brazil, where it also directly controls the wireless-market leader, Telefonica Brasil SA.

“It’s crucial that Telecom Italia is squeaky clean on a sale and that independent scrutiny is very reasonable protection on that front,” Robin Bienenstock, an analyst at Sanford C. Bernstein in London, said in an e-mail.

Shares Jump

The board members proposing the motion are trying to ensure that any potential bid for the unit has to be considered a deal with “related parties of greater importance,” a legal term for transactions between affiliated entities, said the people. Such status would mean that any deal would have to be pored over by a committee run by independent directors to ensure it is done in the best interest of Telecom Italia.

Telecom Italia’s board has 11 members, of which five are considered independent and six are directly appointed by Telco SpA, the holding company in which Telefonica is the largest shareholder and agreed to increase its stake last year.

Telecom Italia shares rose 6.9 percent to close at 75.8 cents in Milan. Il Sole 24 Ore reported today that Telefonica is advancing a plan to sell Tim. Telefonica is close to setting up a financial vehicle to split Tim and sell it to Telefonica Brasil, Oi SA and Carlos Slim’s Claro, the newspaper reported, without citing anyone.

Italian watchdog Consob has asked Telefonica to comment on speculation about the potential sale before the market opens on Jan. 6, a person familiar with the matter said.

Tim, based in Rio de Janeiro, has a market value of about $13 billion, and parent Telecom Italia is struggling to reduce its debt and financing costs after its rating was cut to junk last year by Moody’s Investors Service and Standard & Poor’s.

Still ‘Strategic’

Last month, Brazil’s antitrust regulator ordered Telefonica to lessen its influence in Brazil’s phone business either by reducing its holdings or by persuading Telecom Italia to sell its local unit.

Representatives for Telefonica and Telecom Italia declined to comment on any breakup plans in Brazil. A Telecom Italia spokesman also declined to comment on the board’s plans. In a statement, Telecom Italia said it isn’t aware of any offers for the Brazilian unit and reiterated that it considers the division “strategic.”

“The committee would be set up to review a bid that is on the table,” Hannes Wittig, an analyst at JPMorgan Chase & Co., said in an e-mail. “Rather than pre-empting a bid, it increases the risk that no deal can be agreed, on valuation grounds, but more importantly and positively reduces the risk that a deal would be agreed at a price that disadvantages Telecom Italia minorities.”

Telefonica advanced 0.7 percent to close at 11.68 euros in Madrid. Tim added as much as 9 percent to 13.21 reais in Sao Paulo, while Oi gained as much as 12 percent. Telefonica Brasil’s preferred shares rose as much as 4.1 percent.

--Editors: Ville Heiskanen, Mark Beech