By Sophie Sassard and Danilo Masoni
LONDON/BARCELONA (Reuters) - Telecom Italia Chief Executive Marco Patuano is expected to propose at a Friday board meeting that the best option for the company's Brazilian mobile business is to pursue an acquisition of rival Oi, three people familiar with the matter said.
It was not clear whether the board would back the plan, and board chairman Giuseppe Recchi does not want to make a hasty decision on the key strategic issue, said the people.
Patuano's case will be based on an estimate that combining TIM Participacoes, Brazil's No.2 mobile carrier, with Grupo Oi, the No.3 mobile and leading fixed phone provider, would bring cost savings of 20 billion to 30 billion reais ($7.8 billion to $11.7 billion), said one of the people.
The wide range exists because the Italian side needs to do due diligence to evaluate Oi's finances.
"Tomorrow we will talk about strategy in general following the rules of a company that is careful in creating value for all shareholders," Recchi told Radio 24 on Thursday.
Asked whether Telecom Italia will do a deal with Oi, Recchi answered: "Who knows? There is a debate underway. Tomorrow we will talk about Brazil in general."
Brazil's telecom market is in the process of consolidating because growth has slowed in mobile and big investments are needed to upgrade creaky broadband networks. But it is not certain who will be taken out as the market shifts from four to three mobile players.
Oi does not necessarily see itself as prey, despite its high debts. It has bankers working for it on a joint bid for TIM along with competitors Telefonica of Spain and Mexico's America Movil.
Patuano said earlier this month that Telecom Italia must explore the possibility of buying or merging with Oi so as to strengthen TIM, which is the only local mobile player without a fixed network. Telefonica, the owner of mobile leader Vivo, recently agreed to buy broadband specialist GVT.
Telecom Italia was not immediately available for comment. TIM and Oi declined to comment.
In the scenario being pitched by Telecom Italia management, the company would merge its Brazilian operation with that of Oi and end up with majority control of the combined entity, said two of the people.
No capital increase would take place at Telecom Italia, but TIM could raise as much as 2 billion euros ($2.5 billion) in a share sale to fund the deal, said another person close to the situation. Executives from TIM met investors in London last week to gauge appetite for such an offering, said the person.
Telecom Italia, which owns 66.5 percent of TIM, would retain control of the new entity by participating in a rights issue, said the person.
Another option for Telecom Italia would be to hold off on any deal-making in Brazil and instead focus on improving TIM's performance via additional network investments. Chairman Recchi is said to prefer this course, although a sale could be revisited at a later stage, said two of the people.
A delay could also help attract additional bidders for TIM, according to sector bankers, notably U.S. powerhouse AT&T. The operator is unlikely to make a move before it has digested its $48.5 billion acquisition of satellite player DirecTV, which is present in Brazil.
(Additional reporting by Guillermo Parra-Bernal; Writing by Leila Abboud; editing by Keiron Henderson)