1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Articles (5983) 

Why Telefonica Can’t Catch a Break in Brazil’s Telecom Rumble

With Spain mired in recession, Spanish telecom company Telefonica ADR (NYSE:TEF) has had to rely on Latin America – and Brazil especially – for much of its growth.

Yet Telefonica has to fight increasing competition for everything in the Portuguese-speaking nation.

  • For one, the local government backed a union of Brasil Telecom ADR (BRP) and Telemar. It hoped that, together, those local companies could better challenge their Spanish rival.
  • Then, last November, the French media and telecoms company Vivendi ADR (VIVDY) beat Telefonica out for GVT, a fast-growing Brazilian fixed-line business.
  • In January, Mexican billionaire Carlos Slim – owner of America Movil ADR (NYSE:AMX) – made a move of his own. And he’s already begun implementing his goal of integrating his mobile and fixed line businesses.
Carlos Slim already owns majority shares in Telmex International ADR (TII) and Carso Global Telecom (CGTVY). But he has gone forward to place bids – rumored at $21.8 billion – for total control.

As it is, his fixed-line company Embratel and mobile phone operator Claro accounts for about 25% of the Brazilian market. So Telefonica obviously doesn’t want it gaining any more traction in the market.

But even if Mr. Slim doesn’t succeed in his play for power, the Spanish business faces stagnation at best going forward.

Why Telefonica is Never Gonna Get It

Telefonica would really like to copy America Movil’s moves.

It wants to improve the working relationship between its fixed-line phone business, Telesp ADR (TSP), and its mobile phone operator, Vivo ADR (NYSE:VIV). By tying both Brazilian companies more closely together, Telefonica could generate an extra €2 – €4 billion in cost savings.

The logic behind the move – and Mr. Slim’s as well – is that the companies could then offer combined services, including fixed line, cellular, internet and TV: the so-called “quadruple play.”

But while that sounds all well and good, it isn’t quite that simple. At least not for Telefonica, which only owns 50% of Brasilcel, the holding company with a 59% stake in Vivo. Portugal Telecom ADR (PT) holds the other 50% and doesn’t want to consolidate. It wants to keep Vivo as a pure growth mobile phone company.

Telefonica has tried for years to buy its shares away, even offering $7.2 billion in cash recently. But PT won’t budge, despite that price being more than a 100% premium on the fair value of its stake.

PT could use that money to reduce some of its $5.5 billion debt. It could give some cash back to its shareholders. And it could invest the rest elsewhere.

But it would lose its growth engine, since its Brazilian operations contribute 40% of its earnings. Of course, their shared language of Portuguese doesn’t hurt either. And with PT’s home market of Portugal mired in recession, it can’t easily invest that cash elsewhere anyway.

So CEO Zeinal Bava wasn’t exaggerating when he compared selling Vivo to “amputating our future.”

Telefonica Has a Few Options Left…

With that door closed, Telefonica only has a few options left to it. And they’re not very good…

  • It could launch a hostile takeover of Portugal Telecom. Though the Lisbon government would more than likely block any such attempt.
  • Or it could approach the problem from a different angle, buying up Italy’sTelecom Italia ADR (NYSE:TI), of which it already owns a majority of shares.
By doing that, it could then get control of the company’s Brazilian mobile phone subsidiary,TIM Brasil ADR (NYSE:TSU). Considering that it’s the country’s third largest mobile operator, it would make a hefty addition to Telesp.

Of course, that attempt would probably face some political controversy of its own. And Telecom Italia has a net debt of €34 billion, which also makes it less attractive.

Regardless, regulators in Brazil wouldn’t allow it to own both TIM and Vivo. So if it went through with the purchase, the government would likely force it to sell the latter. Enter Portugal Telecom at that point, to snap up the remaining Vivo shares for total control.

For all intents and purposes, Telefonica just can’t seem to catch a break.

Portugal Telecom, on the other hand, seems to have it made.

Good investing,

Tony Daltorio

Rating: 3.0/5 (4 votes)


Please leave your comment:

GuruFocus has detected 4 Warning Signs with Telefonica SA $TEF.
More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas.

Performances of the stocks mentioned by INVESTMENTU

User Generated Screeners

pbarker46Begin here 3
DBrizan2017sep22 1045p
andrewgu999nick scali style
liuzishudeep value non-div
star1907Rule #1
star1907C3 20% Growth 5 yr
EhrlingerT. Rowe Price Group
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat