Brazil opening hearings on Telefonica's GVT bid

* Hearings opened on objections to GVT buyout

* Telefonica service had five glitches, sales suspension

* Federal prosecutors see deal as threat to competition

By Guillermo Parra-Bernal and Alberto Alerigi Jr.

SAO PAULO, Nov 10 (Reuters) - Brazilian federal prosecutors on Tuesday said plans by Spain's Telefonica to purchase rival GVT could limit competition and reduce service quality, and they opened public hearings that could slow the possible tie-up.

Investors see Telefonica (TEF.MC) as the likely buyer of GVT (GVTT3.SA) even as giant French media company Vivendi (VIV.PA) is also eyeing the company in a move that could bring a new player to south-central Brazil's broadband market, currently dominated by local conglomerate Oi (TNLP4.SA).

But the Prosecutor General's office worries that the acquisition, which could cost Telefonica up to 7 billion reais ($4 billion), could further worsen service in its home Sao Paulo state market, which has already suffered five major outages this year.

"Considering the repeated Telefonica service glitches that took place during the year, the office wants to know whether the acquisition would endanger capital expenditures, hinder the carrier's commitment, and whether blocking the entry of a new competitor could also jeopardize service quality in Sao Paulo," it said in a statement.

The entry of a new player has long been seen as a welcome opportunity to break the near-stranglehold on broadband in Sao Paulo held by Telesp and rival Net Servicos de Comunicacao (NETC4.SA). Telesp subscribers suffered five service blackouts or similar incidents between July 2008 and June this year.

Hearings will be closed on Nov. 17.

The deal has become a litmus test for the government and regulators, a year after industry rules were overhauled to allow for the President Luiz Inacio Lula da Silva-sponsored takeover of Brasil Telecom by Oi.

Marcio Schusterschitz Araujo, the federal prosecutor who opened the hearings, said in the same statement that telecommunications laws "are based on the promotion of free competition, and the possible buyout of GVT by Telefonica could subvert the logic of the industry."

Although a GVT acquisition would pit Telefonica against Oi (TNLP4.SA) in what Brazilian telecom laws classify as Region II -- spanning western through southern Brazil -- it might not lead to lower prices, analysts and industry specialists said this month. [ID:nN30326429]

Some of those specialists, including former telecommunications minister Juarez Quadros, say Telefonica's strategy could have the unintended consequence of stifling any incentive to aggressively compete with Oi by keeping rates unchanged.

If Vivendi lost the battle for GVT, Telefonica would face less pressure to lower prices and improve service, Quadros said recently. Vivendi's $3 billion friendly approach is yet to be formalized.

Telefonica has said it expects regulatory approval from agency Anatel before the tender offer set for Nov. 19.

In recent months, consumer groups have accused Anatel of being too lenient with phone carriers. But in June, Anatel reacted to criticism by banning the sale of Telesp's "Speedy" broadband service for 65 days because of frequent disruptions.

GVT shed 0.7 percent to 52.95 reais. Telesp shares fell 0.1 percent to 45.80 reais. ($1=1.71 reais) (Editing by Gerald E. McCormick)