TIMB TIM SA

By Rogerio Jelmayer 

SÃO PAULO--Brazilian phone company Oi SA is getting a long-awaited second chance at being a key player in the consolidation process in the country's telecoms industry.

Oi said Monday that LetterOne, an investment firm led by Russian billionaire Mikhail Fridman, proposed investing $4 billion in the Brazilian phone company, though the offer is conditioned on the success of a potential merger with TIM Participações SA, the Brazilian unit of Telecom Italia SpA.

If the merger goes ahead, LetterOne will be an important shareholder in the new company, though the exact size of the stake has yet to be defined, according to a person involved in the talks who declined to be identified.

The LetterOne investment will be presented to Oi's board later this week and if it's approved, "a formal proposal to Telecom Italia will be made by the end of November," said the person, without providing any more details.

TIM Participações said Monday in a statement that there are currently no talks with LetterOne or Oi about a possible merger or acquisition. LetterOne didn't respond to a request for comment.

It's not the first time Oi has tried to spark a consolidation in Brazil's telecom industry as the company struggles to reduce its huge debt.

In August of 2014, Oi said it had hired Brazilian investment bank BTG Pactual to look into acquisition and merger possibilities in Brazil, including a potential deal with TIM Participações.

BTG--which still has a mandate from the company to work on a potential deal--received a proposal from LetterOne that could include a capital contribution of as much as $4 billion in Oi, the phone company said Monday.

In 2014, Oi and BTG agreed to work with the Brazilian unit of Telefónica SA and Claro, owned by Mexico's America Movil SAB de CV, to make a combined offer to buy TIM Participacoes and split up its assets, a person involved in the deal told The Wall Street Journal at the time.

The offer never materialized, though, after Telefónica and Claro chose instead to invest directly in their own operations.

Oi has 35% of Brazil's fixed-line telephone market, but fell behind rivals in the mobile race and has been trying to make up ground while cutting its heavy debt load. In the second quarter, the most recent figure available, its net debt totaled 34.64 billion reais ($8.99 billion), while its net revenue in the period totaled 6.78 billion reais.

"Oi can't stay paralyzed, the company needs to do something to reduce its debt because its main competitors continue to invest and gain even more of a competitive advantage," said Alexandre Montes, a telecom industry analyst at consultant firm Lopes Filho Consultores, in Rio de Janeiro.

Oi could use LetterOne's $4 billion to cut debt, paving the way for a merger with TIM Participações, Mr. Montes said.

"From TIM's side, a merger with Oi could be positive, because TIM doesn't have a relevant position in the fixed-phone and broad-brand markets," he added.

Oi shares rose as much as 15% in early trading Monday, and was up 6.4% at 3.57 reais to 12:39 p.m. local time. TIM Participações shares were up 4.7% to 8.47 reais. By comparison, the main local stock market index, the Ibovespa, was down 0.6% at 12:39 p.m.

Write to Rogerio Jelmayer at rogerio.jelmayer@wsj.com

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(END) Dow Jones Newswires

October 26, 2015 11:29 ET (15:29 GMT)

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