By Danilo Masoni and Guillermo Parra-Bernal
MILAN/SAO PAULO (Reuters) - Telecom Italia has concluded it cannot make a move in the expected consolidation of the Brazilian market, where it controls the second biggest mobile operator, until the corporate turmoil abates at prospective merger partner Oi, according to sources familiar with the matter.
Oi also needs to cut its debt and costs before Telecom Italia makes a move, one of the sources said.
The board of Telecom Italia last month asked CEO Marco Patuano to examine the feasibility of a tie-up between its majority-owned subsidiary TIM Participacoes SA and Oi, without giving a deadline for reporting back.
Telecom Italia is aiming for 51 percent of the combined entity, and documents reviewed by its board last month showed potential synergies worth up to 9 billion euros (7.13 billion pounds).
A merger would also create the biggest telecoms player in Latin America's largest market, with a current combined market capitalisation of nearly $16 billion, as fixed and mobile telecoms markets converge and competition grows more intense.
Accounting for a fifth of Telecom Italia's core profits, TIM Participacoes (TIM Brasil) is the second largest mobile network operator behind Telefonica's Vivo but lacks a fixed line network. Telecom Italia lost out earlier this year to Telefonica in the bidding to buy local broadband and pay-TV operator GVT from Vivendi.
In targeting Oi instead, owner of the country's biggest fixed line network but the smallest of the four mobile operators, Telecom Italia is also attempting to turn the tables after Oi revealed its plans to put together a break-up bid for TIM Brasil with rivals Vivo and America Movil.
But Oi, struggling with over $17 billion of debt, has other deals to do before that as it seeks to unwind its troubled merger with Portugal Telecom by selling off the assets acquired, a move which has now been challenged by billionaire Angolan businesswoman Isabel dos Santos with her bid for Oi's key shareholder Portugal Telecom SGPS.
Portugal Telecom SGPS announced on Friday it has called a shareholder meeting for Jan. 12 to vote on whether to back Oi's decision to sell the Portuguese domestic business PT Portugal to telecoms group Altice for 7.4 billion euros.
"(Telecom Italia) is in no rush. They are testing the ground and they will not make a rushed decision," one of the sources said.
According to the source Telecom Italia has also said at recent informal meetings with officials in Brazil that it was now only likely to bid for Oi if the government gives assurance over that Oi's operating permits are renewed and some costly service obligations are removed.
However, the process of getting such assurances could in itself take several months to complete, he said.
A second source said the feeling within Telecom Italia was also that any move on Oi should also wait until Oi concludes a plan to merge its two classes of stock into a single, common share structure, which might not happen until the end of the first quarter of 2015.
(Additional reporting by Sophie Sassard and Pamela Barbaglia in London; Editing by Greg Mahlich)