Spain’s Telefónica eyes KKR and Italian TIM for possible Brazil sale and consolidation

RIO DE JANEIRO, BRAZIL – Italy’s TIM was a key shareholder (and ally) of Telefónica in the past. Moreover, the fund that wants to buy it for more than 10.8 billion euros, the American KKR, is its significant financial partner for infrastructure. The connections are more than obvious.

For this reason, Spain’s Telefónica’s headquarters remain on alert and have one eye on what will happen in the coming days in the war for control of the former Telecom Italia (TIM) in Rome, which has already claimed its first victim: the resignation of the CEO, Luigi Gubitosi.

First, because of the implications for European consolidation, it is logical that whoever emerges victorious should not just stay there but should take further steps.

Second, because everything points to the fact that one of the assets that the Italian group may divest itself of is its Brazilian subsidiary, the third-largest in terms of market share after the Spanish Vivo and the Mexican Claro.

Brazil is one of the four key markets for Telefónica/Vivo, with Spain, Germany, and the United Kingdom. It is the second in terms of revenue. The company continues to pin its hopes for future growth by looking to expand after completing a phase of significant divestments.

Today they are waiting for the regulator to give the definitive ‘yes’ to the split and distribution of Brazil’s Oi mobile business assets, with which Telefónica will gain more than 10 million customers and a juicy package of radio spectrum rights.

The takeover bid for TIM opens a different scenario, as this market is considered the first sale after this arduous power struggle.

Many voices consider KKR’s exit from Brazil to be a done deal. One of those who have verbalized it these days is the investment bank BTG Actual, which insists that U.S. fund would not be interested in Brazil – in Latin America, it only has joint ventures with Telefónica in Colombia or Chile -, but rather in being a ‘consolidating agent’ in Europe.

But even if the offer is not approved or does not go ahead due to lack of support, “it can exert additional pressure which could lead the management team to look for ways to unlock value and selling Brazil could be one of them,” he said recently.

The problem is that here Telefónica/Vivo would find it very difficult to acquire these assets, because, if there are already significant ‘remedies’ imposed before a reduction from four to three major operators, it is logical that yet another reduction would suffer significant regulatory impediments.

TIM in Brazil added 1.9 billion euros in revenues between January and September and has a 20% market share in mobile lines.

Whether it is a takeover or the arrival of a potential new competitor, the reality is that this takeover bid for TIM is shaking up the Brazilian market and, therefore, has Telefónica on tenterhooks. But it is not the only aspect that forces the group chaired by José María Álvarez-Pallete to be very attentive to developments.

The transaction, either with the Americans KKR alone or with the help of another fund such as CVC (which has been analyzing in recent days its possible incorporation), has important implications for market consolidation at a time when the former monopolies are under siege.

France’s Orange is undergoing a complete shake-up at the top with the resignation of its CEO following his conviction in a corruption case, and is under siege from the founder of France’s Altice, Patrick Drahi, who already holds 12.1% and threatens to gain much more weight, which has forced the current management team to pull out all the defensive artillery, from the dividend to other operations. Deutsche Telekom is also fueling rumors of a takeover of the former monopoly.

TIM is going to be a litmus test. It will be the thermometer that measures how a government like Mario Draghi’s, with a marked pro-business approach and an intention to reduce the cost of capital for the Italian nation, manages the sale of the former telecom monopoly. The offer, as Bloomberg noted, was agreed during the last few weeks by the U.S. fund with the Italian government, which has maintained a relatively neutral position.

And it has only leaked internally the possibility of forcing KKR to sell the fixed and mobile networks to a company with a state-owned majority, and thus not lose control of a critical infrastructure.

In Spain, for the time being, Sánchez has reinforced for one more year the anti-takeover shield that expired on December 31, with Telefónica as one of the beneficiaries.

In 2013, AT&T flew over the European market to launch a takeover bid for one of the sector’s giants, something that did not happen in the end.

As if this were not enough, the Italian operation has another incentive for Telefónica – the current largest shareholder of TIM. The French group Vivendi, which bought the shares from the Spanish operator more than five years ago after its exit, is reluctant to accept this transaction with these numbers.

The Gauls are old acquaintances, not only because of their relationship of five years ago. Today, they share a stake in Grupo Prisa, where the Bolloré family has announced its intention to reach 29.9% of the shares (20 percentage points more than it currently has in its hands).

Until now, the Spanish Teléfonica position has been that of an ally of Joseph Oughourlian, today’s leading partner and executive chairman.

The countdown already began last week. TIM’s board meeting on Friday, which served to formalize the resignation of the company’s CEO and the appointment of the head of Brazil on his behalf and the transfer of executive powers to the current president, analyzed the operation.

At the same time, behind the scenes, Vivendi seeks a defense, and KKR analyzes alliances to improve the offer (wielding the sale of Brazil to finance part of the transaction and reduce the unmanageable debt).

While all this is being elucidated, the problems are still pressing for the company, with the second profit warning in just a few months and with the auditors’ team warning last Thursday about the high cost that TIM has assumed by buying for 1 billion euros the soccer rights to Dazn – Telefónica is immersed in the auction of LaLiga rights for the coming years, precisely, with this digital platform as a potential rival in the bids.

The lofty offices of the Telefónica District in Madrid’s Las Tablas neighborhood will not stop watching everything that happens in Rome over the next few days. There is a lot at stake.

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