Tim Purchase Speculation Sparks Wireless Rally

Shares of Tim Participacoes SA, Brazil’s second-largest mobile-phone company, are surging on speculation regulators will let local rivals buy the carrier and reduce competition in the wireless market.

Tim jumped 40 percent in Sao Paulo trading this year as its parent company, Telecom Italia SpA, looked for ways to cut its $39 billion in net debt. The Milan-based phone company has valued its 67 percent stake in Tim at a minimum of $12 billion in preparation for any possible sale, a person with direct knowledge of the matter said this week.

Rio de Janeiro-based Tim leapt to an 18-month high, and Telefonica Brasil SA, Oi SA and America Movil SAB also rose. Whether one of those companies acquire Tim or all three acquire a piece of it, the market of 268 million wireless users would be reduced to three competitors from four. For investors, fewer rivals means greater profits.

“It is important, for the industry to be sustainable, to have a market of three operators rather than four,” said Rajeev Chand, managing director and head of research at investment bank Rutberg & Co. in San Francisco. “It requires a market share of approximately 20 percent in a stable maturing market to have enough revenue and enough profit pool to fund the investment requirements for next-generation infrastructure.”

Only Winner

Tim, the biggest gainer among Brazilian phone stocks this year, rose 2.9 percent at the close in Sao Paulo to 11.85 reais, the highest since April 2012. That compared with a 0.3 percent gain for the benchmark Ibovespa index. Telefonica Brasil rose 1.4 percent, and Oi jumped 2.3 percent. America Movil climbed 2.6 percent in Mexico City, where it’s based.

All four Brazilian companies declined to comment, as did a spokesman for Telefonica SA. A spokesman for Telecom Italia said there is no formal or informal process for the sale of Tim.

Brazil is open to a transaction between Telefonica and Tim and may require asset sales within a year to approve any deal, said a government official with direct knowledge of the matter.

Regulators, concerned that a deal would hurt service quality, would seek to prevent the phone companies from accumulating a concentration of regional airwave licenses, said the official, who asked not to be identified because the scenario is hypothetical. Neither company has sought authorization for a transaction, the official said.

Internal Evaluation

Telecom Italia’s internal evaluation of the Brazil unit is still at an early stage, according to the person with knowledge of that matter.

Telefonica SA, the parent company of Telefonica Brasil and the biggest shareholder in Telecom Italia, would prefer a breakup of Tim as opposed to an outright sale, said Richard Dineen, an analyst at HSBC Holdings Plc in New York. Madrid-based Telefonica “would get the upside of a sale of Tim, because, ‘We’ll buy a chunk of it and we’ll operate in a three-player market,’” he said.

Vodafone Group Plc, cited by BTIG LLC and Brandes Investment Partners as a possible suitor for Tim, isn’t interested in bidding, a person with direct knowledge of the company said this week. AT&T Inc., the Dallas-based phone carrier that has said it may invest outside the U.S., owns 9 percent of America Movil, which has a 25 percent share of the Brazilian wireless market through its Claro brand.

Simon Gordon, a spokesman for Vodafone, and Mark Siegel, an AT&T spokesman, declined to comment on their companies’ interest in Tim.

Regulatory Precedent

Tim has had 15 straight quarters of year-over-year profit growth through June, excluding items such as interest, according to data compiled by Bloomberg. The company had 73 million subscribers at the end of August, second only to Telefonica, according to regulator Anatel.

Brazil wants to prompt more competition by keeping four operators, Paulo Bernardo, the communications minister, told reporters in Brasilia this week.

“If you ask any telecom user, they will want more competition,” he said. A spokesman for Anatel declined to comment because it hasn’t yet been presented with a merger proposal to analyze. A spokesman for the antitrust agency, Cade, also declined to comment on hypothetical situations.

Bernardo’s position follows a precedent set by other governments, including a high-profile case in the U.S., where regulators blocked AT&T’s attempt to buy T-Mobile USA Inc. in 2011. They argued that reducing the number of competitors on the market to three would be unacceptable.

Now that theory is being tested again in Europe, where companies are struggling with traffic growth, lower prices and, in some cases, mounting debt, said Gerardo Zamorano, director of investments at Brandes, which owns 4 percent of Tim.

German Deal

“Regulators have gone from being focused on ensuring the lowest price possible to being more balanced and trying to allow for a healthy environment for the telecom operators,” Zamorano said by phone from San Diego.

In Germany, The Hague-based Royal KPN NV is selling its E-Plus unit to Telefonica, shrinking the market to three from four operators. Regulators are reviewing the deal.

“All eyes are on this E-Plus transaction,” Chand said in a telephone interview. “If the EU lets Telefonica acquire E-Plus from KPN, I think you will see a wave of four to three transactions across Europe, and you will see this global trend that the industry is hoping for.”

Stefan Simons, a KPN spokesman, declined to comment.

Concessions Needed?

Cade’s previous rulings on mergers of competitors show one way regulators could approach a deal between Tim and its rivals. The Brasilia agency approved the combination of Casas Bahia and Ponto Frio, which sell household appliances, this year on the condition that 74 stores be sold in cities where the joint company had a market share of greater than 60 percent.

Oi, Brazil’s fourth-largest wireless carrier, has also shown it’s possible to overcome government opposition to a deal, Zamorano said. In 2009, Oi completed its purchase of Brasil Telecom Participacoes SA after a change in legislation allowed one landline operator to buy another in a different geographic area.

“The regulations have changed in the past to allow consolidation, so it’s a possibility that we’ll see another change,” Zamorano said.

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