Latin Finance - September/October 2010 - 72

Brazil telecoms

fourth-placed mobile operator by revenue. Telefónica’s headache over expansion only got worse last year, when an attempt to buy broadband provider GVT flopped. “It was a pristine asset, had the best customer service, and the best overall broadband speed,” says Morin. But, after an acrimonious bidding war, Telefónica lost out to France’s Vivendi, which paid 4.12 billion reais for the company. Merging Telesp with Vivo makes perfect sense, Morin says. They can “unify call centers, billing systems, and maintenance, unify administrative efforts, administrative staff. They could have full triple-play offers [fixed, mobile, internet]. Even quadruple – play with pay TV and possibly most important: Vivo would have access to Telesp’s backbone.”

compared to the 11 times it was paid for Vivo. Many analysts assumed PT would take nothing less than a majority stake, because of its very recent experience being forced out of market leader Vivo, but could not negotiate a controlling share. The Portuguese firm now finds itself a minority partner in a company where four-fifths of the revenue come from fixed-line services. PT can pay for most of the purchase with a fraction of the funds it is receiving up-front for Vivo.

President Lula sold the deal to the public as a victory for his national champion. He says Oi would remain “brasileira da silva” as long as he was president. Perhaps just as important, the company received a much-needed injection of capital. Last year’s merger left it with a debt of 20 billion reais, or about 2.3 times State Intervention Ebitda, says Aldworth. Telefónica opened bidding for Vivo at €5.70 billion in May. “That was manageable, but they were By the end of June, a large majority of being conservative with cash. The cash shareholders had accepted a €7.15 billion from PT will reduce leverage ratios and cash offer. But the Portuguese government allow them to be more aggressive and stepped in the way, invoking the use of increase capex,” he adds. controversial golden shares. Despite what some Oi shareholders Sócrates says it was in the strategic initially thought, it appears PT will have interest of his country to maintain largesome operational control over Oi, through scale operations in Brazil. He did not back its voting rights and ability to appoint down, even as his government’s actions directors. Before the deal, Lula’s and were ruled illegal by European courts. Sócrates’ administrations approved the Some observers suspected PT was formation of a Lusophone alliance for Oi buying time to negotiate purchasing and PT. control of Oi. But resolving economic This is not the only such pact to be nationalist concerns in Portugal bumped announced recently. In August, Banco do up against similar considerations in Brazil. Brasil and Bradesco made public plans for Oi in its current format was formed a joint venture in Africa with Portugal’s last year after the government changed Banco Espírito Santo. regulations to allow the merger of Telemar Meanwhile, a select few of Oi’s major and Brasil Telecom, pushed through on the shareholders were able to cash in, while argument that Brazil needed a “national Telesp-Vivo merger makes sense, says Morin the rest are stuck with a big new rights champion” to compete with Spanish and offering. As part of the deal, Telemar and Mexican providers. Oi shareholders could not so easily turn around and sell the new company abroad to the Tele Norte Leste – which make up Oi – are expected to raise up to 12 billion reais each in rights offerings. highest bidder. “However,” says Barclays, “the shares currently trade below In the end, the three companies, and the three governments, their subscription prices, and we thus expect that only PT and agreed to a deal: Telefónica would pay a re-sweetened price of the controlling shareholders will exercise their rights, diluting €7.5 billion for PT’s stake in Vivo. everyone else.“ Telefónica will pay €1.8 billion more than initially offered. “The small shareholders in Oi were the losers, as always,” Zeinal Bava, PT’s chief executive, said this made the Vivo sale one says an equity telecoms analyst at a large investment bank in São of the world’s most expensive telecoms deals for a decade. “But they are talking about potential synergies of €3.9 billion, Paulo, speaking on condition of anonymity. “They always are. Bad corporate governance.” so it’s still a net positive value deal at present,” says Aldworth. “We estimate that [major shareholders] Andrade Gutierrez Of the total, Telefónica is paying €4.5 billion at closing, €1.0 and La Fonte are getting 24 times the sum of the value of billion in December and the remaining €2 billion in December the shares. That amount of money, had it been paid to all 2011. The Spanish company will receive a syndicated revolving shareholders, would have resulted in a much better valuation,” credit line for up to $8 billion. Of that, $5 billion will have a three-year tenor, with the option says Morin. LF to extend for an additional year, and a $3 billion portion will have > UPDATE a five-year tenor. UBS and Credit Suisse advised Telefónica, while Bank of America Merrill Lynch advised Portugal Telecom. For more on this story, and daily news about Brazilian telecoms, see On the same day as the Vivo sale was announced, PT said www.latinfinance.com it was buying 22% of Oi for €3.7 billion – six times Ebitda,

Lusophone Pacts

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September/October 2010

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Latin Finance - September/October 2010

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