Telecom Italia faces tough choices in Brazil

Telecom Italia is at something of a crossroads in Brazil, as the company considers how to proceed following the failure so far of its plan to buy Vivendi's Brazilian broadband unit GVT and merge it with TIM Brasil.

Vivendi last week entered into exclusive negotiations with Telefónica on the Spanish company's offer to buy GVT, in a blow to Telecom Italia. The Spanish operator offered €7.45 billion ($9.79 billion) including €4.66 billion in cash, while Telecom Italia's offer represented a total enterprise value of €7 billion.

As things stand, Telecom Italia said it plans to pursue its development and investment plans in Brazil in line with its 2014-2016 business strategy and is understood to be considering a number of different options for its Brazilian unit.

It has also been suggested that the Italian operator would be more willing to sell TIM Brasil if it failed to secure GVT. However, Latin America still represents an important growth market for the Italian operator: Brazil accounts for around a third of the Italian operator's revenue, for example. The company has already agreed to sell its Argentine unit to Fintech Group for $860 million, although the deadline for that sale has been pushed back to Sept. 25.

Interest in TIM Brasil from other companies is certainly high: Brazil's Oi said last week it has hired Banco BTG Pactual to examine a possible proposal to buy shares in the unit. Vodafone has also been cited as an interested party, while Telefónica itself would likely be interested in participating in a sale that could see the number of mobile network operators in the market fall from four to three: Telefónica's Vivo, Oi and America Movil's Claro.

Indeed, Bloomberg noted that Telefónica's plan to finance most of the cash portion of the GVT deal through the sale of new Telefónica Brasil stock would give the Spanish operator options to finance future deals.

Walt Piecyk, an analyst at BTIG LLC in New York, told Bloomberg that the use of stock to fund the deal "is a clear indication that Telefónica is keeping its powder dry to participate in any sale of TIM."

Nonetheless, a leading minority shareholder in Telecom Italia warned that TIM Brasil, which is 67 per cent owned by Telecom Italia, would not come cheap.

Marco Fossati told Reuters that any offer for TIM Brasil should value the unit at around 11 times core earnings, or twice its current market value of €10 billion. Fossati said any offer below this would not be taken into consideration.

Meanwhile Fossati welcomed the possible exit of Telefónica from Telecom Italia following the completion of the Spanish operator's deal to buy GVT--the Spanish operator's chairman Cesar Alierta confirmed the exit plan as part of the GVT transaction this week.

By exiting Telecom Italia, Telefónica would ease regulatory pressure in Brazil and end what has been a rather tense and unsuccessful seven-year relationship between the two European operators.

Fossati has long been critical of Telefónica's position as shareholder in Telecom Italia primarily because of the operators' competing positions in Brazil. He also said he would be happy to welcome Vivendi as a shareholder: as part of its bid for GVT, Telefónica has offered Vivendi an option to buy an 8.3 per cent voting stake in Telecom Italia.

For more:
- see this Reuters article
- see this Bloomberg article
- see this separate Reuters article

Related Articles:
Vivendi enters into exclusive talks with Telefónica on GVT
Telecom Italia offers €7B for GVT as Telefónica ups bid
Reports: Telefónica, Telecom Italia prepare GVT bidding war, as Oi eyes TIM Brasil
Report: Vodafone targets TIM Brasil acquisition to enter Brazilian mobile market
Report: Telecom Italia preparing €7B bid for Vivendi's GVT

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