beyondbrics

The Portuguese government blocked Telefónica’s attempt to buy Portugal Telecom (PT) out of Vivo, the two companies’ joint mobile venture in Brazil because they were openly uncomfortable with the idea that PT and Portugal might then lack large-scale investments in Brazil. But how would the Brazilian government feel if there were no longer any large telecoms operators which were domestically owned?

One of the possibilities floated by analysts and in the media is that PT was looking into staying in the country by taking a majority stake in Oi, the Brazilian company that dominates fixed-line services in Brazil and also offers internet and mobile coverage. Oi was formed through a merger last year between Telemar and Brasil Telecom, made possible by changes in government regulations pushed through on the argument that it would create a Brazilian national champion to compete with the Spanish and the Mexicans. Brasilia may not be so pleased if control of Oi were so quickly sold to PT.

“The government probably allowed that merger to happen precisely because they thought it would create a national champion,” says Michel Morin, an analyst at Barclays Capital. “The concession title normally would not have allowed for the deal to take place. If the controlling shareholders were to turn around a year later and sell to foreigners, it may not look good.”

“The Worker’s Party government has recently given signals that they have an interest in maintaining a national presence in key sectors of the economy,” says another analyst.

It’s possible Oi shareholders could approach the government and make the argument that circumstances have changed and that a new deal would be worthwhile. In this scenario, the government could re-shape the public debate into a “Portuguese-speaking national champion” argument, says an analyst at a large investment bank who doesn’t believe the government bought into the nationalist line of thinking in the first place. According to the local press, Brazilian president Luiz Inácio Lula da Silva discussed this possibility earlier this year with José Sócrates, Portuguese prime minister.

It’s difficult to value Oi. In the increasingly important mobile services market, Oi lags behind Vivo, Claro (controlled by Carlos Slim’s América Móvil), and TIM (owned by Telecom Italia), the three most popular providers in the country. If PT acquired a controlling stake in Oi – already difficult because of the company’s complicated ownership structure and potentially prohibitively high price – Brazilians could not turn to any major national company for cellular phone service.