PARIS (Reuters) - French media company Vivendi picked Telefonica for exclusive talks over the sale of its Brazilian broadband unit GVT, spurning a rival bid from Telecom Italia.
Telefonica will fold GVT into its Brazilian mobile phone carrier Vivo to create the country's biggest telecom group. It will then use GVT's pay-TV and broadband know-how and its broad network to chase higher-value customers and keep profits growing as mobile subscriber growth slows.
Vivendi's decision deals a blow to Telecom Italia, which needed GVT to shore up its own Brazilian mobile business Tim Participações, which lacks a fixed-line network.
For Vivendi, the GVT sale caps a tumultuous two-year overhaul in which it sold three telecom businesses and its video games arm to pay down debt and focus more on media and content.
"The Telefonica offer best meets the group's strategic and financial objectives," said the French company.
"Vivendi begins a new phase in its development to become an integrated industrial group focused on media and content."
In a statement late on Thursday Telecom Italia acknowledged Vivendi's decision to choose Telefonica for exclusive talks over GVT.
"From the start Telecom Italia has made it clear it would take a disciplined approach to its strategy in Brazil," it said, adding it would continue to pursue development plans in the country in line with its 2014-2016 business plan.
Vivendi will get 4.66 billion euros ( 3.68 billion pounds) in cash from Telefonica, which boosted the cash element of a previous bid to see off Telecom Italia.
Vivendi will also get a 12 percent stake in the combined Vivo-GVT, of which about one-third could be exchanged for a 5.7 percent stake in Telecom Italia if Vivendi so chose.
Telefonica is Telecom Italia's largest shareholder but the two have had a tense relationship for years as they also compete in Brazil.
French tycoon Vincent Bollore, who is Vivendi's largest shareholder, led the talks with Telefonica and Telecom Italia in recent weeks, in his first major strategic move since taking over as chairman in June.
Bollore wants to get Vivendi's remaining units, which include Universal Music Group and French pay-TV operator Canal Plus, to work more closely together to generate growth.
Vivendi is also expected to build up its media and content activities via acquisitions, and will be flush with cash even after returning money to shareholders.
The French company is likely to take up the option to be paid for GVT partly in Telecom Italia shares, said two people close to the company.
Vivendi Chief Executive Arnaud de Puyfontaine said such a stake could be "attractive" and played down investors' concerns about whether the group was going back on its pledge to move out of telecoms.
"Our strategy is to be an integrated media group but opportunistically we can hold minority stakes in telecoms," he said. "The priority is to ensure the widest possible distribution and monetisation of our content."
After the GVT sales closes in mid-2015, Vivendi will own stakes in French telecoms group SFR, which it is in the process of selling to Numericable, Telefonica Brasil, and potentially Telecom Italia.
Winning GVT was crucial for both Telefonica and Telecom Italia since their European home markets have been shrinking. Brazil brings in one-fifth of Telefonica's revenue and one-third of Telecom Italia's sales.
Telefonica has coveted GVT since it lost an initial bidding war to Vivendi to buy the company in 2009.
With GVT, Telefonica will gain a much bigger broadband network in Brazil without having to build it. Vivo is the country's third-biggest broadband provider but is concentrated around the Sao Paulo region, whereas GVT has built coverage elsewhere, such as in Rio de Janeiro, the south and northeast.
Telefonica will carry out capital increases at the group level and at Telefonica Brasil to pay for the GVT deal.
Telecom Italia looks unlikely to come back with a new offer. Analysts say its balance sheet is too stretched and its chief executive has pledged not to do anything "crazy" in a bidding war.
Its losing bid, also a cash-and-shares offer, valued GVT at 7 billion euros, including 1.7 billion euros in cash, a 16 percent stake in Telecom Italia and a 15 percent stake in the new Brazilian entity.
Telecom Italia's Tim, number two in Brazil's mobile market, may now be vulnerable to a takeover by rival Grupo Oi, which is exploring a bid to split up Tim between itself, Mexico's America Movil and Telefonica.
Telecom Italia shares closed up 1.3 percent as investors speculated that a sale of Tim Brasil could be in the offing. Oi shares jumped as much as 3.5 percent.
"If Tim had merged with GVT it would have been a much tougher target," said Alex Pardellas, a telecom analyst at CGD Securities in Rio de Janeiro. "Now it remains a natural candidate for consolidation."
Reporting by Brad Haynes in Sao Paulo, Tracy Rucinski in Madrid, Gwenaelle Barzic in Paris and Lisa Jucca, Stefano Rebaudo and Stephen Jewkes in Milan; Editing by Andrew Callus, Tom Pfeiffer and Keiron Henderson