3rd UPDATE:Colombia's ETB To Pick Controlling Partner Mid-Oct

Colombian state-controlled telephone company Empresa de Telecomunicaciones de Bogota SA (ETB.BO) will select a partner to inject fresh capital in return for a controlling stake in the company sometime around Oct. 16.

The company will sell new shares, equivalent to a 36.6% stake, to the new partner, who will be selected during a public auction to be held around Oct. 16. The winner will be the one that offers the highest price per share, said Juan Carlos Alvarez, an investment banker with the local unit of Santander SA, which is handling the process.

The minimum price will remain secret until the auction.

The city council, which currently controls the company, will change its current shares into non-voting shares so that the new partner will control the company, Alvarez said.

"Unless the bidder decides to submit an offer without operating management and becomes a capitalist partner," he added.

At the same time, ETB will sell additional shares to current minority holders at the same price to avoid dilution of their stakes.

The new partner will have to buy the shares the minority holders don't.

The partner will also commit to holding a tender offer to buy minority shareholders' stakes at the same price as offered in October.

In the case all minority shareholders decide to leave the company, the partner would end up with a stake close to 49%, with a majority of voting shares, ETB said in a filing to the market regulator.

To qualify as a bidder, the new partner must already operate at least 1.5 million fixed lines or 5 million mobile lines and at least 100,000 Internet connections. The future partner also must have booked at least $1 billion in total revenues in the last fiscal period.

Shares of ETB ended Tuesday up 3.7% at 942 Colombian pesos ($0.45), while the IGBC stock index rose 0.1%.

ETB badly needs capital to face rising competition from Spain's Telefonica SA (TEF) and Mexico's Telefonos de Mexico SA (TMX), which entered the Bogota market over the past three years and quickly gained significant market share.

ETB's revenues from fixed-line and long-distance calls are stagnating as the three firms now offer fixed line, Internet connection and cable TV bundled together, a service known as triple-play.

"When ETB had no competition more than three years ago, we considered its share price was worth COP1,300," said Andres Jimenez, a market analyst with local brokerage Interbolsa. "Time meant a huge destruction of value for that company," he added.

He estimates the price offered by the partner would be around COP1,000 per share, or even less.

Even though the new partner would get control of the company, the city council will still be on the board and will have influence in the company, which is a negative aspect, Jimenez said.

Additionally, ETB's labor union remains very influential. "We will oppose privatization. What the company needs is not a strategic partner, but good management," Carlos Velasquez, an ETB union leader, said Wednesday.

Unionized workers will protest, and the union will put pressure on the city council and on public opinion to reverse the process, he added.

ETB is controlled by the Bogota city council, which holds 88.4%, while minority shareholders have the remaining 11.6%, according to the company's Web site.

-By Inti Landauro, Dow Jones Newswires; 57-1-610 70 44, Ext. 1131; [e-mail]