IHS analyst Julian Watson comments on a planned merger between Portugal Telecom and Oi.
“As with the Telefónica-E-Plus, and America Móvil-KPN deals, the aim of increasing scale and saving costs is the main driver.
“In practice, this will be easier to achieve in an in-country consolidation than a cross-border merger. The merger is conditional on raising at least 7 billion Brazilian real (€2.3 billion) from outside investors, so Portugal Telecom/Oi will need to convince them of combined company’s future growth potential.
“Brazil will be the centre of gravity for the combined group, accounting for 75% of the group’s 100 million revenue generating units (RGUs) across fixed voice, fixed broadband, mobile and pay TV, followed by Portugal (12.3%) and others (Angola, East Timor, Cape Verde, Namibia, Sao Tomé & Principe) – 12.7%.
“But it faces considerable challenges in Brazil. While its fixed broadband growth has been impressive, Oi lacks the scale of its competitors America Móvil (Claro) in the mobile and pay TV space, and Telefónica (Vivo) in the mobile space.
“In the first half of 2013, Oi’s EBITDA fell 5.3% year-on-year to a margin of 28%, compared to 33% at Portugal Telecom.
“There are no significant antitrust implications to the deal, which we expect regulators in both Brazil and Portugal to approve. Both companies’ shareholders will also need to vote in favor of the merger.
“Should the deal go ahead, we expect the group to be open to offers for its African operations, provided the group is able to repatriate funds. Across Africa and Asia, Portugal Telecom largely owns non-controlling stakes. Its assets in Angola and Namibia are the most attractive and could be of interest to groups like MTN, Orange and Vodacom.”