21 July 2017

Telefonica Looks to Shore Up Market Leadership in Brazil

Telefonica Looks to Shore Up Market Leadership in Brazil
Image Courtesy : http://watchlistnews

Spanish telecom giant Telefónica SA is offering €6.7 billion that is, $8.99 billion in cash and shares for Vivendi SA Brazilian operator, GVT, in a move to shore up its leadership in Latin America’s largest market. Telefónica expresses that if its bid is successful it plans to combine GVT with Vivo, its own Brazilian unit. Telefónica, based in Madrid, has offered to pay 11.9 billion Brazilian reais, or about $5.3 billion, in cash, and shares equivalent to 12% of the combined companies. The total offer is the equivalent of 20.1 billion Brazilian reais, or about $8.9 billion. Vivo is already the largest Brazilian operator by subscribers. Telefónica has long sought to expand the unit, because it is engaged in a costly market-share battle with other operators that has eroded profit margins as it and rivals spend on marketing and subsidies for costlier smartphones. Still, observers expressed skepticism that Vivendi will take an offer with a relatively low cash component of around 60%, which would leave it as a minority shareholder in Telefónica’s business in Brazil.

What and the reason the deal in the making

Currently Telefonica has 4.37 million broadband customers, according to regulator Anatel, an 18.8% share, while GVT has 2.76 million, or 11.8%. A merger would put Telefonica at 7.13 million, or 30.6%, ahead of the present number one, Oi, which is on 6.56 million or 28.2%. Telefonica is actually offering 60% of the bid price as cash and the rest as a 12% stake in the projected Telefonica Brasil. Telefonica’s move could force Telecom Italia to act and even launch a counterbid for GVT. This is because, like Telefonica itself, Telecom Italia has been looking to Latin America and especially Brazil to make up for falling revenues at home at a time of deep recession.

The Italian telco is affected because Telefonica holds a 14.8% stake in TI and is offering 8% to Vivendi as part of the deal. This has led to speculation that Telefonica was seeking to exit from Telecom Italia completely at the time the latter is struggling, having just reported an 11% slump in revenues to €10.6 billion for the first half of 2014.

Telefónica’s ambitions in Brazil were until recently hampered by a large debt pile, but its financial situation has improved sharply in recent months, partly because of a collapse in borrowing costs for Spanish firms. Debt stood at €43.8 billion at the end of June, down from more than €56 billion in 2011. All the same, the offer for GVT represents an adjustment in Telefónica’s strategy. In recent months, Telefónica executives focused on looking for ways to merge Vivo with all or parts of the Brazilian unit of Telecom Italia, although the plan faced regulatory obstacles in Brazil and opposition from key Telecom Italia board members. 

The French company has said that none of its units were for sale but it would consider Telefonica’s offer at its next board meeting at the end of August. Analysts however have speculated that Bollore would be open to shedding GVT at the right price, and say Telefonica’s bid is likely to attract additional suitors for Brazil’s fourth-biggest broadband provider.

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