Portugal Telecom and Telefónica haggle over Brazil

The tussle for control of leading Brazilian mobile player Vivo between Portugal Telecom and Spain’s Telefónica reflects the huge importance of the market to both European players.

Spanish incumbent and Latin American regional specialist Telefónica is increasing the pressure on its neighbour and investment partner Portugal Telecom (PT) over their jointly owned Brazilian operation Vivo. In early June it increased its offer for PT’s 50 per cent of the business to €6.5bn from its previous bid of €5.7bn.

In a show of intimidation, Telefónica also threatened to block dividends from Vivo—and even launch an aggressive takeover of PT (in which it already owns some ten per cent)—in a bid to see its ambition realised. PT was unmoved by the increased offer and dismissed the threats over Vivo’s dividends.

The Brazilian stalemate reflects the strategic importance attached to Brazil in general, and Vivo in particular, by both European incumbents. The market had 185.45 million cellular subscribers at the end of Q1 this year, according to data from Informa’s World Cellular Information Service with Vivo accounting for 53.94 million. Telefónica’s move to assume control is born out of frustration at its inability to execute its favoured multiplay strategy in the market. The Spanish firm already has a fixed presence through Telesp, and is keen to merge the two Brazilian operations and take a converged offering to the lucrative enterprise market. Portugal telecom is known to be sceptical of such a move.

The situation is exacerbated by a strange operational division of responsibilities within Vivo. This is the result of what Informa senior analyst Julio Puschel describes as a “gentlemen’s agreement” that was struck when Vivo was structurally formalised from the merger of various regional operations owned by PT and Telefónica in 2006.

Responsibility for the management of key functions within Vivo is divided between former Telefónica and PT teams, Puschel explains. The Telefónica faction within Vivo manages the network and procurement, for example, while the PT faction is responsible for sales and marketing and the carrier’s IT infrastructure. It’s a bizarre arrangement that illustrates the two companies’ failure to create a cohesive organisation from the merger.

When Vivo was first created, says Puschel, Telefónica tried to put in place an informal arrangement that would have seen the Spanish firm assume full control of the operation within five years. But Vivo’s strong performance in the market, and the success of the brand that the PT team created, has given the Portuguese incumbent a distinct incentive to retain its involvement. “Vivo is now the biggest revenue source for the whole PT group,” he says.

What’s more, says Puschel, there is a greater cultural affinity within Vivo for PT than for Telefónica. And the close relationship between the Brazilian and Portuguese governments cannot be overlooked.

Two things are clear as the situation stands: First, Telefónica and PT will not remain as partners in a Brazilian operation. And second, neither player wants to turn its back on the Brazilian market. Even if Telefónica were able to make PT’s shareholders an offer of sufficient size to change their minds, the Portuguese would look for an alternative investment in Brazil, says Puschel. And if PT won’t budge, then Telefónica will have little choice but to look elsewhere for the mobile element to its all-important converged offering.

But there is a shortage of investment opportunities. TIM Brasil and Oi are the two possible candidates, sitting in third and fourth places in the Brazilian markets, behind Vivo and Claro. Oi is the largest fixed player in the market, having recently acquired another fixed player, Brasil Telecom. Telefónica is looking to add mobile to its existing fixed operation, so would likely have to make some disposals to see a purchase of Oi come good. PT, meanwhile, would be unlikely to realise sufficient funds from the sale of its Vivo share to Telefónica to buy Oi without significant further investment.

In any case, says Puschel, the Brazilian government went out of its way to smooth the path of the Brasil Telecom acquisition by Oi. The Brazilian Development Bank and pension funds from other state-owned companies have financial interests in the merged entity and, having eased the deal through, more than a few eyebrows would be raised if the Government suddenly authorised the sale of the firm to a foreign organisation.

Which leaves TIM Brasil. Telecom Italia’s operation is likely more amenable to approaches from suitors, but is currently not in the best shape. It has the lowest metropolitan 3G coverage of all the carriers, says Puschel, and is currently opting to pay government fines levied for failure to meet rollout deadlines, rather than investing in the expansion of its network.

Puschel’s money is on Telefónica resigning to its fate in Vivo and selling out with a view to a takeover of TIM Brasil. The Spanish incumbent already has a stake in Telecom Italia and has voiced interest in TIM Brasil in the past.

Such a move would represent a victory of sorts for TP, but it may well prove short-lived. Telefónica could price TP out of the bidding for its stake in Vivo, meaning that the Portuguese firm would have to work with another coowner, which might throw up similar integration challenges to those it has faced in Vivo so far. Of the two players, Telefónica is by far the larger and by far the more likely to see its aims achieved. Portugal Telecom has to cling on in Brasil, but life there might not get any easier, even if Telefónica were to exit Vivo.