Integration in the Brazilian telecommunication industry : the case of Vivo and TIM

The telecommunications sector in Brazil has been facing a particular attention from international groups during the last decade. All four main players in Brazil are controlled by global telecom players and several strategic moves have taken place during the past few years in Latin America. This is the case of Telefónica ownership in Vivo, Telecom Italia participation in TIM, the recent merger between Oi and Portugal Telecom, among several asset divestures throughout Latin America countries from both Telefónica and Telecom Italia. Many analysts and investment bankers have suggested that a possible sell of TIM from Telecom Italia is likely to occur due to high leverage ratios from the parent company. The company has divested in several Latin American and European operations in order to reduce debt, but, the leverage continues to increase. We foresee that an acquisition of TIM by Vivo would completely change the industry in Brazil and that the overlap between both players would create synergies above the value of TIM. We forecast a standalone valuation for Vivo and TIM of BRL 56.2 Billion and BRL 26.5 Billion, respectively, and a merged firm enterprise value of BRL 113.8 Billion, corresponding to an expected synergies amount of nearly BRL 31.2 Billion. Nevertheless, the Brazilian regulator could impose several restrictions to the merger, since the combined firm would have market shares above 70% in several states, and, as a result, we expect that an asset by asset sale would be the most appropriate scenario in reality