Opposition to Oi Móvel’s split between Vivo, TIM and Claro grows in Brazil

RIO DE JANEIRO, BRAZIL – The operation to buy Oi Móvel (OIBR3; OIBR4) by the consortium formed by Vivo (VIVT3), TIM (TIMS3) and Claro, agreed in an auction through a R$16.5 (US$3.2) billion bid in December, is meeting with resistance from other market players during discussions within the National Telecommunications Agency (ANATEL) and the Administrative Council for Economic Defense (CADE).

Opposition to market concentration is gaining ground in these arenas, as a result of the division of Oi’s telephony and mobile internet networks among the three rivals.

At this time in which the transaction is under analysis, opposing parties have forwarded studies to regulatory authorities on potential negative impacts with the sector’s consolidation. The parties are also submitting requests to veto the transaction or, at the very least, to implement measures to mitigate the expected negative impacts. The proposals range from stricter supervision of service prices offered by the major telcos to the sale of Oi’s assets to third parties.

At Brazil’s competition regulator CADE, 5 entities have already been approved to closely monitor the process that will analyze the merger. They are regional operators Algar and Sercomtel, business associations TelComp and Neo (representing small and medium-sized carriers) and the Brazilian Institute for Consumer Defense (IDEC). The discussion is also underway at ANATEL.

On June 28, an extraordinary meeting will be held at the request of regional providers to discuss the sale of Oi Móvel.

Offensive

In a petition sent to CADE, the Neo Association (Association of Pay TV Operators, Internet Providers, Providers of Solutions and Services) advocated vetoing the sale of Oi Móvel to the Vivo, TIM and Claro consortium. Neo says the deal will create excessive market concentration, discourage competition and worsen the supply of telecommunications services.

The document cites a study by the Office of Communications (the United Kingdom’s regulatory agency) showing that the reduction from 4 to 3 operators in European countries such as Austria, Ireland and Germany resulted in a decrease in service quality and in the volume of investments in the sector.

This goes against statements by Vivo, TIM and Claro that the transaction will improve services through economies of scale. “International experience confirms that this type of operations do not produce efficiency gains,” Neo’s attorneys described in the statement.

The same study is described in the petition forwarded by IDEC, which urges CADE to reject the deal. “IDEC believes that the operation could potentially lead to anticompetitive impacts in the mobile telephony market, particularly by reducing the offer to consumers,” the agency said in the document.

Paraná’s Sercomtel, controlled by entrepreneur Nelson Tanure’s Bordeaux fund, also sent to CADE a veto request under the allegation that the sale of Oi Móvel to rivals will reduce competition in the sector and increase the risk of competitors being excluded. “It is unreasonable to assume that the existing regulation will contain risks of abuse of economic power,” the company’s attorneys cited.

Algar Telecom, from Minas Gerais, also joined the group to veto the transaction, while adding another argument. In the company’s opinion, the trio of operators would have advanced by closing the purchase of Oi Móvel without first securing the approval of competent bodies – a practice known as gun jumping. The infraction, if confirmed, would imply a ban on the sale of Oi Móvel and a R$60 million fine to those involved.

A common concern for regional operators is the concentration of infrastructure in the hands of only 3 domestic companies. There is concern that this will restrict even further network supply and increase the value of contracts between operators. This would affect, for example, roaming services (when the client of one network is connected to the network of another during travel), much in demand by Algar and Sercomtel, which do not have coverage throughout the country.

Others affected would be virtual operators (MVNOs) that offer telephony and internet entirely from third party networks to meet market niches, such as retailers’ clients, banks, soccer fans, fan clubs, among others. Virtual operators represent a market of almost 2 million people in Brazil, with companies such as Surf Telecom, Datora, Cinco (from the J. Safra group), and America Net.

Safeguards

The president of the Brazilian Association of Competitive Telecom Service Providers (TELCOMP), Luiz Henrique Barbosa, said that a potential veto to the operation is unlikely, considering Oi’s bankruptcy risk, in financial restructuring since 2016 with  billions of debt. “Our role in this concentration is for the sale to be approved, but with competitive and regulatory safeguards,” he explained in an interview.

The ideal solution, he said, would be the sale of Oi Móvel in slices, allocating the customer portfolio and the spectrum of certain regions (separate DDDs) to other companies in place of the trio Vivo, TIM and Claro. “We don’t have associates capable of buying the entire Oi Móvel, but we do have associates interested in buying slices,” Barbosa said. “That would be more balanced to preserve competition.”

Although he did not disclose the name of the parties interested in acquisitions, behind the scenes rumors are that Algar and Sercomtel would be candidates. The interest of virtual operators is not ruled out either.

Telcomp’s president added that it will be necessary to create tools to guarantee that the wholesale network offer has prices lower than retail and that these values are subject to inspection by public agencies.

Along the same line, IDEC recommended the enforcement of measures should the sale of Oi Móvel not be rejected. One option is the sale to an agent not operating in the market, such as Highline do Brasil, the institute said, referring to the group that also made an offer for Oi Móvel, but was defeated by the trio in the December auction. Another option is the acquisition of the company by a consortium of small local broadband and mobile operators, possibly with a private equity fund behind it.

Reaction

Oi and the Vivo, TIM and Claro consortium sent statements to CADE to refute the criticism they have been receiving from market players opposed to the transaction between the parties.

The Vivo, TIM and Claro consortium asked CADE to approve the transaction unrestrictedly because it involves, in their opinion, the best possible competitive arrangement and “does not lead to competition concerns.”

Operators said that “intense competition” will persist in the Internet and mobile telephony market, with no coordinated power between them, since the sector is innovative, dynamic and competitive.

The trio recalled that Oi is voluntarily leaving the industry after losing the ability to invest and compete. And the assets split will be done within the radio frequency limits that each company can hold, as established by the telecommunications regulatory agency.

In addition, they add that there has not been an alternative proposal to buy Oi Móvel apart from theirs. It is worth noting that Highline do Brasil made a binding proposal, but eventually gave up its participation in the auction.

In a separate statement, Oi said the sale of its mobile networks is vital for the group to remain relevant in the Brazilian market, focusing its resources on the development of broadband by fiber optics. Oi also recalled that the negotiation of mobile networks was approved by its creditors in meetings and was ratified by the financial restructuring court.

In turn, Oi reiterated that it expects the process to be approved by CADE between late 2021 and early 2022.