UPDATE 3-Brazil's Oi to buy Brasil Telecom for $3.5 bln

(Adds Oi CEO comments, takeover financing)

By Todd Benson

SAO PAULO, April 25 (Reuters) - Brazil's Oi Participacoes (TNE.N) said on Friday it agreed to buy control of local rival Brasil Telecom BRTP4.SA for 5.86 billion reais ($3.5 billion), forging a home-grown telecoms giant to compete with Spain's Telefonica (TEF.MC) and Mexico's America Movil (AMXL.MX).

The total price tag for the takeover may rise to 12.3 billion reais, taking into consideration an offer for Brasil Telecom's minority shareholders, Oi Chief Executive Luiz Eduardo Falco said. Oi has enough cash at hand to pay for the purchase, but it may also tap the capital markets to raise part of the funds, he said.

The deal, widely expected for months, still depends on changes to Brazil's regulatory framework, which forbids one group from holding two separate telecoms concessions.

But Brazil's government has signaled it is in favor of changing the legislation to allow for some consolidation in the country's fiercely competitive telecoms sector, which was opened to private investment a decade ago.

A proposal to overhaul the legislation and allow for the Brasil Telecom takeover is making its way through the Communications Ministry, after which it will be sent to the country's telecoms regulator for final approval.

If the deal is approved, it would create a Brazilian player large enough to compete on a regional basis with the likes of Telefonica and America Movil (AMX.N), both of which have a major presence throughout Latin America.

"This is a company that is born with ambitions that go beyond Brazil," Falco said at a press conference in Rio de Janeiro. "We have international dreams."

Oi expects to compete head on with America Movil, Telefonica and Telecom Italia as the company expands in the Americas, Europe and Africa, he said.

Falco forecast the merged company will have 110 million customers in five years from about 46 million now in broadband, wireless, fixed line and pay-television services. Mobile phone clients are seen surging to 38 million in five years from 20.5 million now, while broadband clients may jump four-fold to 12 million from 3.15 million now.

Oi also expects to have 30 million clients outside of Brazil in five years.

Trading in Oi and Brasil Telecom shares was briefly halted during the session before the announcement was made. After trading resumed in Sao Paulo, Brasil Telecom's preferred shares tumbled 8.49 percent and Oi fell 3.11 percent.

The combined company would control about 70 percent of Brazil's fixed-line market, 18.5 percent of the wireless market and some 40 percent of broadband Internet services. Together, Oi (TNLP4.SA) and Brasil Telecom Participacoes BRP.N had 28.65 billion reais ($17.15 billion) in revenues last year.

The new company will be controlled by local industrial conglomerates Andrade Gutierrez SA and Jereissati Participacoes, both from Oi's controlling shareholder group. Brazil's national development bank, BNDES, and some state-run pension funds will also hold stakes in the merged company.

Oi said it expects to get legal approval for the deal in 120 days. If the legislation isn't changed in 240 days to allow for the takeover, Oi will be required to pay a break-up fee of 490.15 million reais ($293.5 million).

With the deal, U.S.-based Citigroup (C.N) will cash out of Brasil Telecom after years of acrimonious disputes and lawsuits with some of its local partners in the shareholder group.

Oi, formerly known as Telemar, is based in Rio de Janeiro and is the dominant player in 16 of Brazil's 26 states. Brasil Telecom, based in Brasilia, is the country's third-largest fixed-line operator and is present in 10 states.

($1=1.67 reais) (Additional reporting by Alberto Alerigi Jr, Tais Fuoco, Rodrigo Viga Gaier and Elzio Barreto; Editing by Brian Moss, Richard Chang)