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Telefónica, Portugal Telecom e Vivo: batalha pelo mercado brasileiro

The battle for control of the Brazilian mobile telephone market is now well underway.  It began on May 11, when Spain’s Telefónica decided to break its ties with Portugal Telecom (PT), with which it jointly owns Brasilcel, the holding company that operates Vivo, the leading mobile phone company in Brazil. Telefónica wants to launch a public share offering for PT’s 50% share of Brasilcell, which would give Telefónica total control of Vivo.

The struggle between Telefónica and Portugal Telecom for Vivo involves much more than a mere battle between companies. It has cast a spotlight on the vast potential of the Brazilian market, and the needs of European companies to strengthen their position there.

The US$6.9 billion that Telefónica offered for PT’s shares in Brasilcel was branded as insufficient by PT. Yet barely three weeks later, Telefónica returned to the attack, offering US$7.87 billion — a figure very close to the US$7.73 billion market capitalization for all of PT. Although many observers said Telefónica’s offer price was too high, PT’s board of directors once again said it was insufficient. For PT’s 50% of Brasilcel, the board is asking between US$9.08 billion and US$9.93 billion — a position which it will need to endorse on June 30, when the entire PT board discusses Telefónica’s offer.

Beyond the issue of whether Telefónica will move forward with its proposal, there is another concern: Why are both companies so interested in controlling Vivo?Mauro F. Guillén, director of the Lauder Institute at the Wharton School, notes that “Brazil is one of the larger, more dynamic emerging economies. In addition, forecasts call for the country to grow to the extent that it develops a middle class.” Esteban García-Canal, a professor of corporate management at the University of Oviedo in Spain, agrees. “You need to remember that Brazil is one of the four economies with the greatest growth potential — the famous BRIC countries: Brazil, Russia, India and China. Among them, Brazil is clearly the country where it is easiest for Telefónica to undertake a growth strategy all on its own,” he notes.

An Offer that Would Save Millions

In addition to Vivo’s intrinsic importance – given its leadership in the Brazilian mobile telephony market – Vivo would offer another sweet prize for Telefónica: millions of dollars in cost savings as a result of synergies. Telefónica calculates that it would save some US$3.39 billion by integrating Vivo and Telesp, and it is using this argument to justify the high price of its offer for Brasilcel.

Nevertheless, the financial community is divided about whether Telefónica’s offer of US$7.87 billion is too high. According to Garcia-Canal, Telefónica is playing its cards right. “Given the reluctance of its board of directors, [Telefónica] has targeted its efforts at the non-Portuguese shareholders of [PT], who are the majority [of PT’s shareholders]. In addition, [Telefónica] has realized correctly that no one is in any condition to offer a higher price [than Telefónica]; only someone from a company that operates in fixed-line telephony could obtain these [sorts of] synergies” from such a takeover, he notes.

Esteban Garcia-Canal explains why investors have been backing Telefónica during this period. “The current growth strategy of telecom companies is based on the so-called ‘quadruple play.’ That is to say, an integrated package of services that includes fixed telephony, cellular [mobile telephony], Internet access, and TV. In addition to being attractive for consumers, this optimizes the use of these companies’ investments in infrastructure and reduces their operating costs. For Telefónica, the possibilities derived from offering this package in Brazil go beyond just taking total control of Vivo. Even if the cost of the deal seems excessive, you have to realize that this time around, the [dollar value of the] synergies associated with the deal are easier to estimate than on other occasions. In this case, there is [also Telefónica’s] direct knowledge of the local market and the impact that an integrated supply of services can have on the growth of the company and on its operating costs.”

International Strategy

As experts note, Telefónica’s interest in Vivo can be seen from two points of view. First, there is the potential that Vivo has for the Spanish phone operator [Telefónica], permitting it to integrate its entire supply of telecom [products and services] and to strengthen itself as the leader in its mobile business, which has the largest [growth] potential in the country. Second, there is a more international consideration, related to the global strategy of the company. If its offer wins, Telefónica will consider its geographic expansion plans to be complete, at least for the moment.

Why is there so much interest in Brazil, when Telefónica is already the leader in the Latin American market? Professor Reis notes: “Although the mobile telephony market has expanded in [Brazil], growing by 30% in 2009 [alone], fixed telephony has shown clear indications of stagnation. Some analysts forecast that the largest operators will lose customers since the industry believes it is threatened by the expansion of mobile telephony and the introduction of new technologies [such as Voice over IP] in the country. Estimates call for an annual decline of 2% to 3% in the number of conventional phones in service by the main providers. So the acquisition of Vivo expands Telefónica’s room for action in the mobile telephony industry, and creates new prospects.”

PT would suffer if were to lose Vivo, which has been a real financial gold mine, according to Guillermo Escribano, investment manager of Metagestion, a financial service boutique, in an article in the Spanish investment magazine Estrategias de Inversion. Escribano noted that Vivo “represents 80% of PT’s business,” which explains why it has been “worth the pain” for both PT and Telefónica “to strengthen their positions in the company and in the Brazil.”

Nevertheless, when it comes to size, leadership and buying potential, Telefónica seems to have a greater chance to win this war. It can also make an offer that includes better conditions than an offer made by its competitor.

On June 11, PT acknowledged that it could not guarantee that it would offer its shareholders a similar price for their shares of Vivo if they rejected Telefónica’s offer for those shares. This show of weakness has not prevented PT’s board of directors from once again denouncing the Spanish company’s offer of 6.5 billion euros (currently US$7.95 billion) as too low.

Observers predict that Telefónica is going to fight this war to the finish. If PT manages to block its offer for Brasilcel, Telefónica could go directly after PT. Guillén notes that Telefónica is not prepared to allow itself another failure in the Brazilian market, following its failed attempts for Embratel and GVT. “That’s precisely the reason why Telefónica wants to prevail, and it even seems prepared to acquire PT [itself],” he notes.

It is not a question of the price involved. Telefónica’s latest offer for Brasilcel is nearly US$1.21 billion above the market capitalization of PT itself. And many people are certain that if this offer does not get results, Alierta will directly attempt to acquire PT.

Published in Knowledge@Wharton
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