Building a mobile empire

Telefonica and Portugal Telecom announce a US$10 billion joint venture in Latin America's largest economy. What will this mean for Brazil and the rest of the region?

"What it means is that they are sitting at a very strong enclave in Brazil. That might eventually allow them to pursue other opportunities in the region. On the wireless front, it will give them an edge in other countries, so that is definitely good," said IDC Telecom specialist for Latin America Hector Hernandez.

The strategic alliance between Telefonica and Portugal Telecom means the two companies will sit comfortably at the helm of not only Brazil's but of the region's largest mobile telephone operation.

The aggressive move announced by Telefonica insures the new company's expansion by allowing the partners to use their joint resources for business development in Latin America.

"With this strengthened alliance and new joint venture, PT Group will work with Telefonica to further consolidate mobile activities in Brazil and create one of the world's top ten cellular companies over the next five years," Francisco Murteira Nabo, Chairman of Portugal Telecom said.

Telefonica, which has already taken over some of the major markets throughout the region, consolidates its operation with the inclusion of Brazil, which represents 45% of the regions subscribers and market value.

The Joint Venture will combine the two companies existing mobile phone assets currently representing 9.3 million customers in Brazil alone. These will include, Portugal Telecom's shares in Telesp Celular covering São Paulo, Global Telecom covering Santa Catarina and Parana and CRT Celular covering Rio Grande do Sul, and those of Telefonica Moviles in Tele Sudeste Celular in Rio de Janeiro and Espiritu Santo, CRT as well, and Tele Leste Celular in Bahia and Segipe, which is pending approval.

According to Hernandez, for Telefonica one of the key assets in the alliance is the dominance of São Paulo's cellular market through Telesp Celular, owned by Portugal Telecom.

"One thing that is clear is that for Telefonica having that one on board really compliments very well what they operator has and is consistent with in medium to long term strategy of focusing on wireless as the main strategy," he said. "Or at least, put in a strong emphasis on wireless to become what we have been denominating as full service provider."

The alliance will also cover 70 % of the country's total GDP and a population of over 94 million. Currently, Brazil's second-largest cellular operator covers only 4 million clients.

According to Telefonica, the parties intend to take advantage of the leading positions of Telefonica Moviles and Portugal Moveis in the development of new mobile telephone services in Brazil, such as the launching of the first WAP services in the country. Between 1999 and 2004, IDC figures target an increase of 28.16% in service subscribers for Latin America.

The two partners will have an even 50/50 share of the new company. However, as part of the new agreement, Telefonica will be increasing its stake in Portugal Telecom by 5%, totaling 10% through secondary market purchases. Portugal Telecom is also considering increasing its holding in Telefonica to 1.5%.