Spain's Telefonica, Telecom Italia Could Merge By March - Paper

Spain's Telefonica (TEF) and Telecom Italia (TI) could announce a merger deal by early March, Brazilian newspaper O Globo reported in Tuesday's editions.

Telefonica has discussed the deal with bankers and obtained financing for the deal, which would be announced after both companies report financial results later this month, O Globo said. The report cited unnamed sources with knowledge of the talks.

In a filing with Brazilian stock regulators on Tuesday, Telefonica called press reports of a possible tieup with Telecom Italia "unfounded."

Telefonica and Telecom Italia officials declined to comment on the report when contacted by Dow Jones Newswires.

A Telefonica-Telecom Italia would likely face a tough test from antitrust officials in Brazil. The deal would merge the country's largest and third-largest mobile phone companies, as well as the fixed-line operator in Sao Paulo, Brazil's richest state.

Telefonica owns a 50% stake in mobile operator Vivo (VIVO4.BR), Brazil's largest mobile phone company, and Telecomunicacoes de Sao Paulo (TLPP4.BR), or Telesp. Telecom Italia, meanwhile, controls an 86% stake in TIM (TCSL3.BR) - the country's third-largest mobile phone company.

One of the sticking points to any deal, O Globo reported, was how to value the stakes in each companies' Brazilian assets. According to sources, Telecom Italia's holding in TIM is worth more than Telefonica's stake in Vivo.

Under discussion was the possible sale of Telefonica's stake in Vivo to Portugal Telecom (PT, PTC.LB), which would then try to arrange a partnership with Tele Norte Leste Participacoes (TNE), also known as Oi. Portugal Telecom currently holds a 50% stake in Vivo, as well as a stake in Internet portal UOL and technology company GPTI.

Shares in the local operators traded higher on the report, but accompanied the broader market. TIM's common shares rose 3.7% to 7.06 reals ($3.82), while Vivo's preferred shares were 2.9% higher at BRL53.19. Telesp shares advanced 0.8% to BRL40.55.

The broader market as measured by the Ibovespa stocks index was 2.7% higher at 64,835 points as of 1522 GMT.

-By Jeff Fick, Dow Jones Newswires; 55-21-3288-5011; [e-mail]

(Giada Zampano in Rome contributed to this report.)