Brazil’s telcos are in the middle of a perfect storm: The country is in a deep recession and is facing a political crisis that has toppled a president, and the local telecoms market is seeing the end of a paradigm based on high growth in mobile prepaid connections. Operators that were already suffering from weaknesses and difficulties have been overwhelmed by the crisis and are now potential targets for acquisition. But are there buyers for Brazilian telcos?
Brazil is a selling market now, but who wants to buy?
A quick look at the telecoms market in Brazil shows two outstanding players, America Movil and Telefonica, which between them lead every segment of the market. However, the country has been characterized by a diversity of players that have created a competitive landscape. Sky Brazil is the second-largest pay-TV provider, TIM is the No. 2 mobile operator, and Oi is important in broadband, fixed, mobile, and enterprise telecoms.
The intertwined crises that the industry is facing have had an important impact on telcos: Oi has requested protection against bankruptcy due to its massive BRL65bn debt; TIM Brazil has reduced its headcount by nearly 25% in the past 12 months; Sky has seen its customer base shrink month after month; DirecTV’s acquisition of Time Warner means it is very likely to divest its Brazilian subsidiary; and Nextel Brazil, the only remaining subsidiary of NII Holdings in Latin America, is struggling to migrate its base from iDEN to 3G/4G, is posting net losses, and might well be the next in line to file for bankruptcy protection.
The industry landscape raises questions about the long-term viability of the market as it stands. Ideally, the troubled companies would find new owners, but whom? With volatility still ruling, America Movil and Telefonica would have problems acquiring any company, given regulatory barriers. In the case of the bigger prize, Oi, bondholders and shareholders are negotiating, so the company is likely to have new controlling shareholders, with significant participation among its creditors. This leaves one to wonder who would be interested in buying assets such as Sky and Nextel. Unless new players are willing to arrive in Brazil, there aren’t many candidates.
The market that will emerge after these adjustments might be very different from the current one. A dream scenario for the regulator would be if Oi were to merge with either Sky or TIM, or both. But what is more likely is that the two giants in Brazil will grow their leadership while the remaining operators either fail or settle for a secondary role in specific segments. In the end, the level of competition in Brazil will almost certainly be reduced.
Brazil Telecoms & Media Outlook: 2016–21, TE0001-001066 (December 2016)
Ari Lopes, Principal Analyst, Latin America