TelecomFinance examines the recent wave of telco acquisitions in the Brazilian cable TV market and whether it will spread to neighbouring countries
The last month has seen significant moves from the two powerhouses of Latin American telecoms – Mexican…
TelecomFinance examines the recent wave of telco acquisitions in the Brazilian cable TV market and whether it will spread to neighbouring countries
The last month has seen significant moves from the two powerhouses of Latin American telecoms – Mexican America Movil and Spanish Telefonica – to expand their reach into the Brazilian pay-TV market.
On 18 October, the Brazilian triple-play provider and America Movil subsidiary Embratel said it plans to acquire enough voting shares to become the indirect parent company of cable TV operator Net Servicos.
Less than a week later, Telefonica announced its intention to acquire Comercial Cabo TV Sao Paolo and TVA Sul Parana, both of which provide cable TV services under the TVA trademark.
Both Net and TVA control the infrastructure networks that provide cable TV to customers. While neither of the companies produces content for television, they are currently part-owned by companies that do so – Globo in the case of Net; and Grupo Abril in the case of TVA.
The immediate cause for this burst in M&A activity is a new law concerning pay-TV ownership that was approved by the Brazilian government and Congress in September.
The new law removes foreign ownership restrictions that previously applied for investments in Brazilian cable TV operators, and that limited non-Brazilian investors to a 49% voting stake or less.
Under the new law foreigners are now allowed to own the whole company.
There are still some limitations, though. For example, foreign groups may still not participate in the production of content for TV networks. This is being left to Brazilian broadcasters.
Yet the rule change removed a major barrier between foreign telcos and a growing Brazilian middle class that is hungry for new consumer services.
According to a Moody’s report released in late October, roughly 80% of the Brazilian population currently does not subscribe to cable TV or DTH services. The authors of the report say there is “huge potential for growth”.
Could we see more telco/cable TV acquisitions in Brazil?
The Brazilian pay-TV market is divided equally between cable TV and DTH. Net Servicos is the largest single cable TV provider, serving between four and six million households.
But, given the current market concentration with main competitors Embratel, Telefonica and Brazilian telco Oi (which launched its own DTH TV service in 2009), there are “only limited prospects for further industry consolidation”, Moody’s believes.
Yet other analysts are more positive about the M&A prospects in the domestic pay-TV market.
Vinicius Caetano, senior telecoms analyst at Pyramid Research, said that given the low penetration of pay-TV, there are opportunities for larger operators, particularly for America Movil and Telefonica and their subsidairies, to acquire smaller cable TV providers.
“Brazil has more than a hundred small pay-TV providers, and those are not likely to be able to compete against the giant companies when the pay-TV market matures – they are likely to be acquired by the two conglomerates,” Caetano said.
Other major players in the domestic telecoms space are seen as less likely acquirers of cable TV assets. For example, Caetano said that cable operations could help Oi in the beginning, “but it seems too late for Oi to go down that road”.
He added that Oi is likely to launch an IPTV offering.
Javier Borrachero, head of telecom sector research at Kepler Capital Markets, expects that there will be more movement in the wake of the Brazilian rule changes.
He suggests that Vivendi’s local subsidiary, fixed-line operator GVT, “is a likely buyer of cable in its attempt to accelerate its expansion”.
What about the rest of Latin America?
The spread of pay-TV varies across the continent, with some countries (Argentina, Chile) approaching Western levels of penetration, while in others a relatively small minority subscribe to the service.
The number of subscribers is likely to rise rapidly alongside the high rates of economic growth in the region. Yet whether this will lead to increased reliance on cable TV technology – and more moves to acquire cable TV companies – is less clear-cut.
Caetano argues that new entrants in countries with lower GDP are favouring DTH services to cover the whole country and are likely to develop IPTV services when moving into more developed countries.
“Cable can be ‘used as a trampoline’ but ultimately it is not the favourite technology for new services,” he said.
Moreover, some of Latin America’s largest markets still apply restrictions on telcos willing to move into the pay-TV sector.
Earlier this year, the Mexican government denied the application by America Movil’s local fixed-line subsidiary, Telmex, to provide pay-TV and audio services.
Restrictions also apply in Argentina and Venezuela.
Focus on Brazil
In Brazil, the decision to allow foreign companies to take full control of cable TV providers is just part of a wider set of policies designed to attract more foreign investment into the domestic telecoms and pay-TV sectors.
Olavo Chinaglia, a Commissioner at the Brazilian competition authority CADE, told TelecomFinance that “the Government is taking several measures in order to stimulate investments, whether national or foreign, in the cable-TV/telecom markets”.
He emphasised the recent decision by the government to offer tax breaks in order to encourage companies to boost investment in broadband networks.
Throughout Latin America, and above all in Brazil, growth in the pay-TV sector will inevitably lead to opportunities for telcos. Yet they face some difficult choices on which technologies to focus on in the years ahead.
