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Operadores Telefonicos

Operadores Telefonicos

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Published by Guillermo Mondragon

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Published by: Guillermo Mondragon on Nov 20, 2010
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Please refer to important disclosuresat the end of this report.
Telecom Operators
Sector rating: Neutral
Equity Research
13 December 2006
LatAm field trip: M&A time
Strong operating momentum remains – M&A time is coming
During our recent field trip to Mexico and Brazil, we met most of the operators.Operating momentum remains generally strong and there are no big shifts in thecompetitive positions since last year. Change is going to come from M&A.
Telecom Italia had better sell TIM Brazil quickly
We believe that few parties are interested in TIM Brazil. America Movil (AMX) isthe likely buyer. TIM Brazil could be worth at best EUR9.6bn (100% EV)whereas press reports suggest prices between EUR9-11bn. In our view, thereare no regulatory barriers, but TI should act quickly to avoid the risk of adeteriorating commercial performance at TIM Brazil, asmanagement/employees will be distracted at a time when the market remainscompetitive. Many operators are already trying to lure TIM Brazil’s sales force.
Many options to create value for Telefonica
We believe Telefonica’s exposure offers many options that can create value.The merger of TIM/AMX in Brazil would add EUR2bn to our valuation of Vivo(raising it to EUR8.8bn). If TEF manages to obtain 100% of Vivo, it couldmerge the company with its fixed operations in Sao Paulo (Telesp), creatinganother EUR1bn of value through synergies. Finally, TEF could acquireTelemig/Amazonia, further consolidating the market. In Mexico, we believe itcould make sense for TEF to acquire a fixed operator to achieve critical mass.
Target price raised on TEF (+3% to EUR17.2), unchanged on TI and PT
We have raised our target price for Telefonica to EUR17.2 (7% upside) andreiterate our Outperform rating. We believe Telefonica remains the mostattractive large-cap incumbent to play telecom exposure. Our ratings andtarget prices are unchanged on TI (Neutral) and Portugal Telecom (Neutral).
Mathieu Robilliard 
Sector ratings
Rating Price* Target Upside(EUR) price (downside)(EUR) (%)
Big caps
Neuf Cegetel + 25.5 31.0 21Iliad + 66.8 80.0 20Eutelsat + 14.7 16.4 12Telekom Austria + 20.1 22.0 9SES Global + 13.0 14.0 8Telefónica + 16.1 17.2 7Vodafone Group (p) + 141.0 149.0 6Belgacom + 33.2 34.0 2Telenor (NOK) + 119.8 121.0 1Mobistar = 64.1 70.0 9Bouygues = 47.0 49.0 4Telecom Italia = 2.3 2.4 4Deutsche Telekom = 13.6 14.0 3Portugal Telecom = 9.8 10.0 2Cable & Wireless (p) = 161.5 163.0 0.9TeliaSonera (SEK) = 55.3 55.0 (0.5)KPN = 10.6 10.5 (0.5)Maroc Telecom = 11.6 11.5 (1)BT Group (p) = 296.0 280.0 (5)France Telecom - 20.1 19.0 (6)Tele2 B (SEK) - 93.0 80.0 (14)
Mid caps
Fastweb + 40.8 49.0 20Tiscali - 2.6 2.5 (2)
*Priced at 12 December 2006 
Mathieu Robilliard Antoine Pradayrol
+33 1 42 99 84 06
Stuart Birdtmathieu.robilliard@exanebnpparibas.com Nicolas Didio
Justine Dimovic
William Beavington (Marketing Analyst)
+44 207 039 94 11william.beavington@exanebnpparibas.com telecoms@exanebnpparibas.com
 Price relative to DJ STOXX50
Telecom OperatorsRelative to DJ STOXX50
 Source: Datastream
 2 Telecom Operators
Field trip: M&A time_______________________________________3
Changes in estimates and target prices________________________5
Brazilian mobile: TI had better sell TIM Brazil quickly_____________6
Market remains competitive – Vivo still under pressure________________________6
Regulator unlikely to oppose consolidation_________________________________8
TI should act fast – TIM worth EUR9.6bn at best (100%)______________________9
Change in estimates at Vivo – Consolidation a positive_______________________12
Brazilian Fixed: Triple play and consolidation ahead_____________14
More competition from CATV___________________________________________14
Fixed/Mobile could be next_____________________________________________15
Telemar/Brasil Telecom: a potential Brazilian player_________________________15
New Telesp estimates_________________________________________________16
Mexican mobile: AMX remains unchallenged__________________18
AMX continues to dominate the market___________________________________18
TEM: better but remains sub-scale, could it go fixed?_________________________19
Appendix 1: Brazilian mobile market______________________________________21
Appendix 2: Mexican mobile market______________________________________25
Appendix 3: Telefonica________________________________________________27
Appendix 4: Telecom Italia_____________________________________________28
Appendix 5: Portugal Telecom__________________________________________29
Financial highlights______________________________________33
 3 Telecom Operators
Field trip: M&A time
Latin America is an important region for Telecom Italia, Telefonica and PortugalTelecom, as shown in the table below.
Table 1: LatAm’s contribution
% 2006e TelefonicaTelecom ItaliaPortugal TelecomEV 30916
Mobile 16816Fixed 1410 
Revenues 341233
Mobile 171233Fixed 1700 
EBITDA 33619
Mobile 11619Fixed 2200
Source: Exane BNP Paribas estimates
We have just visited several telecom operators and regulators in Mexico and Brazil tokeep abreast of the latest developments at the local subsidiaries of Telefonica,Telecom Italia and Portugal Telecom.
Table 2: Companies visited
Visit CommentsMexico
Telmex Fixed-line incumbent operator America Movil Leading Mexican mobile operator - regional co-leader with TEMGrupo Salinas Mexican group that owns mobile operators Iusacell and Unefon
Telesp Fixed subsidiary of TEFVivo Mobile subsidiary of TEF and PT (JV)Brazil Telecom Fixed and mobile operator Anatel Regulator Telemar Fixed and mobile operator TIM Brazil Mobile subsidiary of TI
Source: Exane BNP Paribas
From an operational point of view, we believe the situation remains similar to last year:
In Mobile, growth remains very strong, with penetration increasing fast (subscriber growth in 2006e is expected at between 15% and 20%). Competition is intense,however, especially in Brazil. Relative positions have not changed: TIM continues toperform superbly in Brazil, while Vivo has not fixed its problems. In Mexico, TEMMexico is doing better but still lacks critical mass and is dwarfed by AMX.
In Fixed, the growth rates are unexciting (06e revenue growth of 2% for Telesp).Penetration is stagnating at low levels (20%) as mobile captures all the increase inGDP, and the regulatory environment has been less favourable (cut in interconnection,decrease in tariffs). Also, we note the emergence of CATV operators, which arebecoming meaningful competitors.What has changed is that we now expect to see significant M&A activity in the nextyear or two, after the recent fragmentation. We expect consolidation in the Brazilianmobile and fixed-line markets. In Mexico, some consolidation could also occur in bothmobile and fixed.

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