TEF Bids to Expand in Brazil

Spain’s incumbent telecom carrier Telefonica SA (TEF - Analyst Report) has reportedly made an all-cash bid to acquire Brazilian telecom operator GVT Holding SA in an effort to expand its presence in the lucrative Brazilian telecom market.

The Spanish operator’s Brazilian fixed-line subsidiary Telecomunicacoes de Sao Paulo (Telesp) has offered BRL48 (US$27.2) per share of GVT to acquire atleast 51% of the company, equating to a total investment of €2.55 billion (US$3.75 billion). This offer, which is subject to regulatory and shareholders approvals, has outbid the BRL42 (US$23.8) per share offer made by France-based media company Vivendi SA in September 2009. Telefonica targets to eventually acquire 100% stake in GVT.

Large telecom carriers across the US and Europe are increasingly focused on expanding their foothold in under-penetrated markets given the limited growth prospects in their matured domestic markets. With its vast population and relatively low wireless and broadband penetration, Brazil offers an attractive growth opportunity for overseas telecom operators.

Wireless penetration in Brazil is expected to increase by 15% or more over the next two years. The country will also host the 2016 Olympic Games.

Latin America remains the principal growth region for Telefonica. Healthy revenue and subscriber growth from this region continues to partly offset declines across the company’s domestic and European markets due to recession and intense competition.

Through a joint venture with Portugal Telecom (PT - Snapshot Report), Telefonica operates Brazilian wireless operator Vivo (VIV - Snapshot Report), the leading wireless carrier in Brazil with a customer base of approximately 46.8 million and roughly 30% market share. However, Telefonica’s Brazilian presence is currently limited to Sao Paulo, the country’s largest and most lucrative market.
 
Telefonica is exposed to increased competition in Brazil , the largest contributor to the company’s Latin American revenues. Competition has intensified with the country’s fourth-largest mobile operator Tele Norte Leste Participacoes’s (TNE - Analyst Report) acquisition of 61.2% stake in Brasil Telecom (BRP - Analyst Report), the third-largest fixed-line carrier in Brazil. This strategic investment has resulted in the creation of a national telecom giant with approximately 17% and 70% control of Brazil ’s cellular market and fixed-line market, respectively.

GVT Holding operates primarily in Brazil ’s center-west, Southern and Northern regions with roughly 2.3 million subscribers across 86 Brazilian cities. The company’s focus on high-usage and high-margin customers has enabled it to grow at a healthy pace, making it an attractive acquisition target.

Over the years Telefonica has focused on growth through acquisitions. By acquiring GVT, the company will be well positioned to expand beyond its core Sao Paulo market to other regions of the country. Moreover, GVT is the fourth-largest broadband service provider in Brazil , which will boost growth opporutnities in this market.

While the GVT deal represents a significant growth prospect for Telefonica given the attractive potential for synergies, resources spent on acquiring a controlling stake in the entity is likely to constrict returns to investors in the form of dividend and share buybacks.