UPDATE 1-Telefonica mulls legal action against Brazil's antitrust watchdog

Friday, 13 Dec 2013 | 2:34 PM ET

* Telefonica says Brazil watchdog demands "not reasonable"

* Representatives on Telecom Italia board step down

(Adds details, background)

MADRID, Dec 13 (Reuters) - Telecommunications group Telefonica said on Friday it is considering legal action against Brazil's antitrust watchdog Cade, which earlier this month ruled against the Spanish company's Brazilian strategy.

Cade decided Telefonica had to exit its indirect stake in wireless carrier TIM ParticipaƧƵes SA, the local unit of Telecom Italia, or seek a new partner for its Vivo mobile phone unit.

Sources had told Reuters last month that Telefonica was already eyeing a sale of TIM from mid-2014 onwards in a double move to recoup part of its loss-making investment in Telecom Italia and reduce competition on the strategic Brazilian market.

Some analysts believe the Cade ruling could force Telefonica to speed up the plan, creating a headache for the company which is already busy dealing with antitrust reviews following deals in Ireland and Germany, or even derail it.

"Telefonica considered that the measures imposed (by Cade) are not reasonable and, as a consequence, is analysing the possibility of launching relevant legal action," the company said in a notice sent to Spain's stock market regulator.

A spokesman for Telefonica declined to provide any additional information.

Cade said in Brazil it had no immediate comment and was analysing the Telefonica statement.

The company also said in the notice that its representatives on the Telecom Italia board, including Telefonica Chairman Cesar Alierta, would step down from the board with immediate effect and the company would not present new candidates for now.

Telecom Italia, whose board is currently controlled by Telco, an investment vehicle that Telefonica has agreed to progressively take over, declined to comment.

The Spanish group, whose representatives used to step away from meetings when the board discussed the Brazilian operations, has long been accused of conflict of interest.

"They are giving a strong signal to the market that they are taking into account criticism," said a source close to Telco.

A London-based analyst who declined to be named said Telefonica's announcement could be a sign that the Spanish group is gearing up in Brazil.

"This could be a pre-cursor to a bid (for TIM Brasil) to remove the impression of bias on the Telecom Italia board," the analyst said.

(Reporting by Julien Toyer and Robert Hetz in Madrid, Danilo Masoni and Agnieszka Flak in Milan and Leila Abboud in Paris; Additional reporting Brad Haynes in Sao Paulo; Editing by David Holmes and Anthony Barker)

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