Telecom Italia Says Will Quit Fight For Brasil Telecom

SAO PAULO -(Dow Jones)- Telecom Italia SpA (TIT.MI) is threatening to bring even more confusion to a bitter ownership dispute by quitting the fight for control of Brazil's third-largest phone company, a Telecom Italia spokesman said Friday, confirming local press reports.

"Enough! If the pension funds think they know how to run the company (Brasil Telecom), let them do it. They can buy our part," the Folha de Sao Paulo newspaper quoted Paolo dal Pino, Telecom Italia's top executive in Brazil, as saying in an interview published Friday.

Dal Pino was referring to some of Brazil's largest pension funds, mainly related to state-owned companies, which have joined forces with Citigroup (C) to sell their shares in Brasil Telecom.

"This investment has become a nightmare," said Dal Pino, who was sent to Brazil to try and resolve the seemingly endless dispute. Telecom Italia has been "badly treated," he said in the interview.

Dal Pino made it clear that his company has no plans to abandon its separate mobile phone operations in Brazil, which operate through TIM Brasil.

Analysts questioned the motives behind the outburst, saying it goes against everything that Telecom Italia has said to date.

"The fact is that Telecom Italia and TIM have always clearly said that they are very interested in the Brazilian market," said Alex Pardellas, of the ABN Amro Asset Management brokerage in Sao Paulo.

Telecom Italia, the only phone company involved in the dispute, is seen as the natural firm to buy control of Brasil Telecom. It has been negotiating to buy out the pension funds and Citigroup since the beginning of the year, but the talks have stalled over differences in valuation.

Dal Pino said Telecom Italia is now prepared to sell its stake in Brasil Telecom, which includes shares purchased from Brazilian asset management firm Banco Opportunity in March, according to the Folha de Sao Paulo report. That agreement has been frozen by a New York court, which is examining Citigroup's claims that Opportunity profited at its expense through the transaction.

At the moment, it's extremely difficult to spot who has control at Brasil Telecom, as the various shareholders battle on an almost daily basis for control of holding companies within the complicated ownership structure.

Dal Pino said the pension funds' tactics are effectively reversing the 1998 privatization of the phone company.

"If the funds want to re-nationalize Brasil Telecom, let them do it, but (let them do it) completely," Dal Pino said in the interview.

The pension funds' objective may never have been to take control of Brasil Telecom. But they have backed themselves into a tricky situation, according to analysts.

They recently struck a deal with Citigroup, agreeing to buy its shares for about $400 million if no other sale can be struck within three years. Furthermore, the deal - which has been publicly criticized by a number of executives within the pension funds themselves - obliges the funds and Citigroup to sell together, for the same price.

And that price is now far higher than Telecom Italia is prepared to pay.

The pension funds must either accept a significantly lower price for their shares, or persuade Citigroup to accept less than the $400 million in their joint contract. Otherwise, they will be forced to pay high for Citigroup's shares, and then try to find a buyer.

It's unclear how the Brazilian government would react to this situation. Many of the pension funds already have significant liabilities, and the Brasil Telecom saga could dig an even bigger hole in their finances.

While these discussions evolve, a July 18 deadline for Telecom Italia and Brasil Telecom to resolve overlapping mobile licenses is fast approaching. That deadline has been feared by all parties, because no one knows what decision the telecoms regulator, Anatel, might impose.

In recent weeks, Anatel officials have indicated they may be prepared to extend the deadline - which would provide more time for the dispute to continue.

-By Matthew Cowley, Dow Jones Newswires; 5511 3145 1479; matthew.cowley@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 1st July 2005