(Updates with comments from Brazil's Communication Minister)

   By Rogerio Jelmayer 
 

SAO PAULO--The move by Telefonica SA (TEF) and a group of Italian partners to allow Telefonica to gradually take control of Telco, the largest shareholder in Telecom Italia SpA (TI), could cause Brazil's antitrust agency to force the combined company to sell at least some local assets, Brazil's Communication Minister said Tuesday.

"One company can't control two entities this big here," Minister Paulo Bernardo told reporters. "It would concentrate market in the hands of one group, with more than 50%" market share, he said, "and it would eliminate one competitor in the market, which for us is very negative."

Mr. Bernardo, whose ministry doesn't have authority to decide on the issue, said the country's regulators will look into the potential deal once they are officially informed about its details.

"CADE [the government's anti-trust council] is likely to ask the merged company to sell a portion of its assets to local competitors or even to new players interested in entering Brazil," said Fernando de Magalhaes Furlan, former CADE chairman, in an interview.

Mr. Furlan, who was CADE chairman in 2011 and 2012, noted his view was preliminary, given the fact that the companies have still not published all details of the deal.

However, Mr. Furlan pointed out a public statement made by CADE in 2007 on the occasion of Telefonica's purchase of a large minority stake in Telco. Asked at the time by Telefonica itself to comment on antitrust implications of the 2007 purchase, CADE said, "Even the slightest change in Telefonica's holdings in Telecom Italia...could compromise the competitive situation in the [Brazilian] market, making greater intervention necessary."

Under terms of the deal announced this week, Telefonica will boost Telco's capital and hold an option to buy the rest of it next year.

Telefonica will immediately pay 324 million euros ($438 million) in cash to buy new non-voting shares of Telco, lifting its ownership stake to 66% from 46%, according to statements from Assicurazioni Generali SpA (G.MI), Intesa Sanpaolo SpA (ISP.MI) and Mediobanca SpA (MB.MI), all of which will remain junior Telco shareholders.

Through their local subsidiaries, the companies have a dominant presence in Brazil's mobile phone market. Telefonica Brasil SA (VIV, VIVT4.BR), also known as Vivo, and TIM Participacoes SA (TSU, TIMP3.BR), are the two biggest companies in terms of market share, with 28.69% and 27.22%, respectively.

Claro, the local unit of Mexico's America Movil SAB (AMX, AMX.MX), is the third-largest company, with a 24.97% market share, followed by Oi SA (OIBR, OIBR4.BR), with 18.66%.

Brazil's mobile-phone industry has a total of 267 million active phones, more than the country's population of around 200 million people.

"This latest operation shows that Telefonica is taking control of the Italian company," said Mr. Furlan. "As CADE has no jurisdiction to judge a case in other countries, the only action CADE can take is with regard to effects on the Brazilian market." However, he said CADE is likely to be highly interested in evaluating such effects.

According to Mr. Furlan, after the companies officially inform CADE about the operation, the council will have a maximum period of 330 days to hand down a ruling.

Mr. Bernardo said regulators may force the group to sell TIM, and added that none of the current players should be allowed to buy it, as a way to avoid concentration.

A CADE spokeswoman confirmed Mr. Furlan's timetable, but said that the anti-trust body will not comment on the substance of the operation given the fact that the companies have not officially informed the council as yet.

A spokesman for Brazil's telecommunications regulator ANATEL said the agency will be involved in CADE's analysis of the case.

--Paulo Trevisani and Gerald Jeffris contributed in this article.

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

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