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Telecom Argentina Warns Telefonica of Potential Legal Action

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BUENOS AIRES (Dow Jones) The board of Telecom Argentina has warned Telefonica de Argentina that it could take legal action if it suffers sanctions by local authorities due to Telefonica of Spain's acquisition of a stake in its Italian owner.

In a conference call to discuss Telecom Argentina's third-quarter results Friday, Chief Financial Officer Valerio Cavallo said the board sent letters on the matter to both Telefonica of Spain and its Argentine unit. Telefonica is Telecom Argentina's primary local competitor.

The directors also wrote to Argentina's antitrust and telecommunications agencies, which are investigating the situation, he said, "to clarify that Telecom Argentina has not had any intervention" by Telefonica as a result of the transaction in Italy. Those letters reiterated the board's argument that Telecom Argentina should not be harmed by any sanctions, since it is not itself a party to that foreign deal.

On Oct. 25, Telefonica and a consortium of investors confirmed that they had acquired an indirect 23.6% stake in Telecom Italia, Telecom Argentina's controlling shareholder, giving the Spanish telecom giant a 9.9% shareholding in its Italian counterpart.

The deal, which was first announced in April, and which leaves Telefonica with an indirect stake in Telecom Argentina of an estimated 1.8%, generated complaints about potential conflicts of interest from the latter's second-biggest shareholder, the Werthein Group.

Although the holding is small and denies Telefonica any management input in Telecom Argentina, it is technically in breach of Argentina's telecommunications law, which dates back to the privatization of former state-owned telecom company Entel. The fixed-line market is effectively split between Telefonica and Telecom Argentina. As such, those laws prohibit any cross-shareholdings between the two companies.

Meanwhile, the National Commission for the Defense of Competition, Argentina's antitrust agency, has launched an investigation.

Last month, Planning Minister Julio de Vido announced that the agency, along with the National Commission for Communications, would each put a monitor inside Telecom Argentina for a two-month period. Their goal is to ascertain the impact of the deal on Argentine competition.

It's not clear what measures might be taken by the authorities. Nonetheless, Cavallo said, the concerns of one board member - a likely reference to Werthein - and the fear that sanctions could hurt the company, prompted the decision Thursday to send the correspondence.

With respect to the letter to the two Telefonica companies, Cavallo said it declared "that if Telecom Argentina would ever suffer any kind of damage resulting from this operation, Telecom Argentina could decide to start any necessary legal actions in order to be fully restored."

In the letters to the authorities, he added, the board argued that "in case it is decided take some measures with regards to the operation, in no case should this measure affect Telecom Argentina, taking into account that Telecom Argentina doesn't have any role in the (Italian) operation."

Those letters also sought to "clarify that Telecom Argentina hasn't had any intervention" by Telefonica as a result of its share purchase in Telecom Italia, he said.

Separately, the company's management highlighted a 37% year-on-year increase in cellphone revenues via its Telecom Personal unit as the main driver of its strong growth. Earlier Friday, Telecom Argentina announced a net profit of 614 million pesos ($196 million) for the nine months to Sept. 30, up from ARS164 million in the same period in 2006.

The strong expansion in earnings caused the company's shares to soar Friday. As of 1827 GMT, Telecom Argentina was up 9.47% at ARS15.60.

These gains come on the back of prior advances in recent weeks as speculation has grown that the antitrust investigation would force an asset sale that would in turn spark a bidding war.

A statement from Telefonos de Mexico, owned by Mexican businessman Carlos Slim, of its desire to be informed of developments in the investigation fueled speculation that he is interested in buying into Telecom Argentina. Slim's cellphone unit, America Moviles, is the third major cellular service provider in Argentina via its CTI Movil subsidiary, which competes with the mobile-phone operations of Telefonica and Telecom Argentina.

Meanwhile, Gerardo Werthein is also interested in raising his stake in Telecom Argentina.

When he first expressed concern about conflicts of interest with Telefonica, the Argentine businessman said he would buy the 50% stake that Telecom Italia holds in Sofora Telecommunications SA, the holding company that controls Telecom Argentina. As of now, the Werthein Group owns 48% of that holding company, a stake it bought in 2003 from France Telecom, which still retains the remaining 2%.

-By Michael Casey, Dow Jones Newswires; michael.j.casey@dowjones.com; 54-11-4313 1918

(END) Dow Jones Newswires­

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Tags: telecom italia  telefonica  telecom argentina  chief financial officer  antitrust  sofora  telefonica,  Argentina