Latin Finance - September/October 2010 - 71

Brazil telecoms

Mobile Scramble
by Vincent Bevins

n late July, Telefónica finally wrapped up a lengthy – and expensive – quest to buy Portugal Telecom(PT) out of a mobile venture in Brazil, and will now be able to integrate it with fixed-line services. Not willing to leave Latin America’s biggest market behind, PT involved embedded realistic expectations of large synergies, and used part of the proceeds to buy a share in Oi, Brazil’s only major PT didn’t want to lose control. At the moment, Vivo and Tim national telecoms provider. [Telecom Italia’s local mobile operation] are trading at around Not to be outdone, Carlos Slim’s empire shortly afterwards four times Ebitda. AMX [Mexico’s América Móvil] is trading close sent a clear signal of its own major consolidation plans for Brazil. to seven,” he says. And now, there is speculation that UK-based Vodafone may be eyeing the local operations of Fixed Versus Mobile Mobile Subscriber Base, By User (1,000s) Telecom Italia, which controls The second is that in Brazil’s At 94% penetration the other major mobile service expanding market, companies in Brazil. are taking advantage of new 200,000 The scramble reflects two laws that allow consolidation, 185,135 major trends. The first is familiar 180,000 and adjusting to the increasing enough to almost be cliché: importance of mobile services, 160,000 emerging markets are seen to as fixed-line offerings take a 140,000 be powering world economic back seat. 120,000 growth and offer much more “It’s become pretty clear in 100,000 room for expansion than every emerging market in the 80,000 developed markets, say analysts. world that the way to provide Brazil population= 193.0 million Brazil’s economy is expected 60,000 voice coverage on a quasito grow by over 7% this year, universal basis is mobile,” says 40,000 and José Sócrates, prime Michel Morin, director of LatAm 20,000 minister of Portugal, made it equity research at Barclays. 0 clear he would not allow PT to “And, if you look at 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 exit a market which provided broadband penetration in Source: Goldman Sachs, Anatel such a high proportion of sales, Latin America, broadband is no matter what shareholders approaching levels comparable thought. And the high price Spain’s Telefónica paid – more to PC penetration of households. The device in the home is than PT’s entire market capitalization, valuing Vivo, their joint becoming somewhat of a barrier. Mobile phone penetration venture, at around 11 times Ebitda – proves just how crucial it of people is getting close to 100%, however.” So companies thought integrating Brazilian services would be. are looking more and more to mobile operations as a means of “Everybody is starting to realize that all of the companies in supplying internet, he says. Brazil have the ability to generate a tremendous amount of cash,” For the last few years, Vivo, run jointly between Telefónica says Lucio Aldworth, a telecoms equity analyst at Goldman Sachs and PT, has been the market leader – and the best run, analysts in São Paulo. “There’s a tremendous value to buying [Brazilian say – of Brazil’s mobile brands. But Telefónica was unable to telecoms] assets and by every single standard they are cheap.” integrate it with Telesp, its lagging fixed-line operation. Telesp is However, Aldworth concedes that the Telefónica deal was dominant in São Paulo state, the country’s most populous, but all expensive. “Eleven times Ebitda [for Vivo] was a lot, but that other states are dominated by Oi, which also runs the country’s

Ownership of Brazilian telecoms is in flux, reflecting elevated foreign interest as well as expansion on the ground. Consolidation has several more acts to run.

September/October 2010

LatinFinance 71

Latin Finance - September/October 2010

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