M.Lynch: Embratel buy positive for Brazil carriers

A joint proposal submitted Thursday by fixed-line carriers Telemar, Brasil Telecom and Telefonica for Embratel, Brazil's largest long-distance carrier, was a surprise, according to Merrill Lynch. US controller MCI, which put Embratel up for sale in mid-November, also received proposals from Telos, Embratel's employees' pension fund, and Telmex, the Mexican telecommunications giant. In a research note Friday, the bank said Embratel's acquisition by the fixed-line carriers would not only improve the competitive environment but also generate significant synergies. "Assuming a reasonable price (i.e., no bidding war with Telmex), the acquisition of MCI's control position would be positive for Telemar, Brasil Telecom and Telefonica," Merrill Lynch said. The bank predicts the three companies can find a way to circumvent legal restrictions on telecom holdings in Brazil, which require the local telcos to remain independent from one another and from Embratel. "But, we don't believe they will be able to convince Anatel and the anti-trust authority CADE to approve the transaction as this would reduce competition, particularly in the long-distance market," said the note. Also, Merrill questioned Embratel's business model in the face of increasing competition from local telcos and suggested that Telmex might not be able to extract value in the event of an acquisition. "Should Telmex win the bid, we would need to see management clearly articulate its plan for value creation," said the bank. Merrill Lynch reiterated its "neutral" recommendation on Embratel.