Telefonica Fixes Brazil CapEx

Telefonica SA (TEF - Analyst Report), the incumbent telecom carrier in Spain, has released its 2010 capital expenditure (CapEx) guidance for its Brazilian subsidiary Telecomunicacoes de Sao Paulo (TSP). The Spanish telecom giant plans to spend more than R$2 billion (US$1.14 billion) in Brazil in the next year. This is marginally lower compared to R$2.4 billion (US$1.38 billion) earmarked for 2009.
 
The company plans to allocate a major portion of the budgeted CapEx for expanding its broadband network infrastructure in Brazil. Telefonica is boosting investment in broadband to improve service quality. The company contends with decelerating revenue for its fixed-line business. Brazil’s telecom regulator Anatel suspended Telefonica’s fixed-line operation between June and August 2009 due to customer complaints about poor service quality.
 
Telefonica operates its fixed-line telephone and broadband services in Sao Paulo (Brazil’s largest and most lucrative market) through Telecomunicacoes de Sao Paulo (Telesp). Additionally, through a joint venture with Portugal Telecom (PT - Snapshot Report), the company operates Brazilian wireless operator Vivo, the leading wireless carrier in Brazil with roughly 30% market share.
 
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 more than 15% over the next two years.

Latin America remains the principal growth region for Telefonica. Healthy revenues and subscriber growth from this region continue to partly offset declines across the company’s domestic and European markets due to recession and intense competition. Brazil represents the largest contributor to the company’s Latin American revenues. With a projected 4% economic growth in 2010, Brazil continues to offer attractive business opportunities for Telefonica.
 
However, Telefonica is exposed to increased competition in Brazil. Competition has intensified with the country’s fourth-largest mobile operator Tele Norte Leste Participacoes’ (TNE) acquisition of 61.2% stake in Brasil Telecom (the third-largest fixed-line carrier in Brazil). This strategic investment has resulted in the creation of a national telecom giant with approximately 70% and 17% control of Brazil’s fixed-line market and cellular market, respectively.
 
Moreover, France-based media company Vivendi SA, which recently outbid Telefonica for a controlling stake in the Brazilian telecom operator GVT Holding, represents another emerging threat. To counter intense competition, Telefonica is considering a more aggressive pricing strategy for its broadband services.

Read the full analyst report on TEF

Read the full analyst report on TSP

Read the full analyst report on PT

Read the full analyst report on TNE