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Brazil Wireless: Competition Continues 

Latin America Advisor

Italy's Pirelli group has agreed to sell its controlling stake in Telecom Italia to a consortium made up of Spain's Telefonica and a group of Italian companies, thwarting plans by Mexico's Carlos Slim to acquire control of Telecom Italia and gain the upper hand in Brazil's mobile market. Should the Telecom Italia deal go through, what's in store for Brazil's mobile market? How will regulators address competition issues arising from the deal? What are Slim's options in Brazil now?

Wally Swain, Senior Vice President for Emerging Markets at The Yankee Group: As we said when the Telmex-AT&T deal was announced, 'wait for it. This isn't over yet.' That advice still holds even if the players have changed. If anything, Telefonica's purchase of a controlling stake in Telecom Italia is even more complicated. There are even rumors that Telefonica will swap its Telecom Italia stake for Portugal Telecom's stake in Vivo. The numbers are in the right ballpark, but given PT's avowed commitment to the Brazilian market—and the ties of language and culture—why would they swap 50 percent of Vivo for a more distant control of TIM Brasil and a bunch of other assets not necessarily related to their core strategy? Neither Anatel nor the ministry nor CADE, the competition authority, will like a Vivo-TIM Brasil merger any better than a Claro-TIM Brasil merger. Telefonica will argue that their small stake does not imply control, but the Brazilians are unlikely to buy that. This will not terminate in any merger, but rather a redistribution of assets between Telefonica and PT. Slim will also wait and see how this all finishes before showing his next move. There are few other Brazilian targets worth considering if TIM Brasil is off the table either because the new owner won't sell or because the Brazilian government won't let an existing player buy.

Diego Bubillo, Analyst at Signals Telecom Consulting: Telefonica, with its acquisition of control of Telecom Italia, is obtaining benefits twice over: expanding its business and limiting that of Carlos Slim, as much in Europe as in Latin America, where Grupo Telefonica and Grupo Carso are fighting for leadership in the telecom sector. In Brazil, regulators will see a new market configuration, with the presence of Telefonica in more than one operator by segment: Telesp and Brasil Telecom in the fixed segment, and Vivo and TIM in mobile. In this regard, the most important thing to be studied by Anatel will be the presence of Telefonica in two competing companies (TIM and Vivo) in several states and the overlap of long-distance licenses between TIM and Telesp. In the fixed business, Telefonica will be able to benefit if Anatel authorizes the merger between incumbents Telesp and Brasil Telecom. In mobile, the possibilities are several: a Vivo-TIM merger (returning spectrum) or Telefonica deciding to stay in control of just one operator: acquiring all of TIM or Portugal's 50 percent stake in Vivo. In any event, the Telefonica-Telecom Italia deal first has to be approved by various regulatory bodies in Europe before being taken up by Anatel in Brazil, which will not be before the fourth quarter of this year. A clause in the Telefonica-Telecom Italia deal indicates that the Spanish company could veto a competitor's acquisition of a stake held by the Italian group in other companies. This prevents Grupo Carso—which in Brazil already has Embratel, Net Servicos, and Claro—from acquiring TIM or Telecom Italia's stake in Brasil Telecom. Therefore, with a very limited scope for action, Grupo Carso will certainly put more emphasis on the acquisition of Telemig Celular and Amazonia Celular, which are becoming essential to achieving consolidation in the mobile market and expanding its coverage.

George Foote, Attorney at Bracewell & Giuliani in Washington, DC.: The success of Telefonica in acquiring Telecom Italia is not necessarily a loss for Carlos Slim and his telecommunications enterprise. The Mexican magnate's ambitions in Brazil and Latin America are no secret, and the Telecom Italia assets in Brazil would be a marquee addition to his plans. In that sense, the Telefonica coup is a setback. But the Slim method of dominating a national telecom market and wielding influence with its regulators, although successful in Mexico, is not the only way to succeed in the telecom business. His very loss may contribute to later success for himself, as well as the economy and the consumers of Brazil. Telefonica has a large and competent presence in Brazil. Through its regulatory battles with Embratel and other telecom entities in the country, it has strengthened its position in wireless. It also has helped develop telecom and competition law in one of the fastest-growing industries in the largest country in Latin America. The Brazilian telecom and competition regulators function well. The happy result is that no national wireless carrier dominates in Brazil; competition is lively ... A vigorous Telefonica will help preserve these conditions, so Slim has every chance to find other investment opportunities to expand in the Brazilian wireless marketplace.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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