Brazil telecoms: big shake up ahead

It’s the big question in the telecoms industry right now – will Telecom Italia sell its controlling stake in Brazilian mobile carrier Tim Participações?

After being downgraded to junk on Tuesday by Moody’s, the Italian operator sure needs the cash. And Spain’s Telefónica, which struck a deal last month to secure control of Telecom Italia, is believed to be firmly in favour of offloading the Brazilian unit. But who would buy it?

You might also wonder why the market is getting itself into such a frenzy over the possible deal. But this is big money. Reuters reported this week that Telecom Italia is looking to raise at least €9bn ($12bn) from the sale.

In spite of Brazil’s recent economic slowdown, its mobile industry is still booming. Brazil already boasts almost 270m active mobile phone lines (not bad, considering the population is only 200m). By 2018, that number is expected to increase to 350m, according to a report by Ericsson. Smartphone use is also rising fast – for the country’s growing middle classes, it’s the most affordable way to get online. About half of total mobile sales in the first quarter this year were smartphones, compared to about 40 per cent throughout 2012, according to the report. As Brazilians increasingly use their mobiles to go online and watch episodes of their favourite ‘telenovela’ or soap, data traffic is expected to rise 12-fold over the next five years.

The growth of Brazil’s mobile market is perhaps even more impressive considering how expensive making a phone call can be in the country. According to a report by the International Telecommunications Union this week, Brazilians pay the highest tariff in the world for mobile phone calls – $0.74 per minute on average. Getting decent reception in the country can also be a nightmare.

Given the size of Tim, regulators are unlikely to allow the carrier to be sold off to one single player. The company controls about 27 per cent of Brazil’s wireless market – (Claro has 25 per cent, Oi has 19 per cent, and Telefónica, known by its mobile brand Vivo, has the largest slice of the pie – 29 per cent).

Instead, the company is likely to be carved up by Brazil’s other three big players. This from analysts at Macquarie:

Our key assumption is that Telefónica Brasil is the primary acquirer of TIM Brasil, reflecting its superior balance sheet position. We then assume Claro (AMX) has the first look at any assets that TEF Brasil cannot acquire because of regulation, and then finally Oi.

Presuming Tim is diced up this way, Macquarie concludes the market would be split up between the ‘big three’ as follows:

Telefónica Brasil ends up with 38 per cent share of the Brazilian wireless market (currently 29 per cent), Claro with 31 per cent (25 per cent) and Oi with 26 per cent (19 per cent). Importantly, Oi acquires TIM Brasil assets in São Paulo, which is significant.

Sounds simple enough, right? However, with so many companies involved, plus the Brazilian regulators, the battle over Tim is likely to be a long and bloody one – it could drag on for months, if not over a year.

Related reading:
Portugal Telecom to merge with Brazil’s Oi, FT
Oi / Portugal Telecom: simple sense, Lex
Brazil: mobile signals and mango trees, beyondbrics