Oi, the Brazilian telecommunications company, formerly known as Telemar, is at an advanced stage of negotiations to take over Brasil Telecom (BrT) - a move that would create a national champion in an already relatively concentrated industry.
A deal, expected to be worth R$4.8bn (US$2.7bn), would also reduce the possibility of Brazils telecommunications industry being dominated by a foreign-owned duopoly.
Telefónica of Spain and Mexicos main fixed-line and mobile phone operators, Telmex and América Móvil, are the biggest players. The two Mexican groups, which operate as Embratel and Claro in Brazil, are owned by Carlos Slim, the worlds richest man.
Brazils government has long feared that the two domestic companies are no match for the financially superior, more aggressive Spanish and Mexican duo. Hélio Costa, the telecommunications minister, has been one of the key supporters of a deal between the two Brazilian companies. Dilma Rousseff, the powerful chief of staff, also favours the creation of a strong domestic player.
Telefónica is already dominant in São Paulo state, which accounts for 40 per cent of national traffic, and the Spanish-Mexican duo have bigger shares of the mobile market than either of their Brazilian rivals.
The Oi-BrT merger would create a roughly level playing field where none of the three companies dominate, said Ricardo Araújo Silva, a telecoms analyst at Banco Itaú in São Paulo.
Analysts said regulators could still block a deal. A national plan limits concentration in the industry, which means talks could conclude with a right of first refusal agreement between the two Brazilian companies, enabling the acquisition to go through quickly once the law has been changed.
However, the government could push changes through relatively quickly. There is broad support across the political spectrum for a national champion, [President Luiz Inácio] Lula [da Silva] is likely to change the rules by decree and could act soon, said Alex Pardellas, analyst at Banif Investment Banking in São Paulo.
In any event, the deal is also contingent on reaching agreement in what are complex shareholder structures. Oi is owned by pension funds as well as Citi-group of the US and Opportunity Asset Management.
Analysts said it was reasonable to expect Citi to want to divest its stake in view of the companys recent problems in the US mortgage market. A deal could net the US bank R$2.3bn. Some shareholders have stakes in both entities and could plough back profits into the newly merged entity. BNDES, Brazils state-owned development bank, could help fund the purchase.