Global Insight Perspective | |
Significance | Brazil's two fixed-line concessionaries, Oi and Brasil Telecom, have confirmed their intention to merge, thus creating Brazil's largest telecoms operator. |
Implications | For the deal to move forward, Brazil's government will need to change the telecommunications rules by presidential decree; the rules currently prohibit a company from possessing more than one licence in more than one region so as to avoid concentration. |
Outlook | A successful deal would see the creation of a super-carrier that could challenge the duopoly of Telefónica and Mexico's main fixed-line and mobile phone companies, Telmex and América Móvil, both owned by the world's richest man, Carlos Slim. |
Dow Jones reports that Communications Minister Hélio Costa has confirmed that Oi and Brasil Telecom have indicated their intention to proceed with share restructuring, aiming to conclude with the merger of the two groups. "We have officially received information that the companies really intend to restructure," he said on the sidelines of an event in Rio de Janeiro.
Speculation about a possible merger scenario for a deal worth 8.5 billion Brazilian reais (US$4.79 billion) has been circulating for several months but seriously escalated in early January. Out the total, 4.8 billion reais would be paid for the takeover of a controlling stake in Brasil Telecom by rival carrier Oi and 3.7 billion reais would be paid to minor shareholders. Oi has 6.5 billion reais to participate and can raise financing for the remaining amount. Local media claim that Oi has approached various banks and has been given the green light to proceed with the merger.
Outlook and Implications
Regulatory Deadlock: 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. For the deal to move forward, the Brazilian government will need to adjust the relevant rules by presidential decree. According to Costa, the proposed changes will be introduced to the local telecoms regulator, Anatel, on Wednesday. Following that, the proposal will be presented to President Luiz Inácio da Silva; the process is expected to conclude within 15 to 30 days. "The way forward with this deal will become clearer after Carnival," Costa said. (Carnival runs 2 February through 6 February.) Brasil Telecom is owned by Brazilian pension funds as well as the world's biggest bank, Citigroup. Because of the unstable financial conditions fuelled by the sub-prime mortgage crisis in the United States, the group is highly expected to wish a divestment, which could net the bank some 2.3 billion reais.
Creation of a Super-Carrier: A merger deal between the two operators will break the long-established duopoly of the two foreign companies, Spain's Telefónica and Mexico's main fixed-line and mobile phone companies, Telmex and América Móvil. The two Mexican groups are both owned by the world's richest man, Carlos Slim, and operate in Brazil as Embratel and Claro, respectively. Costa has been an ardent supporter of such a deal, which gives hopes for a swift change of law to allow the merger. A merger would also mean increased competition in one of the world's largest telecoms markets with high expectations for future growth, and expansion to other Latin American markets such as those of Colombia, Peru, and Venezuela to compete with the local players. Should the deal go ahead, the new company will claim 29.6% of the total fixed, mobile, ADSL, and pay-TV revenues of all operators, against 29.9% by Telefônica/Vivo, 20.1% by Embratel/Claro, and 12.1% by TIM. Telefônica, the Brazilian unit of Telefónica, is already dominant in the São Paulo state, which accounts for 40% of the national traffic. On the other hand, Brazil's biggest-in-size mobile player, Vivo, is jointly owned by Telefónica and Portugal Telecom (PT). The Portuguese incumbent has unsuccessfully tried to get hold of Oi and Brasil Telecom in the recent past, which would allow it to divest from Vivo as a response to escalating pressure from partner Telefónica. Given PT's wish to remain active in the Brazilian market because of its size and prospects for growth, a merger between Oi and Brasil Telecom would seriously restrict its options.