What to expect for Brazil’s telecom sector if Oi sells its mobile operations?

the company almost ran out of cash in recent months, it managed to secure BRL 2.5 billion by selling bonds and sold its stake in Angola&#8217;s Unitel for USD 1 billion. It also has other non-core assets in the divestment pipeline, such as cell phone towers, data centers and fiber networks in São Paulo. According to BTG Pactual bank, this could generate between BRL 2 billion and BRL 2.5 billion in revenues.</p> <p>But the cherry on top of the cake is Vivo and TIM interest in Oi’s mobile operations. Both companies informed they have contacted Oi’s financial advisor, Bank of America Merrill Lynch, intending to acquire “all or a share” of the mobile business. According to a statement released by TIM, the operation would “add value to the company, creating benefits for customers and shareholders, by accelerating growth, increasing operational efficiency and the service’s quality.”&nbsp;&nbsp;</p> <h2>Unlocking value&nbsp;</h2> <p>While a possible merger or unit selling by Oi has been speculated for months, the news had a significant impact. Oi’s shares reached a 14 percent high during the day, but ended the trading session in the red following the <a href="https://brazilian.report/newsletters/brazil-daily/2020/03/09/brazilian-stock-market-triggers-circuit-breaker/">market’s meltdown over the Covid-19 pandemic</a>.&nbsp;</p> <p>As negotiations are in a preliminary status, companies have not disclosed the amounts involved in the operation. However, the Bradesco BBI research team estimates Oi’s mobile operations should be worth “at least BRL 12 billion, though its value could be higher depending on synergies.” That would be twice Oi’s market cap of BRL 5.3 billion, they added.&nbsp;</p> <p>Such amount would be more than welcome amid’s Oi restructuring, but not only to pay debts. Oi needs money to fund its FTTH expansion, which is the company&#8217;s leading gamble according to analysts from Levante Investimentos.&nbsp;</p> <p>Vivo and TIM, meanwhile, would benefit from “a larger market share in the segment, as well as expanding into North and Northeast areas, less explored by the companies,” wrote the analysts.&nbsp;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1553063"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>What about the market?&nbsp;</h2> <p>As we explained in our <a href="https://brazilian.report/newsletters/brazil-daily/2020/03/11/brazil-tackle-covid-19-coronavirus-industry-telecom/">March 11 Daily Briefing</a>, a potential merger or incorporation would make Brazil’s mobile telecom even more concentrated, with only three major companies: Vivo, Claro and TIM. It currently scores 2,501 in the Herfindahl-Hirschman Index (HHI), a common measure of market competitiveness. Anything above 1,500 shows some concentration, and scores north of 2,500 happen in “highly concentrated marketplaces.”&nbsp;</p> <p>The model, known as four-to-three concentration, has been a global trend in the industry, with similar moves happening in the Netherlands, Austria, Ireland, and Germany. The newest operation of the kind, T-Mobile and Sprint’s merger <a href="https://www.theverge.com/2020/2/12/21134278/sprint-tmobile-merger-court-ruling-opinion-decision-explainer-carriers-antitrust">has recently been approved</a> in the U.S.&nbsp;</p> <p>In Brazil, TIM and Vivo claimed that acquiring Oi’s assets would benefit the overall market, increasing the companies’ abilities to invest and be more competitive. Academic research points out that they do have a point, but it ends up being a trade-off.</p> <p>By studying possible outcomes in the American market, researchers from the <a href="https://laweconcenter.org/resource/a-review-of-the-empirical-evidence-on-the-effects-of-market-concentration-and-mergers-in-the-wireless-telecommunications-industry-2/">International Center for Law and Economics</a> (ICLE) have found that “wireless mergers resulted in increased investment both by individual companies and by the industry as a whole.” This could mean better and faster services, which benefit customers, they say.&nbsp;</p> <p>Regarding prices, results were inconclusive. But they highlight that when the resultant firms are of more equal size “competition is enhanced and consumers benefit both from improvements in quality of service and price.” They add that “for a geographically large market like the U.S., with relatively low population density, it might well be three and there is no good reason to believe that it is four.”</p> <p>A study published by the <a href="https://www.cerre.eu/publications/evaluating-market-consolidation-mobile-communications">Center on Regulation in Europe</a> (Cerre) points to other conclusions, though. Based on their model, researchers estimate that a hypothetical average four-to-three symmetric merger would increase the bills of end-users by 16.3 percent. However, at the same time, capital expenditure at the operator level would have risen 19.3 percent, in comparison with what would happen in the case of no merger.&nbsp;</p> <p>For asymmetric mergers of smaller companies, which researchers see as more realistic, the price increase would range between 4 percent to 7 percent, while capital expenditure per operator would have gone up from 7.5 percent to 14 percent.