What might happen if Telefonica purchases Tim Brasil?

*by Eduardo Tude and José Luis de Souza



The Italian press informed, in the last week of Nov/08, that Telecom Italia would be analyzing Tim Brasil sale to Telefonica.


Telefonica's interest in acquiring Tim Brasil can't be seen as a surprise. Eventually, we can say that one of Telefonica's objectives, by acquiring a stake in the group controller of Telecom Italia in Apr/07, was to avoid that Tim operations in South America were gotten by América Móvil (more details).


Telecom Italia faces a serious crisis that is requesting a new position from the operator. The company is undergoing a reduction in its base of fixed and mobile (cellulars) accesses in Italy and has a net debt of 36 billion euros (more details). This debt, intensified by the international financial crisis, reduces the company's ability to invest in Tim Brasil which operates in a market in strong expansion besides being in a technological evolution pace by the 3G implementation.


In this context, Tim Brasil sale, Telecom Italia's main asset outside Italy, is one of the alternatives for the company, even if this option represents giving up an important position in market share.


Due to an agreement between Telecom Italia's shareholders, Telefonica is the natural candidate for purchasing Tim Brasil.



What might happen if Telefonica purchases Tim Brasil?


To make it effective, the acquisition of Tim Brasil by Telefonica would have to be approved by Anatel. Since Telefonica shares control of Vivo with Portugal Telecom, to get the process approved it will be necessary to come up with a solution to the license overlapping problem between both operators, what is forbidden by the regulation. There are three possibilities:

  • Telefonica promotes the merger of Tim with Vivo.
  • Telefonica leaves Vivo's administration and stays in Tim
  • Telefonica sells Tim to Portugal Telecom, holding 100% of Vivo then

In the following, there's an analysis of each one of the possibilities:.



Telefonica stays in the a administration of Vivo or Tim


In both options the effect in the competitive environment is smaller, with the market being disputed by four groups with national presence.





However, the availability would depend on Portugal Telecom's agreement, with a solution proposed by Telefonica, or on getting enough resources to acquire the 50% Telefonica's stake in Vivo, or the control of Tim Brasil.


It's important to remember that, if Telefonica gets totally out of Vivo, this operator would lose its strength in items such as devices purchase.


The operator that stays with Telefonica will benefit of a bigger integration with the Telefonica's fixed operation in the country.



Merger of Tim with Vivo


Despite being the most advantageous option for Telefonica, it would face more difficulties to be approved by Anatel/CADE due to the concentration promoted by the cellular market. Together, both operators would hold a market share of 54.4%.





This concentration is even bigger in areas like Paraná/Santa Catarina, North and São Paulo.





Besides, Telefonica would have to convince Portugal Telecom to accept this merger, selling its shares or observing its stake to be diluted in the new operator (Vivo/Tim).


Another inconvenience of this merger is given back to Anatel frequency blocks owned by one of the operators.


You could ask:

  • Will Telecom Italia sell Tim Brasil? If that happens, what would be the best option for the Brazilian market? What about Telefonica?
  • If Telefonica had to chose between Vivo or Tim Brasil, which one would it be?
  • Considering the cellular density reaching 100% in Brazil, would it be appropriate to promote bigger regulation flexibility in order to allow mergers?
  • Should the same happen to Pay TV permitting convergent operation to fixed and mobile operators?
  • If Telefonica decides to leave Vivo, would Portugal Telecom be interested in becoming a pure cellular operator in Brazil?



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