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Why Telefonica Can't Catch A Break In Brazil's Telecom Rumble

 May 20, 2010 12:13 PM

by Tony Daltorio, Investment U Research
Thursday, May 20, 2010

With Spain mired in recession, Spanish telecom company Telefonica ADR (NYSE: TEF) has had to rely on Latin America – and Brazil especially – for much of its growth.

Yet Telefonica has to fight increasing competition for everything in the Portuguese-speaking nation.

  • For one, the local government backed a union of BrasilTelecom ADR (NYSE: BRP) and Telemar. It hoped that, together, those local companies could better challenge their Spanish rival.
  • Then, last November, the French media and telecoms company Vivendi ADR beat Telefonica out for GVT, a fast-growing Brazilian fixed-line business.
  • In January, Mexican billionaire Carlos Slim – owner of America Movil ADR (NYSE: AMX) – made a move of his own. And he's already begun implementing his goal of integrating his mobile and fixed line businesses.

[Related -Memo To Apple (AAPL): Smartphone Margins Are Heading South!]

Carlos Slim already owns majority shares in Telmex International ADR (NYSE: TII) and Carso Global Telecom. But he has gone forward to place bids – rumored at $21.8 billion – for total control.

[Related -Hey Apple (AAPL), The Carriers Have The Power Now]

As it is, his fixed-line company Embratel and mobile phone operator Claro accounts for about 25% of the Brazilian market. So Telefonica obviously doesn't want it gaining any more traction in the market.

But even if Mr. Slim doesn't succeed in his play for power, the Spanish business faces stagnation at best going forward.

Why Telefonica is Never Gonna Get It

Telefonica would really like to copy America Movil's moves.

It wants to improve the working relationship between its fixed-line phone business, Telesp ADR (NYSE: TSP), and its mobile phone operator, Vivo ADR (NYSE: VIV). By tying both Brazilian companies more closely together, Telefonica could generate an extra €2 – €4 billion in cost savings.

The logic behind the move – and Mr. Slim's as well – is that the companies could then offer combined services, including fixed line, cellular, internet and TV: the so-called "quadruple play."

But while that sounds all well and good, it isn't quite that simple. At least not for Telefonica, which only owns 50% of Brasilcel, the holding company with a 59% stake in Vivo.

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