*** Key Takeaway
Recent developments have begun to hone the Brazilian consolidation story to an end-game, in our view. In this note we perform merger analysis of the two transactions leading the debate: a break-up of TIM Brazil or a break-up of Oi.
The former feels difficult given Oi's leverage and TI's valuation expectations. The latter however has a greater chance of materialising, in time.
Brazilian M&A. Expectations for market consolidation in Brazil have been persistent and varied. With the Telefonica / GVT acquisition and the withdrawal of Oi from the 700 MHz auction, we’ve got a fresh steer on what consolidation scenarios could play out from here (if at all, the regulator in Brazil has been far from accommodating in its rhetoric). Recent press reports suggest either an Oi-led acquisition of TIM Brazil or vice versa – we look at the feasibility of both in this note. We also look at a major factor that could accelerate the operators’ appetite for mobile consolidation: mobile voice price deflation.
Our conclusions. We conclude that an Oi-led consolidation of the market is unlikely due to the latter’s weak balance sheet and (rightly) inflated valuation expectations from TI for TIM Brazil. What’s more feasible, in our view, is that TI / TIM Brazil bide their time and wait for Oi’s weaker relative growth outlook to exacerbate its already onerous leverage and then
move to carve-up Oi at a reasonable valuation. A close to all-paper deal could be feasible, allowing TI to limit the leverage impact to a digestible level.