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Telefonica Pushing Telecom Italia to Solve the Brazilian Dilemma

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Telecom Italia, and its indirect controlling shareholder Telefonica are said to be in an increasingly acrimonious disagreement about how to settle their outstanding Brazilian problem.

Both companies own majority stakes in Brazilian mobile networks, but Telefonica's controlling stake in Telecom Italia means it has effective control over both Brazilian networks, and it has been ordered by local regulators to resolve the problem.

Telecom Italia would ideally like to sort out its complex shareholding structure so that Telefonica's influence is reduced to parity with its 15 percent stake in the company, and lose control.

However, Telefonica is widely thought to consider forcing Telecom Italia to sell its Brazilian stake would be good for Telecom Italia in paying down its debt mountain, and ensures that Telefonica keeps control of its own local subsidiary.

Telefonica and another local mobile network, Oi are reported to be exploring a plan to break up TIM Brazil as early as this year. Oi would lead the negotiations because as a local provider it would stir less controversy in Brazil, sources told Bloomberg News.

Although Telefonica could force a deal through, it has agreed -- for the moment at least -- to step aside from any decisions by the Telecom Italia board concerning the Brazilian situation.

A decision is expected soon, as Bloomberg News reports that two shareholders in the holding company that controls Telecom Italia are likely to sell up soon, and that could force a final settlement with Telefonica over its control of the company.

Telefonica owns a majority stake in a holding company, Telco. Although it owns only a modest stake in Telecom Italia, thanks to a legacy shareholder agreement, it can nominate 6 directors to the Telecom Italia board, to sit alongside five independent directors.

That gives Telco effective control over the decision making process at the top of the company.

There is mounting pressure for Telco to give up its outsized influence over the group. Not only would that be beneficial for the other shareholders, it would probably be beneficial for the company as it makes it more desirable to other investors.

On the web: Bloomberg News

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Tags: telecom italia  telefonica  Brazil