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Brazil Wireless Shares Fall as Government Prepares Rules

Brazil’s mobile-phone companies tumbled in Sao Paulo trading after the nation’s communications minister said they must prepare for more changes as the government puts consumers’ needs ahead of corporate profits.

Oi SA’s preferred shares slid 3.3 percent, the biggest decline since Aug. 20, to 7.65 reais at the close, compared with the benchmark Bovespa index’s 1.8 percent decline. Tim Participacoes SA dropped 2.2 percent to 7.85 reais, and Telefonica Brasil SA fell 1.8 percent to 44.43 reais. America Movil SAB dropped 1.2 percent to 16.81 pesos in Mexico City.

The government plans next year to begin reducing interconnection fees, which currently generate 36 centavos (18 cents) a minute in revenue for wireless companies every time they connect a call from a competitor’s network, Communications Minister Paulo Bernardo said in an interview. Officials are also working on a framework to require land-line, wireless and cable companies to share infrastructure, he said.

“Companies need to make sure the market grows and develops. They have to make money offering quality,” Bernardo said yesterday in his Brasilia office. “Better to have four companies complaining than millions of clients, no?”

While Bernardo’s comments show the government’s goal is to improve quality, shareholders still don’t have a clear sense of how new rules will affect the carriers, said Roger Oey, head of research at BES Securities do Brasil SA in Sao Paulo.

“The shares are reacting to the governmental risk,” Oey said today in a telephone interview. “Right now investors don’t have visibility into what’s changing, at what rate and how it will be implemented.”

Under Threat

An Oi press official declined to comment. Calls and e-mails to the press offices of Telefonica and America Movil weren’t returned.

“We do feel a little more presence from the government now than in the last few years,” said Rogerio Tostes, Tim’s investor relations director, in a phone interview from New York. “In the past it was a little more predictable than today.”

The threat of tighter regulatory scrutiny has increased financing costs for the carriers and has hurt their shares, Tostes said. Cutting connection fees will cause more instability, he said. Phone carriers in Brazil invest 18 percent to 20 percent of their revenue in infrastructure, one of the highest rates of any industry in the country, he said.

Under Pressure

The wireless carriers’ shares have been under pressure since July 13, when a government official said regulatory agency Anatel would ban the sale of some wireless subscriptions to force carriers to improve quality. The ban, since lifted, signaled that wireless carriers’ Brazilian profits are under threat, according to Sanford C. Bernstein & Co.

“After two years of stellar wireless growth in Brazil, the future now looks less bright,” Robin Bienenstock, a London-based Bernstein analyst, wrote in an Aug. 22 note. “Brazilians should benefit from these changes, but the operators (and parent companies) are likely to find this type of environment more difficult in which to make money.”

Telefonica Brasil, a unit of Madrid-based Telefonica SA and Brazil’s biggest wireless company, has fallen 8.8 percent in Sao Paulo trading since July 13. No. 2 carrier Tim, a division of Telecom Italia SpA, is down 22 percent in that span. Mexico City-based America Movil, owned by billionaire Carlos Slim, has slid 4.9 percent. Rio de Janeiro-based Oi, partially controlled by Portugal Telecom SGPS SA, has declined 20 percent.

“There’s no regulatory risk,” Bernardo said. “The market analysts look at profitability and the financial perspective of the company. They’re not concerned about the consumer. It can’t be that way.”

Gradual Reduction

Anatel, which is an independent agency of the Communications Ministry, is studying how other countries have cut interconnection fees to put together a plan for a gradual reduction, Bernardo said. He said the cuts won’t be as “radical” as in France, where fees are declining from 3 euro cents (3.8 U.S. cents) in 2011 to 0.8 euro cent next year.

Bernardo’s comments yesterday showed the government is taking a tougher stance, said Pedro Galdi, chief strategist at Sao Paulo-based brokerage SLW Corretora.

“The companies are subject to intervention, and they’ll have to adjust to that,” Galdi said today in a telephone interview. “There’s a problem of complaints and quality. Service is still awful. The government, via Anatel, is going to impose improvements on the industry.”

Cutting Taxes

Rate reductions and network-sharing arrangements should create savings that carriers can pass on to consumers, Bernardo said. He also plans to ask Brazil’s Finance Ministry and state governments to cut phone taxes, which now make up about 38 percent of the average telephone bill, he said.

“If we improve regulations, if we increase competition, if we cut taxes, more people are going to be able to use a mobile phone because it’s cheaper and works better,” he said.

Mobile Internet use will grow 70 percent this year and for the next two years at least, Bernardo said. Pay-television subscriptions will rise 30 percent this year and next year, he said. Mobile-phone accounts will increase 15 percent this year, he said, a slowdown from last year, when subscriptions expanded 19 percent to 242 million, according to Anatel.

“You have a consumer that’s eager to consume, but has to be treated well,” Bernardo said. “We have to establish some regulatory changes, an update for current times, a more modern regulation, because ours is clearly behind. Europe already did this. We’re lagging.”

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