Telefonica, TIM to move ahead with Brazil M&A plans despite COVID-19

SAO PAULO (Reuters) - Brazilian telecoms firms Telefonica Brasil SA VIVT4.SA and TIM Participacoes SA TIMP3.SA are moving ahead with a potential joint bid for rival Oi SA's OIBR4.SA mobile unit despite the challenges of the COVID-19 outbreak, executives said Wednesday.

FILE PHOTO: A general view shows the Telefonica headquarters in Madrid, Spain, June 12, 2018. REUTERS/Juan Medina

The carriers have begun due diligence on a plan announced in March to acquire Oi’s assets together. Meanwhile, they remain focused on expanding their fiber-to-the-home (FTTH) network, as well as fourth-generation (4G) mobile coverage, while a long-awaited auction for next-generation spectrum remains uncertain.

“We’re confident that our strategy is the right one,” Telefonica Brasil Chief Executive Christian Gebara told investors on a call, noting it is still early to assess the full extent of the global pandemic.

“The level of uncertainty is much higher, but we’re not willing to cut costs or capital expenditure that will help us grow and compete in the long term,” TIM Chief Executive Pietro Labriola said on a separate call.

The executives did not detail how long the due diligence on Oi’s mobile unit would take, but said they would have a clearer idea on the timeline in coming months.

TIM and Telefonica Brasil are also working together on an infrastructure sharing agreement, pending regulatory approval, as well as exploring other partnerships to accelerate FTTH deployment in Brazil, they said.

In the first-quarter, the two companies reported weaker-than-expected results, as the pandemic hit revenues, mostly in pre-paid plans and handset sales, overshadowing efficiency gains from digitalization efforts and other cost-cutting initiatives.

TIM shares fell nearly 2% in afternoon trading and Telefonica Brasil slipped around 1%.

UBS analysts see Telefonica Brasil, the local unit of Spain's Telefonica SA TEF.MC, which operates under the brand Vivo, less affected by economic and mobility challenges in the country given its premium brand and subscriber mix.

“FTTH momentum and apparent competitive landscape stability provide evidence of Vivo’s resiliency, which should remain even as the pandemic and its effects further hinder economic activity,” UBS analyst Vinicius Ribeiro wrote in a report.

At the end of March, 58.5% of Telefonica Brasil’s mobile customers were using post-paid plans.

For TIM, Ribeiro flagged uncertainty about the impact of the coronavirus crisis, given the carrier’s higher exposure to pre-paid plans, which represented 59% of its mobile base in March.

In the last two weeks of March, the local subsidiary of Telecom Italia TLIT.MI saw pre-paid recharges drop as much as 25%, said Labriola, adding that numbers are slowly improving as social distancing measures are relaxed.

Vivo has also noted a slight recovery in handset sales and mobile data usage in April compared with the second half of March, when stay-at-home measures led customers to use more home internet and stores were shut by lockdowns.

“We don’t expect customers to downgrade their post-paid plans because we offered a lot of benefits,” Gebara added.

Reporting by Gabriela Mello; Editing by Brad Haynes, Louise Heavens and Andrea Ricci