BRASILIA/MILAN Telecom Italia (TLIT.MI) does not rule out merging its Brazilian operator with a local rival but such a move is not on the agenda for now, its chief executive said after meeting Brazil's president on Wednesday.
The meeting between Telecom Italia CEO Marco Patuano and Brazilian President Dilma Rousseff, who faces a tight race to win elections in October, came amid persistent talk of consolidation in the local telecoms market.
"We can't rule out anything but we are not focused on this at the moment," Patuano told reporters when asked about talk of a potential tie-up between its TIM Participacoes (TIMP3.SA) unit and broadband carrier GVT, a unit of France's Vivendi (VIV.PA).
Brazilian anti-trust authorities are concerned about possible conflicts of interest in the local mobile market, given that Spain's Telefonica SA (TEF.MC) has a direct and indirect stake in the two biggest mobile firms in Brazil.
Telefonica owns Vivo (VIVT3.SA), the number one mobile firm, but is also the largest shareholder in Telecom Italia. The Italian firm in turn owns 67 percent of TIM, which is the second largest mobile operator with a 27 percent market share.
Telefonica has been asked by the antitrust authorities to resolve what they see as this conflict of interest by mid-2015, prompting widespread speculation about possible mergers and breakups in the Brazilian telecoms market.
Telefonica's preference has been to try and reduce the number of players in the Brazilian mobile market from four to three by engineering the break-up of TIM, sources said earlier.
That would require teaming up with local rivals Oi (OIBR3.SA) and America Movil (AMXL.MX) to somehow jointly buy TIM and divide its assets among them.
Such a break-up would need political approval and would be technically difficult to carry out. Telefonica had hoped Oi would lead the joint bid since it is the only Brazilian company involved, the sources said.
Telecom Italia, however, is in favor of keeping its stake in TIM because it accounts for one third of its sales, but does not rule out a sale, Chairman Giuseppe Recchi said earlier this month.
A merger between TIM and Vivendi's GVT could be a headache for Telefonica because it would create a stronger competitor to its local unit Vivo.
Other Telecom Italia shareholders, led by businessman Marco Fossati who owns nearly 5 percent of the Italian group, say merging TIM with GVT would create more value.
Italian newspaper Il Sole 24 Ore said one of the reasons for Patuano's visit to Brazil was his interest in a possible tie up with GVT to bolster TIM's broadband capabilities.
Vivendi, which has been selling telecom assets to focus on its media businesses, has so far said that it wants to keep GVT.
Last week, TIM denied being in talks with rivals Grupo Oi SA and GVT for a combination or a takeover. [ID:nL2N0PT2CM]
By 1517 GMT, Telecom Italia shares were down 0.6 percent at 0.874 euros in Milan, underperforming a 0.1 percent rise in the European telecoms index .SXKP. Shares in TIM rose 1 percent.
Brazilian authorities are also pushing for more investment to upgrade the telecommunications infrastructure of the country.
A government auction of licenses for 700-megahertz spectrum for fourth-generation mobile data services is expected by September. Patuano said TIM planned to participate in the auction while focusing on executing its business plan.
(Reporting by Leonardo Goy, Danilo Masoni and Leila Abboud; editing by David Clarke)