Tim Resists Merger Push as Telecom M&A Looming

Tim Participacoes SA, the Brazilian telecommunications carrier providing the best return this year, can thrive on its own and fight growing pressure to sell the company, said Chief Executive Officer Rodrigo Abreu.

The wireless market is “sustainable” with four companies each holding 19 percent to 29 percent of the 270 million lines in use, Abreu said in an interview in New York. While parent company Telecom Italia SpA committed this month to maintaining control of Tim, its largest shareholder, Telefonica SA, favors a sale or breakup of the Rio de Janeiro-based carrier, people with knowledge of the matter said last month.

Brazilian telecommunications companies’ profits are being squeezed as intensifying competition forces them to invest in infrastructure for improved service and increased sales. Tim, the nation’s second-largest wireless company, has held up better by outpacing most competitors in subscriber gains. Earnings before interest, taxes, depreciation and amortization grew by 4 percent in the third quarter from a year earlier, compared with an 0.7 percent decline for third-place Claro, a 2.3 percent drop for fourth-place Oi SA and an 18 percent drop for biggest carrier Telefonica Brasil SA, according to data compiled by Bloomberg.

“Even with the status quo, we can maintain a reasonable return,” Abreu said. “Our return on invested capital is relatively satisfactory compared to the industry average, and our earnings are growing more than the earnings of other companies.”

‘Right Track’

Revenue and Ebitda will grow by a “mid-single-digits” rate between 2013 and 2016, the company forecast this month, as it invests 11 billion reais ($4.8 billion), largely in infrastructure such as network equipment.

“We believe the company is on the right track to enhance its business thanks to its strong infrastructure investments and improved commercial strategies,” a team of analysts at Corporativo GBM SAB led by Andres Medina-Mora wrote in an Oct. 30 note.

Tim shares reversed earlier gains to drop 0.4 percent to 11.06 reais in Sao Paulo today.

Tim’s subscriber base reached 73.2 million at the end of October, up 5.4 percent from a year earlier, according to data from regulator Anatel. That beat market leader Telefonica’s 1.4 percent expansion and Oi’s 2.6 percent increase. Only America Movil, the mobile-phone company controlled by billionaire Carlos Slim, outpaced Tim, with its Claro unit growing 6.3 percent.

“We’ve been the reference on offering innovation, on setting the pace of what consumers actually wanted,” Tim’s Chief Marketing Officer Roger Sole said at an investor conference in New York. “We’ve seen most of our competitors copying what we did.” Tim started its Tim BETA program, targeted at teenagers and young adults, in 2010. Oi introduced a similar program called Oi Galera in September.

‘Right Price’

Tim is a “strategic” asset for Telecom Italia, CEO Marco Patuano said at an investor conference in Barcelona last week, adding that “we would need to receive the right price” to consider a sale. Telecom Italia has $38 billion in net debt and said this month it will sell assets including its Argentine business and wireless towers in Italy and in Brazil.

The company is studying a sale of as many as 7,000 towers, Abreu said. “We’re evaluating the alternatives, which may involve a number of transactions, even from a partial sale to JVs to a sale of stake to a combination,” he said.

Oi and Madrid-based Telefonica sold towers over the past two years for as much as $200,000 each.

Telefonica’s Option

Following negotiations with other Telecom Italia shareholders this year, Telefonica has an option to acquire shares that would give it control of the Milan-based company -- and its Brazilian unit. That would trigger a review by the Brazilian government, which has previously allowed the two companies to compete in Brazil even though Telefonica holds a stake in Telecom Italia. Communications Minister Paulo Bernardo said last month that the country would prefer to keep four competitors.

A spokesman for Telefonica in Madrid declined to comment.

The general attorney of Brazil’s antitrust regulator submitted a report on November 25 recommending that Telefonica pays a 15 million reais fine for increasing its stake in Telco, according to the document on the regulator’s website. A tribunal may hear the case as soon as next week, and will decide whether or not to accept the recommendation, a spokeswoman for the regulator said.

Further Consolidation

After announcing a merger in October with Portugal Telecom SGPS to improve profitability, Oi CEO Zeinal Bava has said he’s interested in further consolidation. It’s unlikely that Rio de Janeiro-based Oi will be able to buy Tim, said Gustavo Serra, an analyst at Planner Corretora de Valores SA, in a telephone interview from Sao Paulo.

“Oi has too much debt today,” Serra said. “The merger with PT will reduce debt, but even so it will be high.” Regulators such as antitrust agency Cade also would oppose bestowing too much market share on one company, he said.

Oi has said its ratio of debt to Ebitda, a measure of liquidity, will decline to 3.3 once the merger is complete, down from 3.6 at the end of last quarter, according to data compiled by Bloomberg. The company’s press office declined to comment.

Tim “will likely be sold,” a team of analysts at Sanford C. Bernstein & Co. led by Robin Bienenstock wrote in a Nov. 8 note. Telecom Italia needs Telefonica’s expertise for an operational turnaround, and resistance to Telefonica’s plan to sell Tim “seems utterly self-defeating.”

The case for consolidation can always be made, Abreu said. “But that doesn’t mean that the market isn’t viable.”

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