PT-Oi Merger Necessary For Strong Future


Portugal Telecom ( PT ) has announced its intention to merge with its Brazilian subsidiary Oi forming a new company to be called CorpCo . The combined entity would have over 100mn subscribers across fixed-line, mobile, pay-TV and broadband services with US$19bn in annual revenue. BMI notes consolidation is taking place across the telecoms industry making the PT/Oi merger a logical step. However, plans to make cost savings of BRL5.5bn (US$2.49bn) may be over ambitious as both companies are facing highly competitive markets and slowing subscriber growth.

Oi is the largest fixed-line operator in Brazil but holds only fourth place in the mobile market. As the market's former incumbent, PT retains around 57% share of the fixed-line market and also holds the top spot in the mobile and broadband markets. Nevertheless, both operators face strong competition in their respective markets and have largely underperformed their peers. A combined entity has the advantage of scale that can help keep costs lower , a key point when both companies need to continue spending on network infrastructure in order to remain competitive.

Brazil's large population and seemingly insatiable appetite for mobile services has attracted some of the largest players in Latin America; companies with deep pockets and a willingness to spend on services. Oi's merger with Brasil Telecom in 2008 helped give it greater scale, but its annual growth and ARPU have both remained below the market average. The same is largely true for PT, although its performance in mobile subscriber growth has taken off since the second half of 2012. BMI does not expect this to last as there is little growth potential in the Portuguese telecoms market.

Will Combined Operations Put PT And Oi Ahead Of Their Peers?
Oi Vs Brazil Market Averages (LHS) & Portugal Telecom Vs Portugal Market Averages (RHS)

For both operators, the greater focus now is leveraging their extensive fixed and mobile networks to offer bundled services to subscribers. The two companies benefit from a shared language, which could potentially lower costs for acquiring key content to appeal to subscribers. As the larger of the two operations, BMI believes Oi will be the main focus for the combined entity. Oi will sell up to US$3.1bn in new stock, using the funds to pay down debt. Combined, CorpCo will have greater ability to raise further equity, which will enable both companies' networks to be expanded to meet the never-ending consumer demand for data services.

CorpCo's greater clout may also prove important if the sale of second-ranked Brazilian mobile operator TIM goes ahead. TIM's owner, Telecom Italia ( TI), is understood to be looking to sell off the operator in Brazil over competition concerns since Spain's Telefónica increased its stake in TI; Telefónica owns mobile market leader Vivo ( see 'Telecom Italia Deal Has Brazilian Downside', September 26). There is ongoing speculation that TIM would be broken up and sold onto other operators in the market offering Oi the chance to move up to third place and compete on a more equal level with Vivo and Claro.

While there are many reasons for the merger of PT and Oi, ultimately BMI believes the operators have little other option. Network upgrade and maintenance costs remain steep and competition in these slowing markets is strong. Since PT acquired a 25% stake in Oi's complicated ownership structure in 2010, both companies have seen their market value decline by more than 50%, according to Reuters, and a merger between the companies was widely expected. The challenge now for CorpCo is to prove that the two companies are worth more than the sum of their parts.

As the consolidation trend continues across the telecoms industry - and also the wider technology space - BMI expects these kinds of mergers to remain common. Scale and purchasing clout are the driving forces behind these decisions and BMI sees no real slow down in the rate at which technology will demand more from telecoms infrastructure, meaning operators will be caught in the cycle of upgrades and next generation network deployments in the long term.

This article is tagged to:
Sector: Telecommunications
Geography: Portugal, Brazil, Spain