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Brazil's Oi: Signs Deal to Buy Rival Brasil Telecom

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SAO PAULO (Dow Jones) Brazil's largest phone operator Tele Norte Leste Participacoes, or Oi, announced Friday the much anticipated deal to buy control of smaller local rival Brasil Telecom Participacoes, creating a major local operator to face regional giants Spain's Telefonica and Mexico's America Movil.

Oi will pay 5.9 billion Brazilian reals ($3.5 billion) to acquire a controlling share in Brazil's fifth-largest telecom operator in revenue terms, ending years of bitter fighting amid Brasil Telecom shareholders.

"This company was born with the aim of expanding beyond Brazil's boundaries...We aim to have 30 million clients outside Brazil in five years," said Luis Eduardo Falco, Oi's chief executive, who will lead the new firm when it is formed.

The merged company will have considerable ballast in the local phone market. It will dominate fixed-line phone services outside Sao Paulo state, have a strong growing broadband Internet service in the same regions and command some 15% of mobile phone services nationwide.

"The deal will also create significant synergies and economies of scale," said Luciana Leocadio, telecom analyst at the local Ativa brokerage.

The company will start with a market value of $23 billion, according to Falco.

However, the merged company won't have the investment capacity or international know how of its regional rivals like Telefonica, despite its greater size, said Eduardo Roche of Modal Asset Management.

"We will be looking to expand in Brazil first," Falco admitted.

While the company will be a major player on the local market, the merger will not force rivals such as Telecomunicacoes de Sao Paulo, or Telesp, or TIM Participacoes to change strategy.

"On the positive side, there is little overlap between Oi and BRT (Brasil Telecom). On the negative side, it doesn't change much in terms of competition," Leocadio added.

The government has been a major cheerleader for the deal, but its closure still depends on a change in telecommunications law, which has to be approved by telecommunications regulator Anatel. This process could take up to six months.

In addition to offering BRL5.9 billion for a 60.5% voting stake in Brasil Telecom Participacoes, Oi will make a voluntary public offer for up to one third of Brasil Telecom Participacoes (BRTP4.BR) preferred shares and a mandatory tender offer for voting shares at 80% of the offer price to controlling shareholders.

In total, Oi will spend BRL12 billion on the deal, Falco said.

Oi will use cash positions to pay for most of the acquisition but it could also raise capital on the market, said Falco, during a press conference.

The government-owned Brazilian Development Bank, or BNDES, announced it will extend Oi a credit line of BRL2.6 billion to help finance the deal.

However, investor reacted badly to price of BRL30.47 offered for preferred shares.

Brasil Telecom shares fell 7.6% to BRL25.25 on the Brazilian Stock Exchange, or Bovespa, Friday, while Oi shares dropped 2.9% to BRL41.89.

The deal must still be submitted for approval to Anatel and government antitrust regulators.

Oi estimated that the reorganization will take up to 120 days after the regulatory changes are made to allow the deal to go ahead.

The controlling group of the new company will be led by Brazilian industrial conglomerate Andrade Gutierrez, and La Fonte Participacoes SA, but the BNDES and a group of mainly government-linked pension funds will also have key stakes. The pension funds include Fundacao Atlantica, the Oi workers funds, Previ, the fund for workers at state-owned Banco do Brasil, Petros, Petrobras's pension fund, and Funcef, the fund for government-owned savings bank Caixa Economico Federal.

Citigroup, GP Investimentos and Banco Opportunity will sell stakes.

The various parties have been brokering the deal for months, but it only became reality after key shareholders in Brasil Telecom, most notably Citigroup and Banco Opportunity, agreed to end litigation related to the control of the group. Oi will pay out approximately BRL315 million to end the lawsuits.

Brasil Telecom had been stymied for years by the rancorous relationship between its main shareholders, who sued and countersued each other, bringing the company to a standstill at some stages.

While the takeover may not force the competition to change strategy, the weakening of telecom monopoly rules could open the way for other firms, in particular Telefonica, to make acquisitions.

Earlier in the year, Anatel President Ronaldo Sardenberg admitted that telecommunications regulations could be revised thoroughly as a result of the Oi-Brasil Telecom initiative.

For example, Anatel could allow leading mobile operator Vivo Participacoes to merge operations with TIM Participacoes, creating a dominant mobile operator. Vivo is jointly owned by Telefonica and Portugal Telecom, while TIM is owned by Telecom Italia.

"This deal could indicate the start of a trend to further consolidation," said Modal's Roche.

-By Alastair Stewart, Dow Jones Newswires; 5511 3145-1479; alastair.stewart@dowjones.com

(END) Dow Jones Newswires

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