Who's gonna buy Tim?

Tim had a good performance in the third quarter of 2006 (3Q06) decreasing to 4.6 million cellulars the difference that separates Tim from Vivo, cellular's market leadership in Brazil.

Tim already surpassed in market cap (more details) and presented in the 3Q06 revenue and EBTIDA close to Vivo (more details).

Tim could, however, be sold and never surpass Vivo. Telecom Italia announced in 11/06/06 that received a proposal (not required) to acquire its cellular operations in Brazil and its Administrative Advice authorized the negociation of sale.

According to Valor Economico (brazilian's periodical) América Móvil, controller of Claro, would have offered around R$ 15 billion for the participation of Telecom Italia in Tim Participações oppening the competition for the control of Tim in Brazil. Telefonica and Brasil Telecom are also candidates.

Why does Telecom Italia want to sale Tim in Brazil?

Telecom Italia is saling its actives out of Italy to reduce its debt of 39.5 billion euros (Sept/06), around R$ 109 billion. It already sold its operations in Venezuela, Chile and Peru. It also put on sale it participation in Brasil Telecom. In Sept/06 the Council of Telecom Italia established as strategy the service changing of fixed-mobile telephony, broad band and media in Italy and Europe.

Representatives of Italian Government to Telecom Italia expected to raise between 7 and 9 billion euros (R$ 19 billion and R$ 25 billion) with the sale of Tim in Brazil. Hardly the transaction would reach this numbers. The participation of Telecom Italia in the Tim Participações (81,19% of the ordinary shares and 63.7% of the preferred shares), would have a market cap (market value) of R$ 13.5 billion in 10/31/2006. The market cap of Tim Participações on this date was R$ 19 billion.

Not satisfied with the offers value, Telecom Italia would have, as alternative, to spray the shares in the stock market, keeping the control of the Company. It cancelled in June/06 a public offer to sale the preferred shares controlled by Tim Participações. In 10/31/2006 the Market Cap of the preferred shares, controlled by Telecom Italia, was R$ 7 billion.

Situations with Tim's sale

It's following below three possible situations with the sale of Tim to Claro, Telefonica (Vivo) and Brasil Telecom (BrT).

It isn't expected, in any of these three situations, hard time with Anatel or Cade to the acquisition of Tim. The purchaser company would have to return the authorizations in the regions where would have overllaping of licenses and could incorporate Tim's base of clients to its on base.

It's following analysed each one of these three situations.

América Móvil

América Móvil is the main candidate to acquire Tim in Brazil. With the acquisition of Tim, the group of the mexican business man Carlos Slim composed by: Claro/ Tim/ Embratel/ Net/ Vivax would be the biggest in revenue of the telecommunication sector in Brazil, with gross revenue of R$ 27.1 billion ( Jan- Jun/06), much better than the group composed by Telefonica/ Vivo that presented in the same stated period gross revenue of R$ 26.7 billion.

The acquisition of Tim would make Claro the biggest cellular operator in Brazil with 46.3 million cellulars and market share of 48.3% of the cellulars of Brazil (3Q06). Brazil would have in América Móvil similar quantity of cellulars and revenue that Mexico, where Telcel has 40.7 million cellulars. Also would consolidate the leadership of América Móvil in Latin America oppening advantage in relation to Telefonica: main opponent.

América Móvil group is in better financial situation to acquire Tim. The debt of América Móvil was US$ 3.5 billion in the 3Q06.

The biggest problems of these situations could be operational. Claro would have a GSM network doubled almost in the whole Brazil, which should be joint to reduce operational costs. The joint of systems could cause problems, as the problems faced by Claro when joint the Billing system of its operators. The networks would consolidate with the following suppliers: Ericsson, Nokia and Siemens.

Telefonica

The acquisition of Tim, beyond preserve the leadership of Telefonica in the brazilian market, would help to balance the dispute with América Móvil for the Latin America market. Would also count, beyond Tim's clients, with a GSM network covering whole Brazil. With the acquisition, the group Vivo/Tim would have 52.8 million cellulars and market share of 55.1% of the Brazil's cellulars (3Q06).

The biggest challenge of Telefonica is that it already got the Group O2 of cellular operators in Europe. With this operation the debt increased in 23 billion euros reaching a total of 53 billion euros (2Q06). Telefonica is still negotiating the purchasing of 50% of Vivo that belong to Portugal Telecom. The operational difficulties would be restricted to the joint of systems, the same will have to face with the implantation of GSM. But, wouldn't have the inconvenience to implant a new network in 850 MHz and wouldn't have great news with suppliers and network.

Telefonica must not , however, let the acquisition of Tim in Brazil be cheap to América Móvil.

Brasil Telecom

Brasil Telecom (alone) presents minor financial condition than América Móvil and Telefonica in the competition for the control of Tim in Brazil. It could be, however, the perfect match for an operator or international investor that it's interested in this active. Telemar must temporarily be out of the game because of the reorganization process that has been going through. In the operational point of view, this would be the most simple joint of all, including the network suppliers.

According to the situation you could ask:

• Who is gonna buy Tim in Brazil?
• Will Tim's sale increase the concentration and let the cellular market with less competitor? What are the consequences? Decreasing or increasing the growth? Is it a space to a new competitor?
• A international operator, for example Vodafone, could also be interested in Tim ?
• How will be Tim's brand in Brazil?
• How will be the sale of Telemig and Amazonia Cellular in this situation?
• Will the sale of Tim be a opportunity to born a huge brazilian group in telecommunications?
• How will be the market for the cellular network suppliers with Tim's sale?

Commentaries

Comment.

To send us a commentary, click on: teleco@teleco.com.br

Commentary : Peter Curwen

Visiting Professor of Telecomminications Strategy

Strathclyde University

One aspect that has not been considered is that (1) Vivo is half owned by Portugal Telecom (2) PT is under hostile offer from Sonae.com (3) which, if successful, may lead to PT's Vivo stake being offered to Telefonica (4) which will not then have the money or desire to buy TIM Brazil. Alternatively, PT could buy out Telefonica which could buy TIM Brazil- the conversion of Vivo to GSM is a huge drain.

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