South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Brazil is one of the world’s prized telecom markets. Subscriber numbers were more than 268m in August, representing penetration rates of more than 1.35 lines per head of population, compared with 46m cellular lines a decade ago, according to Anatel, the industry regulator. By 2018, Brazilian cellphone users are expected to increase to 350m, a report by Ericsson predicted.
The prime beneficiary of this growth has been Vivo, owned by Telefónica of Spain, with more than 77m subscribers, followed by Tim, controlled by Telecom Italia, with nearly 73m. In third place was Claro, owned by Mexican billionaire Carlos Slim’sAmérica Móvil, with about 67m and then Oi, the former Brazilian incumbent fixed line operator, with 50m.
Speculation is rife, however, that Tim will soon be put up for sale by Telecom Italia in a transaction that could be worth at least €9bn, according to analysts. Anatel is unlikely to let Telefónica own the country’s two largest mobile operators, so Tim is expected to be divided up between Vivo, Claro and Oi.
Regulators are expected to be suspicious of any sale of Tim to its three rivals. Brazilian telecom companies are already regularly criticised by consumers for low-quality services, and any reduction in the number of operators would raise fears this would get worse.
Operators counter that high taxes, red tape and fierce competition limit their ability to invest, particularly in remote areas and in new technology, such as next-generation 4G services, which they aim to roll out in time for next year's World Cup.
For this reason, analysts expect the regulator to consider allowing only three operators, as long as they carve up TIM in such a way that no one company dominates any single region.
Zeinal Bava, chief executive of Oi who will remain in charge after the merger, says the combined Portugal Telecom and Oi would have the scale and financial firepower to participate in the wider consolidation of the fiercely competitive Brazilian market.
“If we do not make this move then we will never have the option to consider anything,” he told the Financial Times in an interview. “Let’s suppose that Telecom Italia gets rid of its asset in Brazil and sells bits to different people. Then there is a knock on my door and someone is saying how about this? I would have to raise capital – do you think I could do [that] before?”
The merger would result in a single, Rio de Janeiro-listed group with 100m customers and almost $19bn in annual revenue. It would span the new and old world economies with large operations in Brazil and Portugal, as well as an African business that could be sold, according to people familiar with its strategy.
It is a union though that has left some analysts scratching their heads, who say the transaction benefits the controlling shareholders of both companies at the expense of Oi’s minority shareholders. “The level of disclosure has been poor,” said Richard Dineen, analyst with HSBC.
This transaction is not just about scale, although that is important. We will have one listed entity, one class of shares, high liquidity, high standards of governance . . . the company becomes investable
- Zeinal Bava Oi chief executive
The structure of the company will be simplified to take out the debt of the old controlling shareholder, Telemar Participações. Portugal Telecom will go from holding a 25 per cent direct stake in Oi and an indirect stake of 12.1 per cent in Telemar to about 38 per cent of the new combined group.
From the spaghetti-like corporate structure of the old group, which had many classes of shares with unequal voting rights, the new company will have one class of shares with the same rights 100 per cent free floated on Brazil’s Novo Mercado, which entails the market’s highest standards of corporate governance.
“This transaction is not just about scale, although that is important,” Mr Bava says. “We will have one listed entity, one class of shares, high liquidity, high standards of governance . . . the company becomes investable.”
Analysts question whether the deal will really fortify Oi to make acquisitions. The merger is expected to generate synergies of R$5.5bn, although Oi will need to raise R$7bn-$R8bn to complete the deal. However, the group will be left with a large net debt of R$41.2bn even after the equity raising. That is equivalent to a net debt to 2013 earnings ratio of 3.3 times, a metric similar to Oi on a standalone basis, which Mr Bava acknowledges is high. This also worries analysts, with rating agencies threatening to downgrade the group’s debt to junk status.
The company’s debts are a legacy of a period of high dividend payouts to investors, a shareholder perk that mostly disappeared under Mr Bava after he cut the dividend by three-quarters.
“Of course, the shareholder base has got to change as a lot liked the dividend and yield, but now we are positioning ourselves as a growth stock.”