Brazil: Telefónica's next move? Break up TIM Brasil?

The Issue: The Brazilian Competition watchdog, Cade, has ruled against Telefonica and has said that ‘it has identified potential risk to competition’ since Telefónica bought a larger stake in Telecom Italia’s dominant shareholder this year

Telefonica has a controlling stake in Vivo , which is the leading mobile operator in Brazil.In 2010 ,Telefonica agreed to pay $10 Bn to Portugal Telecom for a controlling stake in Vivo. 

Telefonica has 14.76% stake in Telecom Italia , which owns the majority stake in TIM Brasil.Telecom Italia own 67% stake in TIM Brasil, which is a strong competitor to Vivo.In September, 2013, Telefonica increased its stake from 46% to 66% in Telco SPA, which controls Telecom Italia with a 22.4% stake. 

Thus indirectly Telefonica has 14.76% stake in Telecom Italia, which owns controlling stake in TIM Brasil.

So Telefoncia has a stake both in number 1 player , Vivo (direct stake) and the numbet two player , TIM Brasil (indirect stake).

Options before Telefonica: 
1.Reduce stake in Telco SPA? 
Why Telefonica might choose this option?
By reducing stake in Telco SPA, Telefonica would indirectly reduce stake in TIM Brazil, which is a strong rival to Vivo, thereby overcoming the antitrust issues in Brazil. Also Telefonica is trying to shed its debt continuously and exit non key markets. At the end of Sept,2013, its debt was Euro 46.1.Billion Reducing a stake in Telco SPA , could further help in improving its debt position
Telecom IQ View
Telefonica recently (Sep-13)increased its stake from 46% to 66% in Telco SPA, which controls Telecom Italia with a 22.4% stake. This was a very strategic move and Telefonica is very unlikely to go back on this decision anytime soon. Also Telefonica has already achieved its 2013 target of reducing debt to less than 47 Billion euros.
Thus Telefonica would not sell off its stake in Telco SPA any time soon!


2.Reduce its Majority Stake in Vivo
Why Telefonica might choose this option?
By reducing its stake in Vivo, Telefonica can successfully address the antitrust concerns and pacify the regulators in Brazil

Telecom IQ View
LatAm contributes 51% revenues for Telefonica and 68% of the accesses. Brazil is the biggest market in LatAM for TEF, and ranks next only to Spain in terms of revenues and OIBDA.

• Revenue: Spain contribution:-23%; Brazil:- 22%
• OIBDA:- Spain contribution:- 34%;Brazil-21%
• Accesses:- Spain 13% ;Brazil-29% (Sep-13)
• Vivo with 28.49% share in Brazil, is the market leader

Telefonica is very unlikely to exit the lucrative Brazilian market!

3.Force Telecom Italia to sell off its stake in TIM Brasil? 
Why Telecom Italia would resist?
Brazil is a very important market for Telecom Italia

• 26% of Telecom Italia revenue and 17% of EBITDA comes from Brazil. 
• Brazil registered a 7.3% YOY growth in revenues as against a 10% decline in revenues in Italy (Sep-13)

Telecom IQ view 
Why it makes sense for Telecom Italia? 
Telecom Italia is reeling under a debt pile of $38 Billion and in the longer-term, it must raise about $9.9 billion to prevent its credit rating from being downgraded to junk. The market capitalization of TIM Brazil is $11.9 billion. Telecom Italia could reduce its debt burden by selling of its stake in TIM Brasil.
Why it makes sense for Telefonica? 
This would help Telefonica tackle the antitrust concerns in Brazil, retain its share in Telco SPA and Vivo as well! Killing three birds with one stone!

This we foresee, would be the most likely outcome of the impasse in Brazil. Already there are rumors in the market of Telefonica forming an investment vehicle with Claro and Oi, to break up TIM Brazil.