Telecom Italia has reportedly begun M&A talks with Brazil’s third largest mobile operator, Oi, which is also the fixed-line incumbent. The Italian group has for years said it wanted to hold on to its Brazilian asset, despite ongoing reports to the contrary.
Telecom Italia (BIT:TIT) has reportedly begun M&A talks with Brazil’s third largest mobile operator, Oi (BVMF:OIBR4), which is also the fixed-line incumbent.
The reported talks come after months of speculation and an attempt by LetterOne, backed by Russian billionaire Mikhail Fridman, to help broker a deal. Telecom Italia has for years said it wants to hold on to its valuable Brazilian business, long considered a target in the country’s four-player wireless market.
A spokesperson for Telecom Italia said the company had “no contacts, either formal or informal, with Oi.” A spokesperson for Oi declined comment.
Oi, which has debts of R$35bn (US$8.7bn), has for some time been open to consolidation. In April, CFO Flavio Guimarães told TelecomFinance: “We do believe consolidation would be beneficial to all operators, and will continue to work with our adviser [BTG Pactual] to participate in this at the right time.”
Reuters reported last night that the discussions were being led by the Italian telco’s board and Oi CEO Bayard Gontijo. So far, the two sides have discussed a framework – which could be ready by the end of January – but not a valuation. Oi is reportedly in favour of LetterOne becoming a shareholder in the combined group, but Telecom Italia is not yet in agreement.
Bank of America Merrill Lynch and Banco Bradesco BBI are reportedly advising on the Italian side, while Oi may mandate another two banks to help with M&A and debt.
Were a merger to take place, the resulting fixed-mobile group would become the leading cellco with a 44% market share. Telefónica Brasil and América Móvil currently hold a respective 29% and 25% of the market.
Government relaxation of telecom rules could smooth deal
In November, the government has launched a public consultation to seek feedback on new telecom rules that could come into effect in this year, smoothing the path towards a merger. The CEOs of both Telecom Italia and Oi have both noted regulatory risk as the main hindrance to any deal.
According to a local competition lawyer, government involvement makes sense in this case since Oi is at risk of bankruptcy.
“If it were to cease services, it would have a negative impact on service, employment and tax revenue,” the lawyer said.
Brazil is already facing devaluation and broader economic uncertainty, due in part to a large-scale corruption scandal at 51% state-owned energy company Petrobras.
Assuming the new rules are rubberstamped, this would be the second time that Oi has benefited from regulatory changes. In 2008, the government overturned rules prohibiting mergers among leading fixed-line players in different regions, enabling the company – then known as Telemar – to acquire Brasil Telecom and create a national champion able to compete against players owned by América Móvil, Telecom Italia and Telefónica.
“This is the second time the law has been changed with the primary purpose of allowing a transaction to go through – it just happens to involve the same company,” the lawyer said.
