The LatAm telecom chessboard after Telefónica’s exit

Telefónica’s announcement that it will divest all its Latin American operations except for Brazil took the market and analysts by surprise.

While the company’s high indebtedness was well-known and sell-offs of non-core assets were already underway (the company is selling thousands of towers to Telxius in Brazil), giving up on most of its business units at once to focus on four priority operations was seen as a bold move.

From now on, Telefónica will focus on Brazil, Spain, the UK and Germany. 

But what does Telefónica’s exit mean for the Latin American telecom market and could it help América Móvil further expand? And how about Brazil?

ALL BETS ON BRAZIL

With 73.8mn clients, Brazil is by far the largest market for Telefónica in user base - or revenue generating units.

Brazil also generated 20%, or 11bn euros (US$12.1bn), of the group’s Q3 net revenues, just below top-selling Spain (12.4bn euros).

The company also has the most valuable telecoms brand in Brazil and leads the local mobile and the fixed telephony markets, with 32.3% and 32.4% of market share, respectively.

According to data compiled by telecom consultancy Teleco, Telefónica boasts highest average revenue per user (ARPU) in Brazil's mobile segment: 51.7 reais in postpaid.

Considering the prepaid and M2M terminals as well, Vivo’s mobile ARPU goes down 29.1 reais, but it still is the highest among all four national players.

Teleco’s head, Eduardo Tude, told BNamericas that the biggest impact of Telefónica’s spin-off will likely be felt in South American markets where the group operates with relatively significant footprint. This is the case for Argentina, Colombia and Peru.

According to Tude, the chessboard arrangement will now depend on who makes the next move, buying Telefónica’s assets.

Frost&Sullivan’s ICT research manager Renato Pasquini said it is “unclear” if the company will sell all operations in Latin America as package or separately.

In any case, “the most surprising” aspect was the decision to fully dives, he said, putting all units for sale at once rather than opting for a gradual exit as the company did in Central America, for example.

Telefónica sold its Panama, Nicaragua and Costa Rica operations to Millicom for US$1.7bn and operations in Guatemala and El Salvador to América Móvil, setting the stage for two-player competition in the region.

“[The announcement] must have been prompted by a combination of the troubled political and economic scenario in Latin America with the telco’s high indebtedness,” Pasquini told BNamericas.

Pasquini believes that first, Telefónica must have assessed potential interest in its operations before the announcement, and second that the exit paves the way for a new entrant - perhaps from China - or for the expansion of US presence through AT&T.

OPEN GAME

The analyst also said a takeover of Telefonica's assets by América Móvil is unlikely because of the high market concentration such a move would create.

The principal analyst of Ovum consultancy, Ari Lopes, agreed.

He said the “competition for hegemony” in Latin America that used to take place between América Móvil and Telefónica is now open for grabs.

“Telefónica is leaving the game. [But] investor groups, other local operators, new players…that will fill this gap is a big unknown,” he told BNamericas, adding that CEO Álvarez-Pallete (pictured) has focused on reducing debt and transforming the business [for digital].

According to Lopes, the decision is momentous.

He said Telefónica largely failed in many of its Hispanoamerican ventures, the group's Mexico exit being just one example. “The experience in Mexico was not successful. In addition, the company had difficulty selling these operations. It wanted to go out but couldn’t.”

He also recalls Telefónica ended up with a large exposure to debt in Latin American markets.

In this sense, “pooling” all regional operations could make sense, because it bundles more complicated operations, such as Mexico's, with successful ones, like Peru's.

Telefónica’s exit also has an impact, in his view, on the Brazilian market, as with the sale of its Latin American operations Telefónica is expected to beef up its position for a possible consolidation scenario (such as buying Oi’s assets) and for the 5G auction, slated for the second half next year.