Global Insight Perspective | |
Significance | Oi has agreed to buy control of regional rival Brasil Telecom, opening the door to a new era in Brazil's telecoms business. |
Implications | The deal requires approval by telecoms regulator Anatel, the Securities and Exchange Commission (CVM), Brazil's anti-trust authority (CADE), the São Paulo Stock Exchange (BOVESPA), and the U.S. Securities and Exchange Commission (SEC), as well as a series of regulatory changes linked to restrictions in the current telecoms law. |
Outlook | The government-backed deal will create a regional super-carrier of national interest and a potent rival to Spanish Telefónica and Mexico's Telmex and América Móvil. |
In addition to offering 5.86 billion reais (US$3.5 billion) for a 60.5% voting stake, Oi will make a voluntary public offer for up to one-third of Brasil Telecom Participações' preferred shares and a mandatory tender offer for voting shares at 80% of the offer price to controlling shareholders. The final takeover cost is estimated at some 12 billion reais. According to Oi's chief executive officer, Luis Eduardo Falco, Oi will use cash positions to pay for most of the acquisition, but it could also raise capital on the market. Brazil's National Bank of Economic and Social Development (BNDES) announced it will extend a credit line of 2.57 billion to help Oi finance the deal and conclude the restructuring process. BNDES is owned by the government and its subsidiary, BNDESPAR, has been an Oi shareholder since its creation in 1999.
Oi is the regional incumbent in 16 federal states in the north-west, north, north-east and south-east of the country (Region I), while Brasil Telecom is present in the capital city of Brasilia and nine states in the south and centre-west (Region II). The deal requires approval by telecoms regulator Anatel, the Securities and Exchange Commission (CVM), Brazil's anti-trust authority (CADE), the São Paulo Stock Exchange (BOVESPA), and the U.S. Securities and Exchange Commission (SEC); as well as the finalisation of a series of regulatory changes that will allow the deal to go ahead. Under the current Telecommunications Law, a company is not allowed to possess more than one fixed-line concession in more than one region so as to avoid concentration in the industry.
Outlook and Implications
The deal will see the creation of a huge telecoms entity and a major new player in the Latin American region. According to the two operators' latest quarterly releases that date back to 31 December 2007, Oi totalled some 14.22 million landlines and 15.98 million mobile accesses, while Brasil Telecom claimed 8.03 million fixed and 4.26 million mobile users. Anatel's end-of-March 2008 market data release gives the new entity a combined mobile market share of 17.42% and ranks the new Oi in fourth position after Vivo, TIM and Claro, but with a slightly higher slice of the pie.
The deal has been ardently supported by the government as it will create a new company of national interest that can effectively compete against the two giants that dominate the Latin American markets, Spain's Telefónica and Mexico's Telmex and América Móvil. It is an "important event that will put Brazil at the forefront of communications," Communications Minister Hélio Costa said on Friday. The company plans to become a regional super-power by adding some 30 million users within the next five years. However, lacking the investment capacity or international know-how when compared to the other two telcos, it will initially direct its efforts towards growing in the Brazilian market. Despite its high-ranked position in the fixed-line and broadband business, it is well behind three larger mobile players in that it will soon be facing the 3G challenge as a result of the December 2007 auction of spectrum in the 1.9 GHz and 2.1 GHz frequencies.
The revision of the local telecoms law and the lifting of restrictions imposed shortly after the privatisation of formerly state-owned fixed-line monopoly Telebrás will open the way for further consolidation in the country, which proudly claims to be the world's fifth-largest market after China, India, the United States, and Indonesia, as well as the fifth-largest country behind Russia, Canada, China, and the United States. A relatively low mobile penetration rate of 65.90% and a significantly lower fixed-line index of around 20% raise high hopes for the future.