| MILAN/MADRID, July 17
MILAN/MADRID, July 17 Telefonica's move
to reduce its stake in Italian rival Telecom Italia may help the
Spanish phone group appease regulators over competition concerns
in Brazil and possibly accelerate consolidation in that market.
Telefonica controls Vivo, Brazil's leading mobile
operator, and is the biggest shareholder in Telecom Italia
, which owns Vivo's rival TIM Participacoes.
Brazil is a crucial market for Telefonica because it is its
second-biggest generator of cash after its home market, and
still has growth opportunities unlike relatively saturated
European markets like Germany and Britain.
Brazilian watchdog CADE gave Telefonica 18 months to either
sell its interest in Telecom Italia, or seek a new partner for
Vivo in December following a deal with Italian investors which
gave Telefonica nearly 15 percent of Telecom Italia.
On Thursday Telefonica launched the sale of a 750 million
euro ($1 billion) bond exchangeable into Telecom Italia
shares, reducing its stake to between 9.4 and 8.3
percent on conversion and loosening its grip as the group's
It also sought to appease the Brazilian regulators by
pulling its two representatives from Telecom Italia's board back
in December to avoid conflicts of interest.
But it is the decision to partially exit its investment in
Telecom Italia that has fuelled expectations the regulator might
now soften its stance towards the Spanish group, people familiar
with the situation and analysts said.
"I don't imagine CADE will look at this negatively, on the
contrary," a senior Brazilian telecoms executive told Reuters.
Telefonica declined to comment while CADE said it had not
officially been informed of the plan and so could not comment.
The exchangeable bonds, which allow Telefonica to protect
itself from downside risk whilst also benefiting from any upside
in Telecom Italia's share price, mature in three years but can
be converted at any time before that or paid in cash if
conditions are met.
Banca Akros analyst Andrea De Vita said a reduction of
Telefonica's stake in Telecom Italia to below 10 percent may be
enough to alleviate Brazil's concerns.
It may also pave the way for speedier consolidation.
Telefonica's aim is to break up TIM Participacoes and share
its assets with other local players America Movil and
Oi to eliminate its rival, sources close to the
matter have said. To do that, Telefonica - or one of the other
players such as Oi - would have to undertake a joint bid for TIM
and secure approval from regulators who could have qualms about
such a plan if they believed Telefonica's conflict of interest
was still in place.
Telecom Italia is in favour of keeping its stake in the
Brazilian unit because it accounts for one third of its sales,
but it does not rule out a sale, Chairman Giuseppe Recchi said
earlier this month.
Other Telecom Italia investors including businessman Marco
Fossati, who owns a nearly 5 percent stake, oppose the break-up
plan and see more value for Telecom Italia in a merger between
TIM Participacoes and local broadband operator GVT, a unit of
"The market is clearly betting on a consolidation of the
Brazilian market and while there are many conditions still to be
met for that to happen, yesterday's move clears one hurdle,"
said one source familiar with Telefonica's thinking.
(Additional reporting by Leila Abboud in Paris and Leonardo Goy
in Brasilia; Editing by Elaine Hardcastle)