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Brazil: Vivo Hurts Competition?

Vivo's latest purchases should not negatively affect Brazil's telecom competition, experts say.

Latin America Advisor

Vivo, Brazil's largest mobile phone company, said [recently] it has agreed to acquire control of Telemig and Tele Norte Celular (Amazonia Celular), two regional wireless companies in the South American country, for $639 million. Do you see the offer as a good or bad deal for the companies involved in the sector? Will Brazil's regulators go along with the consolidation?

Alex Zago, Senior Telecom Research and Consulting Analyst at IDC: With the acquisition of Telemig, Vivo would finally have access to one of Brazil's largest provinces (Minas Gerais). Although the acquisition would reduce the number of competitors in the region from four to three, there is no doubt that Vivo, Claro, and Oi would continue to compete for every client. The case of Amazonia Celular is a little bit more complicated. Vivo was already a competitor in Amazonia Celular's coverage area; therefore, the acquisition would result in a operator with more than 40 percent market share (nearly 75 percent market share in the case of the state of Roraima). The problem here is that the third competitor in this region is TIM, which was recently acquired by Telefonica. In a scenario where Vivo, TIM, and Amazonia compete as a single company, competition would certainly be threatened. In the case of Roraima and Amapa states, Vivo would be the only provider, and in the rest of the region the mega-carrier's market share could be as high as 85 percent. Therefore, it is hard to analyze the acquisitions of Telemig/Amazonia Celular separately. The regulators have not approved the acquisition of TIM yet. If Vivo does not acquire TIM Brasil, I believe the acquisitions of Telemig/Amazonia Celular would be approved easily. The Brazilian government is aware that the telecommunication sector will go through mergers and acquisitions. It is also aware that TIM's sale was a result of Telecom Italia's need for financial resources. In spite of that, it is the government's duty to ensure competition in the long run, and the competitive landscape of the Brazilian mobile telephony market could be moving in the wrong direction.

Tricia Paoletta, Partner at Harris, Wiltshire & Grannis: Even after Vivo's purchase of Telemig, the Brazilian market would remain competitive. Vivo and Telemig's combined market share would be 31.41 percent, followed by TIM with 26.38 percent and Claro with 24.55 percent. With such market shares, the Brazilian regulator, Anatel, would have little cause to block the acquisition based on a perceived threat to competition. Vivo also has some goodwill stored up with Anatel, thanks to investment in mobile infrastructure, overlaying CDMA to GSM during the last year. However, given the costs of such network investment, observers will question how much more they have to invest in the upcoming 3G (third-generation mobile) auctions and the deployment of new network infrastructure in 2008. In terms of the long-term strategy and competitiveness of Vivo, while it will have bought itself some time with the Telemig purchase (if approved), and will have shored up its market share, its longer-term competitiveness depends on 3G service strategies in 2008. Vivo's competitors, TIM and Claro, will have the benefit of operating and upgrading a single technology network, based on GSM. Vivo on the other hand will have to split its efforts between CDMA and GSM maintenance and upgrade. The economies of scale offered in a single technology network will help TIM and Claro in service provision and coverage, which will be the main drivers to enable them to compete against Vivo in retaining and attracting new customers.

Beatriz Battelli, Telecom Analyst at Banco Brascan in Sao Paulo: Even though the transaction multiple exceeds Vivo's current trading multiple, we consider the acquisition of Telemig Celular and Amazonia Celular positive for the company due to synergies resulting from the transaction. Vivo will start operating with more muscle in the Minas Gerais market, where until now it did not have a license and could not offer digital roaming for its client base. Besides, Vivo will also add to the region a high value-added portfolio of clients, which have allowed the mobile telephony operation with the highest EBITDA margin in the sector. For Telemig Celular and Amazonia Celular, we also think that the transaction is positive due to a stronger management. Regarding the sector's consolidation, we believe that the merger of Telemar and Brasil Telecom is possible, given that the largest stake in Brasil Telecom is held by local pension funds (after the exit of Telecom Italia from the controlling group), coupled with recent statements by the government favoring creation of a large national company, which might facilitate the necessary changes in the Brazilian legislation. We also expect that Portugal Telecom will sell its stake in Vivo to Telefonica. After this, the Spanish company might merge Telesp and Vivo, which would be positive, due to operating and fiscal gains.

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


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