Telefonica Loss Is NII’s Gain on Fees-Cut Plan: Corporate Brazil

Tim Participacoes SA and Telefonica Brasil SA are poised to be the biggest losers in Brazil’s plan for more competition and improved service among mobile-phone carriers.

Regulators are considering proposals to reduce so-called interconnection fees, lower taxes and make companies share infrastructure to aid carriers with smaller stakes in the market, including NII Holdings Inc., which operates the Nextel brand. The plan would hurt Telefonica Brasil and Tim more because they’re the top two wireless providers by subscribers.

Brazilian President Dilma Rousseff, who this year has ordered banks to shrink interest rates and utilities to cut power bills to fuel growth and curtail inflation, is now seeking to drive down mobile-phone costs for consumers. Fees to connect calls between subscribers in Brazil are so high that users often have multiple chips that they switch in and out of their phones so they can call others at in-network rates.

“The biggest concern of the telecom industry is the moderation of tariffs,” Edu Carlier, head of equities at Schroder Investment, which manages 3 billion reais ($1.48 billion), said in a telephone interview from Sao Paulo. “It’s a real risk and puts pressure on the whole regulatory environment.”

Market Share

Telefonica Brasil, the local unit of Madrid-based Telefonica SA, had 30 percent of Brazil’s 256 million mobile-phone lines at the end of June compared with Tim’s 27 percent. America Movil SAB, which is controlled by billionaire Carlos Slim and operates under the Claro brand, had 25 percent of the market and Oi SA had 19 percent, according to Anatel, the industry regulator. NII, whose handsets use a walkie-talkie technology, had 4.2 million local subscribers.

The press offices of NII, America Movil and Oi declined to comment. Telefonica and Tim said there was no one available to comment yesterday.

Anatel, as the telecommunications regulator is known, may vote as soon as Nov. 1 on the plan to prohibit the top four mobile-phone providers from charging a fee to accept incoming calls from smaller rivals, said a government official directly involved in the discussions.

Telefonica Brasil increased 1.4 percent to 44.80 reais at the close in Sao Paulo trading, while Tim rose 4 percent to 7.30 reais. The companies, which get more than half of their sales from mobile services, each plunged more than 13 percent in Sao Paulo trading this year.

Tim’s 60-day historical volatility fell to a five-month low on Oct. 26. Tim traded at a ratio of 12.6 times reported earnings today, compared with 10.1 times for Telefonica Brasil, 7.19 for Oi and 13.8 for America Movil.

Lower Rates

Under the plan to be voted upon in Brasilia as early as this week, users who sign up with smaller carriers such as NII and need to call out of network regularly won’t be penalized because the provider’s customer base is smaller than Tim or Telefonica Brasil, said the government official who asked not to be identified because a decision is yet to be made. The move would allow NII to lure customers by offering lower rates to make out-of-network calls than rivals, the official said.

The change may reduce the overall cost of mobile interconnection fees, known in Brazil as VU-M, by 20 percent, the official said. Out-of-network calls cost an average of 70 percent more than in-network, the person said.

‘Competitive on Price’

“If you want to promote competition, that’s a way to do it,” Chris King, an analyst at Stifel Nicolaus & Co. in Baltimore who has a buy rating on NII, said in a telephone interview. “It allows Nextel to be competitive on price.”

In a filing yesterday, NII asked Anatel for permission to take over Unicel do Brasil Telecomunicacoes SA to gain 3G mobile-phone airwaves in Sao Paulo, giving it more capacity for Internet downloads and voice traffic.

In addition to evaluating fee reductions, officials are preparing regulations to require land-line, wireless and cable companies to share infrastructure, Communications Minister Paulo Bernardo said last month. While such measures have been adopted in Europe, they’ve also been used in developing countries where it’s more difficult to build infrastructure, according to the International Telecommunications Union, a United Nations agency.

Anatel in July banned Tim, Oi and America Movil from signing up new wireless customers for 11 days in some states to force them to address complaints about quality and customer service.

Tax Relief

Not all the proposals being considered by the government will hurt the industry. Rousseff this year approved a law eliminating a tax on locally made equipment purchases by phone companies to expand fiber-optic networks. The measure, details of which the government has yet to disclose, is expected to save companies 6 billion reais over five years, according to the Communications Ministry’s press office.

“In the longer run, phone companies should rely less on phone calls as their main source of revenue and focus more on data services and Internet access, segments where profit margins are higher,” said Joao Pedro Brugger, who helps oversee 220 million reais at Leme Investimentos in Florianopolis, Brazil. “If this happens, changes in rates related to phone calls would have little impact in their profitability.”

Since the fee plan is just a proposal, Anatel’s board could vote to reject it and reconsider the plan, according to the agency’s rules. Competition has already intensified as Brazil’s economic growth has slowed, which may have hurt the carriers’ shares more than regulation, said Valder Nogueira, an analyst at Banco Santander SA in Sao Paulo.

“The government’s intervention didn’t help, but it’s not the only thing that has weighed on the shares,” Nogueira said. “Competition in the industry is already very strong, and one of the things we’re talking about is how far the government wants to go in stimulating competition in telecom.”

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