(Adds comments from government agencies)
By Carolina Mandl and Gabriela Mello
SAO PAULO, Sept 19 (Reuters) - Brazilian telecommunications firm Oi SA is in talks with Spain's Telefonica SA and Italy's Telecom Italia SpA to sell its mobile network to avoid insolvency, five people with knowledge of the matter said.
Oi has been struggling to turn around its business since filing for bankruptcy protection in June 2016 to restructure approximately 65 billion reais of debt.
Brazil's largest fixed-line carrier expects to raise more than 10 billion reais ($2.4 billion) by selling its mobile operations, according to two of the sources, who spoke on condition of anonymity because the talks are confidential.
Oi reported some 35 million mobile clients in its most recent earnings.
Proceeds from the sale would be used to boost fiber-to-home (FTTH) broadband service, considered key to the company's growth, according to its strategic plan in July. Oi currently has 223,700 miles (360,000 km) of fiber in Brazil and its infrastructure is also used by other carriers.
The company is also in preliminary talks with AT&T Inc and a Chinese company, aiming to lure more operators that do not operate in Brazil yet, two other sources said.
Representatives for Oi, AT&T and the Brazilian unit of Telefonica declined to comment on the matter. A Telecom Italia representative in Italy denied that "any negotiations are underway with Oi."
New entrants would not face the same antitrust hurdles as companies already in Brazil. Brazilian antitrust watchdog Cade and telecom regulator Anatel may resist the sale of Oi's mobile network to one or two carriers with operations in the country, two of the sources said.
Anatel said in an emailed statement that "a potential acquisition of Oi's mobile network by other telecoms providers must be previously submitted to this agency" and that so far it has not received any formal submission of the sort.
Cade declined to comment on the matter.
Although current talks have focused on Oi's mobile network, the sale of the entire company is not ruled out, one of the sources added, although such a deal looks less likely.
Since it filed for bankruptcy, Oi's mobile customer base has shrunk over 20%, and the company is spending heavily to expand its fiber network. Its cash position fell to 4.3 billion reais ($1.1 billion) at the end of June, some 2 billion reais below what it foresaw in its restructuring plan, according to another source.
If Oi runs out of cash, it could leave millions of Brazilians without service or force regulator Anatel to intervene, creating a potential burden on a tight federal budget.
In a report on Wednesday, Fitch calculated that Oi is likely to face a shortage of 7 billion reais through 2021 due to intensive capital spending. "Oi depends on assets sales and short-term regulatory changes to finance its transition to a sustainable business model," the rating agency noted.
Oi hired Bank of America to advise on the sale of non-core assets in January, and two of the sources said it is now helping to evaluate the sale of core operations which include the mobile network.
Bank of America did not immediately respond to a request for comment.
While in negotiations to sell its mobile operations, Oi is mulling short-term alternatives to raise money, according to the sources, such as the issuance of up to 3 billion reais in debt backed by proceeds of future asset sales.
The telecom carrier is also trying to speed up the sale of its stake in Angolan carrier Unitel to some of its current shareholders, which could raise around $1 billion and unlock unpaid dividends.
The company is also exploring a capital increase or financing round by existing shareholders, which would give Oi more room to manage its short-term liabilities.
According to a source with direct knowledge of Oi's operations, Oi Chief Executive Officer Eurico Teles and some shareholders oppose the sale of its mobile network.
($1 = 4.11 reais) (Reporting by Carolina Mandl and Gabriela Mello; Editing by Cynthia Osterman, Bernadette Baum and Sonya Hepinstall)