Telefonica Weighs Options After Brazil Order to Sell AssetsDaniele Lepido and Manuel Baigorri
Telefonica SA must determine how to reduce its presence in Brazil to comply with an antitrust ruling, which said its move to boost its influence over Telecom Italia SpA undermines competition in the South American country’s telecommunications market.
Telefonica can fight the ruling -- which offered several options for how to cut back in Brazil -- in the courts. An appeal could buy Telefonica about a year, according to Diego Piselli, a professor of commercial law and competition specialist at University of Bergamo in Italy.
The antitrust regulator fined Madrid-based Telefonica yesterday and ordered it to reduce its Brazilian holdings or convince partner Telecom Italia to sell its local unit. An appeal could buy Telefonica more time to engineer a sale of Telecom Italia’s Tim Participacoes SA, an option that would help maintain the Spanish carrier’s strength in Brazil.
“Telefonica visibly has to calm the Brazilian authorities,” said Jean-Michel Salvador, an analyst at AlphaValue in Paris. “On the other side, they have to persuade the Italians, who are still reluctant to sell.”
Spokesmen for Telefonica and Telecom Italia declined to comment on the decision or their next steps. Telefonica’s deadline to comply with the ruling is confidential, a Cade press official said.
The regulator, known as Cade, said yesterday it seeks to reduce Telefonica’s position in the market to its pre-2010 level, when it only held half of wireless carrier Vivo and a minority stake in Telco SpA, which controls Telecom Italia. Telefonica acquired full ownership of Vivo in 2010. In September, it agreed to a deal to let it take over Telco.
Vivo and Telecom Italia’s Tim together control more than half of Brazil’s wireless market. If Telefonica can’t undo either its 2010 buyout of its partner in Vivo, or the move to take over Telco, Telecom Italia could address Cade’s concerns by selling Tim, the agency said.
Telefonica already favors a sale or breakup of Tim, people with knowledge of the matter have said. Tim, based in Rio de Janeiro, has a market value of almost $12 billion, and its parent Telecom Italia has struggled with debt.
The regulator’s order “will simply accelerate the timetable for a bid for Tim,” Robin Bienenstock, an analyst at Sanford C. Bernstein & Co. in London, said today in a note to clients. “Telefonica has a strong interest in seeing Tim Brasil broken up.”
Tim Chief Executive Officer Rodrigo Abreu said today that there’s no way Telefonica can force his company to be sold. Telefonica will have to reduce its indirect stake in Tim, he told reporters in Rio de Janeiro.
Cade fined Telefonica 15 million reais ($6.3 million) for violating an agreement it signed in 2010 to preserve competition in the Brazilian telecommunications market, in line with its attorney general’s recommendation last month. Cade also fined Tim 1 million reais.
Telefonica shares fell 1.5 percent to 11.51 euros at the close in Madrid. Telecom Italia declined 2.6 percent to 67 cents in Milan. Tim gained 1.8 percent to 11.57 reais in Sao Paulo.
Government officials including Communications Minister Paulo Bernardo have said they’re wary of any transaction that could reduce the number of competitors in Brazil’s phone market -- making it difficult for Vivo or smaller rivals America Movil SAB and Oi SA to buy Tim, or to split it up between them.
Telefonica has held a stake in Telco since 2007, giving it influence over Telecom Italia. To get Brazilian approval for that stake, the Spanish carrier has operated under an accord with regulators to keep the operations of Vivo and Tim separate.
In September, Telefonica bought additional shares of Telco, which owns 22.4 percent of Telecom Italia. The Spanish company defended the move since the increased participation in Telco, to 66 percent from 46.18 percent, didn’t include voting shares.
Telefonica said in its response to Cade’s inquiry this year that the second stage of the plan would convert its Telco stake to voting shares, followed by the purchase of additional shares, giving it 70 percent ownership of Telco. The last stage would give Telefonica the option to buy the entire holding company.
The recommendation accepted by Cade yesterday said completing this deal “would represent one of the gravest offenses imaginable” of Telefonica’s 2007 agreement.
Tim controls 27 percent of the country’s wireless subscribers, according to government statistics. Vivo has 29 percent. Mexico City-based America Movil follows with 25 percent, and Rio de Janeiro-based Oi has 19 percent.
In November, Telecom Italia CEO Marco Patuano unveiled plans to dispose assets including wireless towers, a broadcasting unit and a mandatory convertible bond. It also agreed to sell its Argentine business for $960 million.
Those measures, projected to bring 4 billion euros ($5.4 billion) in proceeds, would ease pressure on the carrier to conduct a share sale previously under management consideration.
Patuano has been pushing to trim Milan-based Telecom Italia’s debt, which was cut to junk by Moody’s Investors Service and Standard & Poor’s. The CEO told Bloomberg News on Nov. 19 that the company can return to investment grade within three years by reviving its domestic business and cutting its $38 billion in net debt.