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Telecom Argentina Battle Gets Nasty as Top Shareholders Spar

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BUENOS AIRES (Dow Jones) The battle for control of Telecom Argentina a saga replete with accusations of wiretapping, lies, greed and political maneuvering is heating up as a deciding deadline approaches.

In one corner sits Italy's Telecom Italia, which owns half of Sofora S.A., the company that controls Telecom Argentina. In the other: the Werthein Group, a privately held Argentine company, which owns the other half.

Telecom Italia accuses its local partner of hardball tactics to block it from exercising a call option that vests in January, one that would allow it to buy from Werthein the 48% stake in Sofora it first bought from France Telecom in 2003 at a price well below current market value. (An application Werthein made to purchase the French company's remaining 2% stake earlier this year is pending regulatory approval.)

In 2003, with Telecom Argentina saddled with almost $4 billion in debt and the country reeling from a massive default and devaluation a year and a half earlier, Werthein paid a fire sale price of $125 million for France Telecom's 48% stake in Sofora. Five years of a surging economic recovery and runaway cellphone sales later, those shares would be worth an estimated $800 million if they were valued at the current market price for Telecom Argentina. According to the formula applied in the contract, on the other hand, it would currently cost Telecom Italia about $400 million to exercise its call option.

From Telecom Italia's point of view, the option contract is final. But there's an added complication: Under Argentine telecommunication law, the National Communications Commission must approve any major shareholding change in the company. And in this case, the decision could be swayed by antitrust concerns over last year's move by Telefonica, the Spanish owner of the other main Argentine fixed line provider, Telefonica de Argentina, to take a minority stake in the Italian company.

In the midst of this dispute, with much resting on its standing in the eyes of a government that has tended to favor domestic business interests over foreigners, Telecom Italia now says it is the target of a biased media attack.

In recent days, local news channel C5N has been repeatedly running an extensive expose accusing Telecom Italia of widespread wiretapping and data interception carried out against business rivals. The Werthein group was explicitly mentioned as a target for the illegal spying.

In response, Telecom Italia published full-page ads in Argentina's leading papers to "categorically deny any participation in these acts".

According to Telecom Italia, C5N was simply recycling and distorting details of a scandal that was extensively covered in the European press in 2006 in which the company itself was a "victim" of illegal activities by employees acting outside their duties. Those people, it said, had been prosecuted in Italy for using wiretaps and data interceptions to blackmail people.

Some people within the media and telecommunications industries suspect the Werthein group of orchestrating the story at C5N, a recent and rapidly growing addition to the media empire of local businessman Daniel Hadad.

But Adrian Werthein, who owns a quarter of the shares in his family's company and is also vice president of Telecom Argentina's cellular unit, Telecom Personal, denied any involvement. "We don't have anything to do with it," he said. "Telecom Italia has a problem with their security."

The Spanish Problem

In March, Telecom Italia Chairman Carlo Buora confirmed that his company planned to exercise its option on the Werthein shares and take full control of Telecom Argentina.

But the relationship had already been strained in October last year, when Telefonica of Spain joined a consortium that took a 24.7% stake in Telecom Italia and gained two seats on the Italian company's board.

Although Telecom Italia maintains that the Spanish company's indirect 10% holding translates into a mere 1.8% stake in the Argentine unit and that its directors are barred from making decisions in the two markets where the providers overlap - Argentina and Brazil - critics say the deal will stifle already limited competition in Argentina.

Meanwhile, Telecom Argentina's biggest minority shareholder sees the Europeans' deal as a blow to the local company's interests. "The strategic decisions of the company are threatened by Telefonica's share in Telecom," Werthein said. "The country has to decide if it wants competition or a monopoly."

One reading of the law says regulators have grounds to agree with Werthein. When Argentina's telecommunications sector was privatized in the 1990s and the fixed-line telephony business was divvied up between Telecom Argentina and Telefonica de Argentina, its governing code stipulated that there could be no cross-ownership between the two.

But although the government has taken some aggressive measures - in response to the deal in Italy, it put monitors inside Telecom Argentina - neither the country's antitrust commission nor the telecoms regulator has yet ruled on the implications of the Telefonica transaction.

All bets would be off, Werthein argues, if its Italian adversary were to buy it out and so double Telefonica's indirect interest in Telecom Argentina.

"I don't think that Telecom can exercise the option as this will create a monopoly," Werthein said. It's not just a question of the option contract, he added, it is "an issue that will be solved by the authorities."

Others in the industry say the dispute may just as well be decided by local politics. They note that another Werthein family shareholder, Gerardo Werthein, was part of a delegation of Argentine businessmen who accompanied President Cristina Fernandez to New York this week for the United Nations General Assembly.

-By Shane Romig, Dow Jones Newswires; 54-11-4590-2438; shane.romig@dowjones.com

(END) Dow Jones Newswires

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