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Spanish Telecom behemoth, Telefonica (TEF - Analyst Report), has refused mulling over any option to buy a significant stake in Telecom Italia S.P.A (TI - Snapshot Report) by tying up with investment management company BlackRock Inc. (BLK - Analyst Report).

The concerns started mounting after BlackRock recently raised its stake in TI to 9.9% making it the second largest stake holder in the Italian telecom giant. However, responding to queries raised by the Italian stock market regulator, Telefonica declared that it is not increasing its stake further. Notably, TI has struggled in recent years due to lower investments and a massive debt obligation.

TI is controlled by Telco, which owns a 22.4% stake in the Italian carrier. Telco in turn is owned by Intesa San Paolo SpA, Assicurazioni GeneraliSpA, Mediobanca and Telefonica. Earlier in 2013, Telefonica raised its stake in Telco by acquiring shares from other investors and has the option to buy a controlling interest in 2014.

Telefonica, which operates under the Vivo brand in Brazil, had 76.614 million subscribers at the end of Sep 2013. However, Telefonica could face anti-trust concerns in Brazil if it raises its stake further in TI as the carriers remain competitors in the largest Latin American country.

Further, the Spanish incumbent has one of the highest debt burdens within the industry. The company has taken several initiatives including divestment of non-core assets to reduce its mounting debt. Telefonica is also slated to close its U.S.-based VoIP (Voice over Internet Protocol) subsidiary Jajah by the end of Jan 2014.

Owning a majority of TI will allow Telefonica to get hold of a large pie of the Brazilian market share, but will put more pressure on its ailing balance sheet. We thus believe that Telefonica’s decision to raise stake is a wise one.

Telefonica Brasil, which operates with other Latin American telecom service providers like America Movil S.A.B. de C.V. (AMX - Analyst Report), currently holds a Zacks Rank #4 (Sell).

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