Analysts: Claro Likely to Lead Price War Following Vivo Expansion

Brazil's third largest mobile operator Claro is likely to be the frontrunner in propelling the market to lower prices in response to acquisitions by the largest mobile group Vivo, telecoms analysts say.

On August 2 Claro was beaten by Vivo to acquiring Minas Gerais-based mobile operators Telemig Celular Participações and Tele Norte Celular Participações (Amazônia Celular). M&A activity such as this could lead to a price war in Brazil's mobile market, the analysts told BNamericas.

Vivo, a joint venture between Spain's Telefónica and Portugal Telecom, announced it would pay 1.09bn reais (US$549mn) for a 22.7% controlling stake in Telemig and 120mn reais for a 19.3% controlling share in Amazônia.

Claro, controlled by Mexican mobile group América Móvil, is believed to have considered acquiring Telemig and Amazônia as a pre-emptive measure to prevent Telefónica from attaining nationwide coverage, and particularly considering that Vivo may already have gained strength in April when Telefónica became linked to the other main Brazilian mobile group TIM.

The connection with TIM Brasil comes by virtue of Telefónica's alignment with a consortium of Italian companies which indirectly acquired a 23.6% controlling stake in Telecom Italia for around 4.1bn euros (US$5.6bn). However, it is debatable how much influence this gives the Spaniards over TIM Brasil.

Telefónica and América Móvil's vying for Telemig and Amazônia in fact mirrored a bidding pattern already seen in the case of Telecom Italia. In April, the Mexicans put in a bid to acquire 33% of Italian holding company Olimpia, which has an 18% controlling share of Telecom Italia. However, it was Telefónica that clinched the deal, on April 28.

Claro now needs to look at other possibilities to grow quickly, according to analysts.

For Roger Oey, of Brazilian investment bank Banif Primus, after the failure to make these acquisitions Claro's plan A is likely to be to target strong subscriber growth, while plan B could be to acquire Brazil's largest fixed line operator Oi.

"Claro has been aggressive in the past and now it is left with just the opportunity to gain customers in the market rather than acquisitions," Oey told BNamericas.

Therefore, Claro may attempt to launch an aggressive marketing campaign to attract customers, especially from Vivo, he predicted.

In fact, senior Claro executives said in April that they wanted 40% of the net additional customers in Latin America, Oey said. "Therefore, it is already part of their strategy to be aggressive."

Senior analyst Julio Puschel at US consultancy Yankee Group believes Claro is not in a difficult position despite not acquiring Telemig or TIM.

Puschel admits it is hard to predict what will happen in Brazil's mobile segment, but "it will be a good fight, because [Claro] has the investment power," he said. This, in Puschel's view, is why Claro can afford to start price cuts. "It will be interesting to see how they invest, and the first strategy could be a price war."

"Such a price war could turn mobile phone services into a commodity, which we already see in some cheap, postpaid plans," he added.

In Oey's opinion Claro will not focus on the average prepaid customers, but instead on the more lucrative postpaid and top-end prepaid customers.

This fight to poach the best customers with lower prices could lead to a rise in operators' churn rates, the analysts agree.

This may force mobile operators to invest in customer retention, which could ultimately increase Ebitda margins, Oey added.

Claro is not the only company to push towards lower prices, since the race for customers will also be fueled by Vivo's move into the GSM market, Oey said.

Vivo is trying to steal GSM customers from its rivals as well as defend its own CDMA client base. Meanwhile, other GSM operators such as TIM, Claro and Oi Mobile are simultaneously likely to attack Vivo while deploying defensive tactics, according to Oey.

Other Aquisitions

As for Oey's proposed plan B for Claro, the acquisition of fixed line operators Oi or Brasil Telecom, this is not without major hurdles.

The government is unlikely to give up on its intention to create a national telecoms company out of these two large operators, Oey said.

Furthermore, América Móvil is a notoriously hard fighter on acquisition price, and may not be willing to pay the price that Oi's controllers want, he added.

According to Yankee Group's Puschel, one way ahead could be for Claro to gain synergies from its fixed line sister company Embratel Participações and the country's largest pay TV provider Net Serviços, both controlled by Telmex.

"This would allow Claro to offer quadruple play services," Puschel said.

So far Claro has not been very successful [at leveraging its relationship with Telmex], but establishing more synergies would give it a competitive advantage, especially with number portability on the horizon, Puschel said.

In addition, "Claro is likely to invest in 3G to target high-end customers," he added.

Subscribers

An attempt by Claro to focus more on price is also likely to affect the mobile operators' rankings in terms of the number of subscribers.

Brazil's mobile market should reach 115mn subscribers at the end of 2007 and almost 126mn at the end of 2008 compared to about 109mn at the end of July this year, according to preliminary data from telecoms regulator Anatel.

At the end of the 1H07, Vivo was the largest company, while TIM was second and Claro third. However, Claro is likely to overtake TIM next year, according to Oey.

"This is because TIM is more careful with its balance sheet and Telecom Italia expects its mobile arm to send some money back to Italy," he said.

With Brazil's economic improvement giving customers more spending power, TIM expects its customer base to spend more on mobile services and expand naturally, Oey said.

On the other hand, while TIM tries to maintain its profitability, Claro and Vivo will be aggressive, he said.

But this year at least, the three main operators are likely to maintain the same positions. Vivo should remain in pole position with 36.6mn subscribers by the end of 2007.

TIM should remain in second place with 29.6mn at the end of this year, while Claro should be close behind with 29.3mn subscribers by the end of 2007, Oey forecast.

Posted to the site on 21st August 2007