Telefonica and TIM circling bankrupt Oi for Brazil expansion

With the troubles of Brazilian telco Oi plain for everyone to see, Telecom Italia and Telefonica are sniffing out an opportunity for growth in market with significant potential.

Telecom Italia (TIM) has confirmed in a letter to shareholders that it and Telefonica have approached Bank of America Merrill Lynch, Oi’s financial advisor, to jointly purchase the telco’s mobile operations. This should not be taken as a sign of any merged business operations, but more corporate opportunism in a market which has potential for riches as the digital society beds-in.

What is worth noting is this acquisition would only be for the mobile business unit. The broadband and fixed line units would continue as an independent operation. As the country’s largest broadband business, the collapse of the wider group would certainly be a much larger problem.

Telco Subscriptions Market share
Telefonica – Vivo 77,793,156 34.5%
TIM Brazil 55,044,418 24.4%
Oi 35,844,975 15.8%

Statistics curtesy of Omdia World Information Series (WIS)

What is slightly unusual is the level of competition which will be left in the market. Outside of these three service providers, only Claro offers a competitive threat, meaning the market will shrink from four to three. Many regulators would get twitchy at such a thought, though it seems this is not a worry for Telefonica or TIM.

Although the extinction of the Oi brand is not something Brazilian authorities would have wanted to see, it is an entirely predictable outcome. Oi has been searching to offload the mobile business unit, and the financials have not been painting a pretty picture.

Period Total revenue Net income
Q3 2019 5,001 -5,747
Q2 2019 5,091 -1,559
Q1 2019 5,130 568
Q4 2018 5,365 -3,359
Q3 2018 5,481 -1,336
Q2 2018 5 545 -1,258
Q1 2018 5,668 30,543

Figures in Brazilian real (millions)

The incredibly large net income figure during Q1 2018 is down to a cash injection from various different distressed asset funds. Roughly $1 billion was injected into the business as part of the restructuring process following the telcos decision to file for bankruptcy in 2016. In the years following this saga, financial reform was introduced in Brazil thanks to this saga, though the capital raised could not entirely save the business.

Oi’s misery is a gain for the European duo, both of whom have big plans for the Brazilian market moving forward. There are of course many questions which still remain, for example, how will the assets be split between the pair, but it is still early days in the acquisition process.

Interview: Wagner Morais, Cyber Security Consultant at VIVO Brazil

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Francesca Greane, Marketing, Content and Community Lead for 5G Latin America 2020, spoke with Wagner Morais – Cyber Security Consultant at VIVO Brazil – to discuss the new security threats that are surrounding the emergence of 5G in Latin America.

5G Latin America: In your opinion, what are the latest security threats when it comes to 5G in Latin America?

Wagner Morais (WM): The biggest threat to 5G security is to fail to comply with these practices and not to implement continuous supervision mechanisms with regard to security aiming at the integrity of the control and administration plan, as well as the implementation of interconnection supervision mechanisms (IPx). Most threats and fraud start with network interconnections. One thing is certain, the 5G network will inherit all the vulnerabilities of 4G networks, and research indicates that 100% of 5G networks are vulnerable to Denial of Service (dos) attacks. , privacy is another challenge threats like semantic information attacks, time attacks, and border attacks are primarily aimed at subscriber location privacy.

5G Latin America: What are the new threats that are being created by the move to 5G in Latin America?

WM:  In addition to the vulnerabilities inherited from the 4G network, we will have the growth of DDos attacks, and the possibility to exploit flaws to track the location of the cell phone and even transmit false emergency alerts.

5G Latin America: Is building infrastructure a cause for concern or an opportunity for new security architecture?

WM: The 5G infrastructure remains the most disruptive technology in recent years, I understand that it is an opportunity to explore this technology and the demand for 5G infrastructure and the incredible benefits offered by this technology have stimulated the investment of the main market participants. The security architecture is a great challenge, as new threats have emerged, and many challenges are to come.

5G Latin America: What are your recommendations for service providers and solution providers to evaporate these security fears?

WM: Investment in infrastructure and partnerships with companies that already have security tools and solutions for networks 4 and 5G with proven positive results and network security because of a greater exposure to attacks and a greater number of potential entry points for attackers. With 5G networks increasingly based on software, the risks associated with important security flaws, such as those resulting from bad software development processes at the suppliers themselves, are gaining importance. Therefore, the need for research and investments in security.

5G Latin America: What difficulties do the likes of IoT and new business verticals present in terms of this security question?

WM: One of the biggest concerns will be with the number of connected IoT devices. Security companies say that by 2020 there will be about 20 billion of these devices. And, no wonder, the number of Internet of Things attacks is increasing because device protection is poor and malware distribution is easily scalable. The company found 800,000 vulnerable devices last year. And, to avoid attacks of great destruction capacity, with threat of interruption of services, operators with 5G will have to develop new threat models more in tune with these realities.

5G Latin America: What are your recommendations for overcoming these challenges?

WM: All good security practices regarding the segregation of the entire control infrastructure, separation (micro / nano segmentation) of resources, reducing possible attack surfaces, as well as policies for hardening and approving equipment from the security point of view are necessary, 5G security starts “by design”, that is, all components are designed with security bias. In addition, it is necessary to create mechanisms for continuous security auditing in the various plans (control, data, administration). Not forgetting the continuous training and awareness of teams working on 5G systems.

Wagner Morais will be joining our speaker line-up for 5G Latin America 2020. Joining our Cyber Security Panel, Wagner will go into further detail on the security threats that are surrounding the emergence of 5G in Latin America, and how the ecosystem can overcome these emerging challenges.

 

Be in the audience for Wagner’s discussion, and join us for three-days of content focused on how operators and solution providers can unleash the 5G future in Latin America. Operators you can claim your FREE pass to 5G Latin America 2020 by clicking here. Solution providers, don’t miss out on your full-access pass by clicking here to purchase now.

Vivo introduces FTTH franchising model in Brazil

Telefonica’s Brazilian brands Vivo and Terra have launched a franchise model for its fibre rollout plans seemingly to ease the financial demands of the digital economy.

Working with local partners, the initiative will focus on cities with populations between 20,000 and 50,000. The aim will be to add an additional 1 million households to the fibre footprint by 2021, taking the total north of 15 million.

“Population demand is for the internet, and Vivo is the only company in Latin America to invest heavily in a fiber project, promoting a unique experience for its customers,” said Fernando Duschitz, Senior Franchise Manager at Vivo.

“This new business model from Vivo is an opportunity for companies and investors who want to enter this market, as well as for those already acting as providers, to benefit from the strength of the Terra brand, with Telefonica scale, and Vivo quality, as well as of all our experience in expanding fiber, present today in 154 cities across the country.”

Just to paint a bit of context to the situation, Telefonica is a company which is not in the most comfortable position when it comes to debt. While debt had been reduced to €41.785 billion, this is still seemed too steep for investors. Various other strategies have been introduced, such as a new business model for the tower division, though this franchise idea also aids the pursuit of a future-proofed network.

This is the conundrum being faced by Telefonica. The management team does need to reduce debt, though it also needs to find investment for fibre and 5G deployments. Without these investments, rivals would gain the upper hand and potentially erode profits as customers elect for better services. Franchising certain localities in Brazil is a compromise, lessening the financial impact to fuel the mission for future-proofed networks, but weakening control.

Franchisees will be responsible for developing all necessary network infrastructure, as well as managing the operation, including sales, service and installation. On the other side of the deal, Vivo will offer agile processes, managerial and technical training, access to tiered qualified suppliers, unique central call centre, network topology ensuring stability and scalability.

Although not many telcos are facing the same debt challenges as Telefonica, finding cash to fuel network upgrades and deployment is an industry-wide conundrum. Compromises will need to be made, and this is certainly an interesting idea.

América Móvil strengthens its position in Brazil with Nextel acquisition

The Latin American mobile heavyweight América Móvil has agreed to acquire its competitor Nextel in the Brazilian market for $905 million.

Shortly after the deal was announced by América Móvil on Monday, and the board of NII Holdings, which owns 70% of Nextel, announced that it would propose to the shareholders to accept the offer. The other 30% of Nextel is owned by AI Brazil Holdings, the local operation of Access Industries, an American private company whose portfolio includes natural resources, telecoms, internet services, as well as Warner Music, among other media interests.

The nature of the deal, “cash free / debt free”, will let NII and AI Brazil keep all the cash while América Móvil will not assume Nextel’s debts. Although the total transaction value is less than 1.5 times of Nextel’s annual revenues in 2018 ($621 million), it represents almost four times NII’s market capitalisation on its latest trading day on NASDAQ ($229 million), indicating the buyer’s relatively strong confidence in the business prospect.

Brazil is a highly competitive market. According to research by Ovum, by Q4 2018, Vivo (owned by Telefónica) led with one third of the total mobile market, while TIM and Claro (América Móvil’s existing operation in Brazil) were vying for the second place, each serving about a quarter of the total mobile subscribers. Nextel had slightly over 1% market share. The rest of the market is served by Oi (a JV between Altice Portugal, formerly Portugal Telecom, and Telemar, Brazil’s largest integrated telecom operator).

After the acquisition, América Móvil plans to combine Nextel with Claro to “consolidate its position as one of the leading telecommunication service providers in Brazil, strengthening itsmobile network capacity, spectrum portfolio, subscriber base, coverage and quality, particularly in the cities of São Paulo and Rio de Janeiro, the main markets in Brazil.”

For NII, selling Nextel in Brazil represents the end of an era. The company once operated mobile services in multiple North and Latin American markets, including the eponymous professional radio service in the US, which was later acquired by Sprint. Brazil is its last operation, where it has been struggling in a classic four-operator market. Not only has it not been able to break into the leader group, but also seen business declining fast. The revenues in 2018 were a 29% decline from 2017 ($871 million), which itself was a 12% decline from 2016 ($985 million).

“The announcement of this transaction marks the culmination of an extensive multi-year process to pursue a strategic path for Nextel Brazil and provides our best opportunity to monetize our remaining operating assets in light of the competitive landscape in Brazil and long-term need to raise significant capital to fund business operations, debt service and capital expenditures necessary to remain competitive in the future,” said Dan Freiman, NII’s CFO. Earlier potential buyers included Telefónica Brasil, Access Industries (NII’s JV partner), though the most concrete case was TIM, which, according to Reuters, approved a non-binding offer in November last year. None of these negotiations has come to fruition.

“Management and our Board of Directors believe the transaction is in the best interest of NII’s stockholders,” Freiman added.

TIM looks to Nextel to boost Brazilian armoury

Telecom Italia is reportedly scouring through bank statements, trying to figure out whether it can purchase Nextel Telecommunicacoes in an effort to boost market share.

The move itself might be considered by some as somewhat of an unusual one. With activist investor Elliott Management pulls the strings of nine board members, the business has seemingly been favouring strategies which would return cash to investors across a shorter period of time. One of these ideas might have been a disposal of assets, making any acquisition rumours slightly out of the ordinary.

According to Bloomberg, TIM is considering the move to absorb the fifth largest Brazilian telco to improve market share and spectrum holding in certain parts of the market. The Brazilian business is the only market of genuine note for TIM outside of Italy, and has been aiding the overall performance for the group, though the emergence of acquisition rumours are slightly unusual. Brazil is a highly competitive market, there are seven telcos of note and hundreds of minor regionalised companies, which does not make it seem like a bet of particular value to the short-termist investor.

CEO Amos Genish and certain executives do have an eye cast on the long-term, and most likely greater, success of Telecom Italia with the TIM2020 strategy, though you cannot argue with the majority. Thanks to some pretty effective rousing and sh*t-stirring, Elliott now has control of the board. It might not want to rock the boat too much when it comes to altering the TIM2020 strategy, losing Genish at this point would not be healthy for anyone involved, though we suspect it might have enough muscle on the board to quell any ambitions for expensive acquisitions.

For a telecommunications company which has its eye on the distant horizon and is concentrating on building value in the business for the greater gains in the long-run, this acquisition makes sense. However, with Elliott Management pulling the strings, strings which do not have much slack, we find it hard to believe rumours are not focused on more short-term profitability.

Why would such a short-termist investor allow the board to entertain an idea which will possible decrease profitability, reduce free cash and continue the trend of absent dividends, which has existed since 2013. This doesn’t quite make sense to us.