Analysts: Pace of Consolidation Likely to Slow Down

The pace of consolidation in Brazil's telecoms sector is likely to slow down, as players take stock after a series of false starts in 2006, telecoms analysts told BNamericas.

"Last year, like Mark Twain said, everyone talked about it, but nobody did it," according to Andrew Campbell, telecoms analyst at Credit Suisse.

"Telemar was talking of restructuring for a year and then nothing happened, nothing happened to Portugal Telecom and we have been waiting for three years to see whether Brasil Telecom will change control," Campbell told BNamericas.

Egyptian group Orascom Telecom recently confirmed that it is in talks to acquire Brasil Telecom, further complicating the firm's lengthy ownership saga, and Portuguese group Sonae failed in its bid to take over Portugal Telecom. And these factors could also cause a delay in consolidation, US investment bank Merrill Lynch said in its recent report "Consolidation One Step Back."

There may be simplification in the market this year in individual groups such as with Vivo, where Portugal Telecom and Telefónica are both making noises about taking control of the operator, the largest in Brazil's mobile sector, according to Campbell.

Telemig and Amazônia Celular, which target relatively small areas, are also expected to be sold before 2008, while Brasil Telecom is also likely to change ownership before the end of 2008, according to Thomas Abreu of Pyramid Research.

There is also talk about a possible merger between Brasil Telecom and Telemar (now known as Oi) to create a national fixed line operator.

Otherwise, Abreu does not expect a lot of M&A activity, especially as Telecom Italia now seems committed to its Brazilian mobile unit TIM.

This year the market is likely to assess the real targets, but "the low hanging fruit is now gone," Abreu added, referring in particular to acquisitions of cable TV operators. Telemar purchased Minas Gerais cable company Way TV, Telefónica is taking a stake in pay TV company TVA and Net Serviços (Nasdaq: NETC) acquired rival Vivax.

While some further consolidation may occur, it is always difficult to determine the timing, according to Campbell.

ORASCOM

Egypt's Orascom is reportedly negotiating to buy a minority stake in Brasil Telecom from Telecom Italia, plus the controlling stake held by US financial giant Citigroup and local pension funds.

"Brazil would fit into Orascom's requirements of scale, growth and low penetration," Merrill Lynch's Europe, the Middle East and Africa telecoms analyst Stephen Pettyfer said in the bank's report.

"However, Brasil Telecom doesn't seem to fit well into [Orascom's] wireless preference. Fixed line accounts for 90% of Brasil Telecom's revenues," Pettyfer said.

Telecom Italia's minority stake in Brasil Telecom would give Orascom almost no say in the company, other than veto rights on strategic matters and the chance to appoint a couple of board members, the report added. "Time will tell if Orascom is truly interested in Brasil Telecom," according to Pettyfer.

A deal is certainly not necessarily imminent, but Orascom is a new strategic player to consider, Campbell said.

It could be good for Brasil Telecom as a single strategic shareholder may end the disputes, while operationally Orascom could help Brasil Telecom on the mobile side, he added.

SONAE'S PT BID

If Sonae's offer had been successful, its highly leveraged balance sheet would have likely given Spanish telco Telefónica the opportunity to get full control of Vivo, Merrill Lynch said. Then Telefónica would have been able to merge Vivo with its fixed line incumbent in São Paulo, Telesp.

Though a merger is still possible, depending on negotiations with Portugal Telecom, it is likely to cost TEF more and take longer to be negotiated, the report said.

TELECOM ITALIA STAKE

Nonetheless, Telefónica still has its eye on likely future consolidation in the Brazilian telecoms segment, Merrill Lynch said.

A minority stake in Telecom Italia would be a good alternative to getting full control of Vivo, because it could either facilitate an eventual negotiation to buy Telecom Italia's 70% stake in TIM Brasil or make it more difficult for América Móvil to do so, according to the bank."

Posted to the site on 20th March 2007