Brazil urges Telefonica to exit stake in rival TIM Brasil

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Brazil antitrust watchdog Cade ruled on Wednesday that Spain's Telefonica SA must exit its direct and indirect stake in wireless carrier TIM Participações SA or seek a new partner for its Vivo mobile phone unit.

In a meeting that took place at the regulator's headquarters in Brasilia, directors at Cade also ruled that a new partner for Vivo, Brazil's largest mobile phone carrier and part of Telefonica Brasil SA, will not be allowed to own a stake in another rival in Brazil.

Wednesday's ruling, which is definitive, gave a strong indication that the approval of Telefonica's stake increase in Telecom Italia SpA - TIM Brasil's parent company - faces serious challenges in Brazil. Cade's decision addressed Telefonica's failure to meet a so-called performance agreement signed in 2010 by which the company agreed not to participate in TIM Brasil's management decisions or raise its stake in Telecom Italia.

In addition to ordering the Spanish company to exit its stake TIM Brasil, Cade imposed a 15 million reais ($6.3 million) fine on Telefônica for increasing its stake in Telco, which owns 22.4 percent of Telecom Italia SpA - TIM Brasil's parent company.

TIM Brasil was also fined 1 million reais by Cade, after the wireless carrier hired a consultancy firm owned by Telefónica.

Analysts said Cade's decision was severe and aimed to punish Telefonica for failing to notify regulators in advance of its plan to increase its stake in Telco. While Cade was likely to impose fines on both firms, it was expected not to force Telefônica to sell the stake it acquired in Telco during the capital increase, Susana Salaru, a telecommunications analyst with Itaú BBA, wrote in a client note this week.

"Telefonica and Vivo are currently analyzing the extent of Cade's decision and will make a statement when it deems opportune," both companies said in a joint statement.

Telecom Italia spokespeople based in Milan did not reply to requests for a comment.

Shares of TIM Brasil gained 3 percent on Wednesday, while those of Telefonica Brasil shed 0.1 percent.(GNN)(Reuters)(GNN INT)

($1 = 2.37 Brazilian reais)

(Reporting by Leonardo Goy; Additional reporting by Guillermo Parra-Bernal, Luciana Bruno and Stephen Jewkes; Editing by Gary Hill and Lisa Shumaker)