Telecom Italia, Telefonica Said to Disagree Over Tim Breakup

May 30, 2014 4:30 pm ET

(Updates with closing share prices in seventh paragraph.)

May 30 (Bloomberg) -- Telecom Italia SpA and its largest shareholder, Telefonica SA of Spain, are locked in disagreement over the future of the Italian carrier’s Brazilian business, according to people familiar with the matter.

While Telecom Italia Chief Executive Officer Marco Patuano is in favor of keeping Tim Brasil and expanding the division through an eventual merger with Vivendi SA’s Brazil unit GVT, Telefonica and Oi SA -- the country’s No. 4 wireless carrier -- are exploring a plan to break up Tim as early as this year, said the people, asking not to be named because the deliberations are private. Tim has a market value of $13 billion, and Milan-based Telecom Italia owns 67 percent of the company.

The discord opens a new front in the conflict between Telecom Italia and Telefonica in Brazil, where Telefonica controls the biggest carrier under the Vivo brand. The renewed push to sell Tim comes as the Telefonica-led investor group that owns 22.4 percent of Telecom Italia is due to be broken up next month -- with at least two of the three financial investors planning to exit.

Telefonica and Oi executives have discussed as recently as last month a potential deal to split Tim Brasil among Oi, Vivo and Claro, owned by Carlos Slim’s America Movil SAB, said the people. One scenario would involve the use of a financial vehicle known in Brazil as Comissario Mercantil to acquire Tim and then split the business among the other operators, the people said. Grupo BTG Pactual would act as the agent, two of the people said.

‘Jumbo Offer’

Oi would lead the negotiations because as a local provider it would stir less controversy in Brazil, the people said. A transaction may happen after general elections in October, they said. Patuano told analysts on March 7 that if a “jumbo offer” for Tim comes up, Telecom Italia would evaluate it.

Representatives for Telefonica, Telecom Italia, America Movil and BTG declined to comment. An Oi official had no comment.

Tim, which trades under the name Tim Participacoes SA, rose 1.2 percent to 12.16 reais at the close in Sao Paulo. Telefonica Brasil SA, the Spanish carrier’s local unit, fell 1.6 percent to 44.75 reais, and Oi climbed 1.6 percent to 1.94 reais. America Movil fell 2.6 percent to 12.43 pesos in Mexico City. Telefonica rose 0.2 percent in Madrid and Telecom Italia fell 0.3 percent in Milan.

Stock Sale

Tim, with almost 74 million customers at the end of April, has an enterprise value -- which includes debt -- of about 30 billion reais ($13.4 billion), data compiled by Bloomberg show.

Oi raised 8.25 billion reais in a capital increase last month as part of its merger with Portugal Telecom SGPS SA. The transaction put Oi on more solid footing to be able to participate in consolidating Brazil’s phone companies, one of the people said. BTG was the lead underwriter of the stock sale and raised a 2 billion-real fund to help support the deal.

“It’s clear Telefonica still has all the interest to prepare the ground for a potential breakup of Tim Brasil in order to eliminate an inconvenient rival,” said Andrea Rangone, a professor of business strategy at Milan’s Politecnico. Still a merger with GVT would make more sense because it would allow Tim to add TV offers, he said.

A representative for GVT declined to comment.

Telefonica, which indirectly owns about 15 percent of Telecom Italia through investment vehicle Telco SpA, deems consolidation in Brazil positive for the market, Chief Financial Officer Angel Vila said this month.

“Lots of stars need to get aligned, maybe some stars are starting to align,” Vila said during a May 9 conference call with analysts. “But still many things would still have to happen for a consolidation to take place.”

--With assistance from Patricia Laya in Mexico City, Rodrigo Orihuela in Madrid, Jonathan Levin in Sao Paulo and Crayton Harrison in New York.