Telefónica Launches Attractive Offer for Portugal Telecom’s Stake in Vivo

Spanish telecoms giant Telefónica launched on 6 May 2010 an unsolicited 5.7 billion euro (US$7.3 billion) bid to buy 50% in Dutch company Brasicel, the unlisted joint venture with Portugal Telecom that owns approximately 60% of Vivo. The offer also stipulates that Telefónica will launch a tender offer for the ordinary shares in Vivo not controlled by Brasicel, representing approximately 11.1% of the total number of ordinary shares and 3.8% of the total capital stock of Vivo, valued approximately at 600 million euro. This offer expires on 6 June 2010.

However, the juicy offer, which values Vivo at about 140% higher than its market capitalisation, has not seduced the Portuguese incumbent, whose board unanimously rejected the offer yesterday (10 May).

Outlook and Implications

• Vivo—A Cobbled Asset: Vivo is a very important piece in the Brazilian telecoms puzzle and Telefónica may try to tempt Portugal Telecom with a more attractive offer in the near future. The Spanish giant has been considering different options to improve its position in Brazil, its most important market in terms of revenues after Spain. In fact, Telefónica has expressed on a number of occasions that it would be interested in acquiring Portugal Telecom's participation in Vivo; however, the Portuguese operator has expressed its intention to remain in the Latin American country for the long term (see Portugal: 4 March 2010: Portugal Telecom's Q4 EBITDA Up 5.6% on Strong Vivo Growth). Despite this first refusal, Telefónica could try to strike again with a much better offer.

• Leading the Market: Vivo, which registered 53.9 million mobile subscribers at the end of March 2010, continues to gain ground in the Brazilian mobile market, where it already controls a 30.12% share, compared to 29.70% one year ago. Between January and March 2010, the operator added 2.2 million customers, representing 42.8% of the total additions for the whole country during the period. Net operating revenues for the year stood at 4.2 billion reais (US$2.4 billion), up 4.8% year-on-year (y/y), thanks to the rapid increase in revenues from data and value-added services. ARPU fell by 9.2% y/y to 24.8 reais as a consequence of the rapid increase of its customer base. Blended minutes of use for the year stood at 116 minutes from 77 minutes in the first quarter of 2009. Earnings before interest, tax, depreciation and amortisation (EBITDA) increased to 1.3 billion reais, up 3.8% y/y, thanks to improved costs controls, while EBIT for the same period were down 6.8% y/y to 402.4 million reais and net incomes hiked to 191.9 million reais, 44.3% more than in 2009.

• Other opportunities? Telefónica needs to add mobile capabilities to its fixed-line unit, Telesp, if it wants to maintain its status in Brazil, particularly now that its regional mobile rival, América Móvil (Claro Brasil), has announced plans to combine its operations with those of its sister fixed-line company, Embratel, controlled by Telmex Internacional (see Latin America: 14 January 2010: América Móvil Announces Bid for Carso Global Telecom). The consolidation is expected to bring cuts in administrative and network costs, as well as allow the launch of multiple-play packages of wireless, land-line phone, internet, and cable TV services. The problem is that the list of candidates for Telefónica’s mobile expansion in Brazil is not that long. Telecom Italia’s TIM Brasil, which holds a 25.5% market share in the Brazilian mobile market, has been rumoured to be a possible match. However, the Italian incumbent would also be reluctant to sell its Brazilian assets (see Italy: 7 May 2010: Telecom Italia's Q1 EBITDA Up 3.2% on Brazilian Growth). The union would also generate problems with the regulator unless Telefónica rids itself of its share in Vivo. Another possible option could be Algar Telecom (formerly know as CTBC), which currently provides fixed (voice and broadband) and mobile phone services in the states of Minas Gerais, Sao Paulo, Mato Grosso do Sul, and Goiás. Algar also has 3G frequencies in the country—a very important asset given the increasing demand for 3G services in Brazil. In 2009, Telefónica attempted to increase its presence in the fixed-line market with the acquisition of local ISP GVT, latterly acquired by French entertainment group Vivendi (see Brazil: 16 November 2009: Vivendi Launches New Offer for GVT and Frustrates Telefónica's Expansion Plans in Brazil). After the acquisition, Vivendi announced plans to launch mobile services in the country via an MVNO business model, an option that has also been considered by Telesp. However, business options in this field are still uncertain as Brazil has not yet approved new MVNO regulation (see Brazil: 25 March 2010: Telesp Expresses Interest in MVNO Business).