Brazilian Telecom Going Monopolistic

Seeking Alpha recently published an excellent article by J. Christoph Amberger called "Brasil Telecom a Steal Below $35".

Since then, the merger he discussed is even more likely to be approved, and this is likely to increase the synergy of Brasil Telecom (BTM) and related components that will form a huge Brazilian telecom company. Nonetheless, the stock price has recently met some resistance.

An Associated Press article on Friday June 13, titled "Brazil shakes up telecom market with rule change" noted that Anatal, a Brazil regulator, wants the merger to include a partial split of operations:

....As part of the change, however, Anatel also said Oi must split its broadband Internet services into a separate company.

The Anatel decision now goes before the Communications Ministry which will allow for 30 days of public consultations on the proposed changes before being presented to President Luiz Inacio Lula da Silva for approval...

The President has already been described as pro-merger, so the only issue is whether he will support a split of the broadband internet services as part of the deal. Whether he supports a split or not, the company will still be a giant in a country that is booming with previously unheld discretionary income. However, if he looks at how things have gone in America with AT&T (T), for example, and if he really wants to compete internationally with Spain and Mexico, etc, he will reject the proposed change.

Of course, politics may go before logic (as Anatel's idea of split doesn't necessarily create more competition as much as it means no lower "package prices" for hard-working Brazilians) and at that point investors will need to assess what percentage of the company's growth is expected from the internet versus wireless and landline operations. Bottom-line from the POV of a consumer who has visited Latin America: broadband internet is nice, but if you have to, you can go to an internet cafe for it; what you will want even more is wireless and/or landline phones. So all these products and services will grow in Latin America but the latter will grow faster than the the former.

Secondly, an analyst from JP Morgan has guessed that because the buyer, Oi (TNE), has a record of poor of governance and currently has a low stock price. The analyst suspects both poor governance and the low stock price will continue after the merger. Based on the limited facts available, and without reading the full opinion of the analyst (which I have not been able to find online) I suspect the analyst has made little more than a guess. As to his first point of "poor governance" it is unclear at this point in time why he would believe that Tele Norte, in its plans to expand and compete internationally would not tap the readily available expertise from BTM and Brasil Telecom Participacoes (BRP), which, based on past success, appear better managed than their peers.

Also, if service is a concern, investors must admit that regardless of whether we / consumers find the service provided by "Ma Bell" / AT&T companies "poor", these big comanies usually do an okay job and when they don't consumers can, and do, take them to court.

Last but not least, recent comments suggest that TNE is paying the equivalent of about $42 US dollars per share of BTM, and as Dean Laster wrote in his Seeking Alpha article, titled "Tele Norte Primed for a Major Breakout", that when this merger is complete, TNE, with all its new componnents, will likely be worth at least twice as much as it is now (currently at appx $25/share). That is why this merger is such a big deal to the regulators and President of Brazil. After all, why would the market expect to buy the stock of BRP or BTM for just $25 or $35 share when they finally have as close to a monopoly as the government of Brazil dares to allow them, and the only change is that their name is TNE?

According to an April 10, 2008 Investor's Business Daily article, titled "Brazil Government Covets Telecom Merger", the Brazilian government has legitimate worries that foreigner Vodafone (VOD) will try to buy the newly merged company. Even at an estimated $42US per share being offered for BTM, the Brazilian government is now trying to prevent a merger of Brazil assets (BTM, BRP, and TNE) being taken over by foreign investors (of course, Vodafone may not be the only ones interested). Just as Brazil's newly commodity and oil rich economy will rise, so will discretionary income, as will demand for telecom services, as will the prices of all these stocks.

Disclosure: The above are personal opinions of the author and not recommendations to buy or sell; the author currently owns shares of BTM and intends to also buy shares of TNE below $42.

Comments

[swaps]

I bought into BTM last year when Shrub made his visit to Brazil.
I deeply regret that I only nibbled on the stock and did not take a bigger position, since it is up 135% since then. And it went up so fast I did not buy more in the low $20. Riches go to the lion hearted.

[privatetrader]

Yes. The lion hearted must also move quickly. In the mail, as a holder of BTM, shortly after writing the article, I received what appeared to be a tender offer for my BTM shares. It was quite lengthy and did not have time to read the details and/or ensure that my shares would be bought out (although the offer did appear that way). Anyway, with BTM not moving up or down much, and TNE going down way more than appears reasonable, I decided to exit BTM more or less at my entry point. (I hope I do not regret that as the $42 buyout would have been a clear profit). I did this because TNE appeared to be going down so low and fast that I wanted dry powder. Now at 22/sh, it is way lower than I thought it would go and I need to see whether any real reason supports its decline or whether it simply is an irrational market making it an even better buying opportunity than I earlier thought it was. I am also keeping an eye on commodities and drybulk shipping. Again, unlike the more diversified American economy, Brazil is a commodity driven country. It makes no sense for its stocks to be going down right now. Do your own due diligence, but I think that after the American presidential election and position on Iraq and interest rates becomes more clear (not necessarily better, just more clear), larger amounts of money will start pouring into the market again. And again, due to commodities, Brazil's economy should be one of those that rises more quickly than others. Meanwhile, I am frustrated that things aren't moving in that direction a bit more quickly. Everyone should do their own due diligence, and these are just my personal opinions, but right now I believe cash and/or commodities are king... Hopefully, we'll see a bit of move up on Monday, I will continue to watch TNE for a bottom now (and would appreciate any technical support anyone else can provide as I almost bought into last week and now am perplexed as I never would have thought it would go down to 22/sh). Of course, one advantage to staying out of an irrational market is that it is less likely to drive you crazy. I think I'm good at spotting trends, but again, I'd appreciate it if someone with some technical skills would suggest support levels for TNE. Thanks.