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Brazilian market remains "unchanged" in medium term by TEF-Telecom Italia deal - analyst

Bnamericas Published: Tuesday, September 24, 2013
Although welcomed by investors, Spanish telco Telefónica's (NYSE: TEF) deal to progressively raise capital for - and eventually control - Telecom Italia (NYSE: TI) is not expected to alter the Brazilian mobile telephony market in the medium term, Frost & Sullivan telecoms analyst Renato Pasquini told BNamericas. In Brazil, TEF owns mobile telephony market frontrunner Vivo (NYSE: VIV), while Telecom Italia controls Vivo's closest rival, TIM Brasil (NYSE: TSU). Telecom Italia also controls Telecom Argentina. According to Brazilian regulatory agency Anatel's latest data from July, Vivo had a 28.7% market share, while TIM had 27.2%. Therefore, a hypothetical TIM buy-out would give TEF 56% of the market. Under the terms of the agreement announced, TEF is increasing its capital and stake in Telco, the holding behind Telecom Italia, to 66% while maintaining its voting rights at 46.2%. However, in a second phase, TEF could convert its shares into shares with voting rights and even acquire full control of Telco. According to Brazilian regulations, a single telecoms group cannot hold overlapping licenses for the same type of service in the same coverage area. Thus, mobile carriers Vivo and TIM, which have national licenses, could not continue to operate if both become controlled by Telefónica. There are two possibilities in the event of full control by TEF: either TEF agrees with shareholders that it will keep out of TIM and Telecom Argentina's operations, or Telecom Italia agrees to sell the two assets. Moreover, Anatel has had specific rules for TEF and Telecom Italia's operations in Brazil since TEF announced its entry into the Telco consortium in 2007. In July 2008, Anatel's board approved the shareholders' agreement signed by Telefónica and Telecom Italia with restrictions to prevent market concentration. Anatel's goal was that TIM and Vivo Brasil would remain independent as separate legal entities, with separate boards and business plans. The restrictions avoided merging, and overlapping licenses, or a situation in which one company could impose market or technological guidelines on the other. "Perhaps Anatel will review the rules established in 2007 and 2008, or impose new conditions. But I understand that the competition landscape does not change much in Brazil for now just with Telefónica's increased participation in Telecom Italia, as TEF was already Telco's main shareholder," Pasquini told BNamericas. "However, if and when there is a change of control and/or a sale of TIM in Brazil, then we would have a broader regulatory and antitrust analysis," added the analyst.

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