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Monday, April 16, 2007
Perspectives

Mexican Acquisition of TIM?

Will Telmex/America Movil be able to acquire TIM and its Brazilian assets? Here a promo for TIM Brasil.
CHRONICLE SPECIAL
Latin America Advisor

Mexico-based America Movil and its fixed-line affiliate, Telmex, and the US' AT&T are in talks to acquire control of Telecom Italia. Do you think the deal will go through? How would the acquisition affect competition in Latin American countries where Telecom Italia still has assets? Would regulatory authorities in Latin America approve the deal?

J. Paul Groom, Founding and Managing Partner at Telefinance Advisors in Brazil: If Italian chauvinism can be overcome, it will happen! The wireless Mexicans (America Movil) and the fixed-line Americans (AT&T) are jointly trying to buy control of Telecom Italia from Pirelli, the prime mover in the controlling group. This potential acquisition is one that would take this major telecom operator out of the classification of serious walking wounded. A solution to the burden of overwhelming indebtedness was initially sought through the sale of non-strategic assets, such as the participations in companies in Greece, Venezuela, etc. But the values received gave almost no debt relief. Thus, TI moved toward the sale of strategic assets, most prominently the sale of Telecom Italia's mobile assets in Brazil. Alas, all sale discussions were called off six weeks ago when it became clear that the sale price would be a drop in the bucket compared with their debt problems. The fixed wireline business appears to be relatively insulated, as AT&T has no substantial holdings in Europe. However, the acquisition of Telecom Italia Mobile (TIM), by the Mexicans, is replete with regulatory issues, but interestingly stands the old 'sphere of influence' issue on its head. Due to enormous Italian immigration to many countries in Latin America, including Argentina, Venezuela, and indeed Brazil, Italian influence has always been strong. However, to have the Mexicans try to reverse this trend with such a visible and strategic acquisition of Italian assets is breathtaking. America Movil has already made a proposal for TIM's assets in Brazil that was rejected, and which faced many problems in being approved by the regulators. For instance, the Mexicans already have a footprint that is almost complete. The question would be whether they would be allowed to acquire licenses in areas where they already have operations. But more important is the antitrust issue. The profile of mobile telecom in Brazil is essentially three large operators with 75 percent of the market divided roughly equally between them. This acquisition would clearly give the Mexicans close to 50 percent of the market and a predominant position compared to its competitors.

Wally Swain, Senior Vice President for Emerging Markets at The Yankee Group: The deal itself has challenges, given the Italian government's overt hostility to non-Italian ownership. The government is already pressuring the banks to sweeten their once-rejected offer. Now Deutsche Telecom wants to enter the bidding, and while Italy might be able to reject non-European suitors, the European Union would apply significant pressure to accept a German offer that was better than Telmex/AT&T if the banks do not step up. This story has some time to go before it is finished. If the deal does go through, the issue is less about Latin America in general than about Brazil. Bolivia is already trying to nationalize Telecom Italia's assets in that country. In Argentina, America Movil's and Telmex's proportional participation in Telecom Argentina would be so weak that it might be possible to argue that it was irrelevant. Only in Brazil would participation be significant, and the opportunity even more so. The Brazilian government has already signaled its displeasure with an America Movil-TIM Brasil merger and worked hard to find a 'national champion' the last time it was a possibility. Expect a long regulatory holdup in Brazil if the deal goes through and long odds for a Claro-TIM merger. America Movil and Telmex should view the Telecom Italia investment as part of a global diversification strategy, not as an easy route to TIM-Brasil.

Jose Otero, President of Signals Telecom Consulting: Telecom Italia desperately needs shareholders who are willing to inject capital into the operator in order to alleviate its heavy debt burden. The bid received by Olimpia (Pirelli's holding company in the operator)—set to expire on April 30—would provide AT&T with a 6 percent stake in the Italian operator while giving 3 percent each to Telmex and America Movil. Of course, the main dilemma after an acquisition by these players is what the future of Telecom Italia would be. It's no secret that Telecom Italia's European assets fall more in line with AT&T's client profile both for corporate and residential. It also would allow the company to venture into the international arena (beyond its around 8 percent stake in Telmex and America Movil, and around 24 percent voting shares in those two companies). But, it would also mean—something that creates enormous opposition in Italy—a backdoor entrance for America Movil and Telmex to acquire Telecom Italia’s assets in Latin America. Signals believes that America Movil would end up controlling TIM Brasil (to be merged with Claro), Personal Paraguay (to be merged with CTI Movil), and Personal Argentina (where it would face regulatory scrutiny before a merger with CTI Movil could be approved at all). On the other hand, Telecom Argentina would be merged with the local operations of Telmex in the country. If the deal is approved, the main loser of this acquisition would be Telefonica, which planned to continue negotiations with Telecom Italia to develop synergies between the two companies' European assets, estimated to yield around $2 billion over the next five years. These negotiations were scheduled after Telefonica declined to acquire around 5.4 percent in Telecom Italia through a minority stake in Olimpia. In addition, the potential strengthening of Telmex and America Movil in Latin America will go against Telefonica's objectives to derive more revenues from the region in the upcoming years. But the soap opera is not over, as several other companies have expressed renewed interest in the Italian operator: Deustche Telekom, France Telecom, and Telefonica. Regardless of who ends up buying Pirelli's stake in Telecom Italia, as AT&T has recognized the new owner must partner with Italian investors in order to ultimately have the transaction approved by the government. Otherwise, they will face an uphill battle.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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