The deal for Vivo: everyone’s a winner

 A long-awaited deal between Telefónica of Spain and Portugal Telecom opens the way for the final wave of consolidation of Brazil’s telecoms sector. It will also allow operators to put years of distractions behind them and get on with building their businesses.

After months of increasingly acrimonious negotiations, all sides seem to have emerged victorious.

Telefónica, because it can now bring its fixed and mobile services in Brazil under one roof in what Cesar Alierta, chairman, said was “a unique opportunity to create value”.

Portugal Telecom, because it sold half of Vivo for more than PT’s own entire market cap on the day of the deal and will retain a big presence in Brazil through Oi, the integrated operator in which it now has about 22 per cent.

The deal is good for Oi, too, because it will get a much needed injection of capital from PT and other shareholders, enabling it to pay down debt and expand at home and, the idea is, abroad. Oi also gets a telecoms operating company among its controlling shareholders for the first time – something that should help improve governance – as well as a 10 per cent stake in PT.

Several details of the operation remain to be ironed out. Most significant will be what happens to TIM, the mobile operator controlled by Telecom Italia, whose biggest shareholder is Telefónica. Brazil’s regulators may force Telefónica to sell TIM’s Brazilian operation; in any event it now stands alone as the only single-service operator in Brazil and looks certain to become a takeover target.

The deal brought two big surprises for many analysts. First, that PT agreed to accept a minority stake in Oi: after the trouble it went through as joint controller of Vivo, the reasoning went, it would not want less than outright control of Oi. PT put a brave face on this, pointing out that it would nominate board members and directors to the various companies in Oi’s ownership structure, describing the deal as an “industrial alliance”.

Oi’s management, it should be noted, played down PT’s operational role in an early hint of potential trouble ahead.

The other surprise was that the deal received the blessing of Luiz Inácio Lula da Silva, Brazil’s president (and of his colleagues José Sócrates in Lisbon and José Luis Rodríguez Zapatero in Madrid). Lula’s government changed the law to allow Oi to be created last year as a “national champion” capable of seeing off foreign competition. Allowing foreigners take a share of its control never seemed to be part of the plan.

Now the government is letting it be known that it always liked the idea of a lusaphone operator. More to the point may be the fact that the deal that created Oi left the national champion deeply in debt. It will now emerge re-capitalised.