Brazil, March 10, 2020 – Brazil’s telecom operators Telefonica Brasil S.A. (Vivo, Ba1 stable) and TIM S.A., the local subsidiary of Telecom Italia S.p.A. (Ba1 negative), announced a joint plan to acquire the mobile business of Oi S.A., their competitor now operating under bankruptcy protection.
The potential transaction, whose terms remain undisclosed, would benefit the entire Brazilian telecom industry by excluding Oi from the market, thereby enabling the remaining three mobile operators to increase profits.
Oi, which filed for judicial recovery in 2016, is the most aggressively priced operator in Brazil’s mobile telecom market. Its removal would make Brazil’s competitive environment more rational and profitable. An increase in profitability would allow the three remaining mobile competitors to invest more easily in infrastructure, better service quality and balance-sheet deleveraging.
Vivo and TIM jointly intend to acquire Oi’s mobile business, as a whole or in parts. Each company would receive a portion of Oi’s mobile business, but TIM would probably get the largest part to avoid excessive market concentration with Vivo. An outsized increase in Vivo’s market share would likely have more trouble winning approval from CADE, the Brazilian federal antitrust authority. Vivo leads the mobile market in Brazil with 33% market share, followed by TIM and Claro with 24% each, and Oi with 16% as of January 2020.
Even without details yet about the market value of Oi’s mobile business or how Vivo and TIM would finance their acquisition, Vivo’s balance sheet is strong enough to support a debt-financed acquisition without significant stress on its credit metrics. Vivo had a of 0.7x total adjusted debt/EBITDA ratio at the end of 2019, and a 20.7% free cash flow/debt ratio.
The proposal marks a relatively rare opportunity in Brazil’s telecom market, whose M&A opportunities are limited; unless Oi sells its assets, there are no other significant acquisitions remaining. Claro, the local subsidiary of America Movil S.A.B. de C.V. (A3 stable), acquired Nextel Brazil in March 2019 for around $900 million. The move strengthened the Mexican group’s mobile business in Brazil, particularly in the populous states of Rio de Janeiro and São Paulo, and gave Claro valuable spectrum in Brazil.
The Vivo-TIM deal would benefit Claro as well, leaving only three operators competing in the 5G auction slated for December 2020, implying more capacity for each company just as Brazil has relaxed its spectrum licensing rules.
Under a new telecom bill approved in 2019, Brazilian telecom operators can renew mobile spectrum licenses more than once, giving them longer term visibility. Previously, an operator could only renew its license once, and had to go through the bidding process after the first renewal.
Credit Outlook: 16 March 2020. Pg. 31
Moodys
Atlantic Investors Service 