Global Emerging Markets Brazil
Telecoms
30 November 2008
Latam Telecommunications
Telecom, cable competition and
economics -- Trends in 2009
Rizwan Ali
Head of Research
(1) 212 250 3712
rizwan.ali@db.com
Miguel Garcia
Research Analyst
(212) 250 7977
miguel-a.garcia@db.com
Alexandre Constantini
Research Analyst
(55) 11 2113 5968
alexandre.constantini@db.com
Economic slowdown should force consolidation
The economic slowdown in LatAm should force further restructuring of the
telecom and cable industries in the region. This process should be eased by
changing regulations, with telecom and cable operators entering each others’
businesses and providing quadruple-play services. We believe Tele Norte Leste
(TNE), America Movil (AMX) and Vivo (VIV) are the telecom operators best
positioned to benefit from the expected wave of restructuring and move towards
bundled services. In the cable industry we prefer Net Servicos (NETC).
Deutsche Bank Securities Inc.
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factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
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http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Company Update
Top picks
America Movil (AMX.N),USD52.74 Buy
Tele Norte Leste (TNE.N),USD13.64 Buy
Vivo (VIV.N),USD11.50 Buy
Net (NETC.OQ),USD4.96 Buy
Companies featured
America Movil (AMX.N),USD29.70 Buy
Telmex (TMX.N),USD16.70 Hold
Telmex Internacional (TII.N),USD8.69 Hold
Tele Norte Leste (TNE.N),USD13.64 Buy
Brasil Telecom (BRP.N),USD35.59 Hold
Vivo (VIV.N),USD11.50 Buy
TIM Participacoes (TSU.N),USD14.97 Buy
Telemig Celular (TMB.N),USD29.18 Hold
Telefonica CTC (CTC.N),USD6.38 Buy
Entel (ENT.SN),CLP6,999.10 Buy
Telecom Argentina (TEO.N),USD8.04 Hold
Grupo Televisa (TV.N),USD14.96 Buy
Net (NETC.OQ),USD4.96 Buy
Megacable (MEGACPO.MX),MXN19.47 Hold
Global Markets Research Company
Accelerating trends
While most major Latin telecom and cable operators should emerge unscathed
from the credit crunch, some smaller players may be forced to consider strategic
partnerships, mergers or outright sales. The resulting consolidation process should
pit telcos against cable operators and accelerate the underlying trends in both
sectors: migration of traffic from wireline to wireless networks; cable operators
offering voice (VoIP); telcos entering the video market via satellite and IPTV; and
the bundling of all these services to provide quadruple-play packages. In our view,
Telefonica (TEF) and the Carlos Slim Group are exceptionally well positioned to
take advantage of the financial crisis to restructure and expand their operations in
Latin America.
Restructuring in Brazil
We believe TEF and Telmex Internacional (TII) are likely to restructure their assets
in Brazil to compete more effectively against the national goliath to be born with
the merger of Brasil Telecom (BRP) and TNE. Following statements by its CEO, we
expect TEF to consolidate its Brazilian assets, potentially starting by combining
Telesp (TSP) and Vivo (VIV). Similarly, based on what Telmex has done in the past,
buyout and consolidation of NETC by Embratel (EMT) seems likely (though regulations
still need to change). A bigger event would be for NETC, EMT and their sister
company, Claro, to start bundling services to provide quadruple-play packages.
Mexican cable consolidation
TEF is already planning JVs with cable operators to bundle its wireless services
with their triple-play packages. Permission to fully own terrestrial assets may
convince it to bid for cable and wireline companies whose balance sheets have
come under strain due to the credit crunch and face the threat of Telmex entering
pay TV market. Cable or telecom operators not part of Telefonica’s consortium in
Mexico will be at a significant competitive disadvantage and be relegated to niche
markets. In the meantime, we remain cautious on the Mexican cable sector,
including Megacable, given the high exposure to the middle-income segment.
DCF-based valuations; regional macroeconomics and regulations are risks
Our 12-month price targets for the Latin telco stocks are based on DCF, using
WACC ranging from 10.7% to 19.5% and costs of equity between 12% and
23.1%. Our risk free estimate is 4.5%, and we include country risk premia
between 170bps and 1,30bps. Risks to our valuations include: 1) macroeconomic
deterioration (or improvement) in the region; 2) regulatory changes (especially in
interconnection rates); 3) capital restructuring and dilutive (or accretive)
acquisitions; and 4) competition and threats from new technologies.

Table of Contents
Summary & recommendation .......................................................... 3
Winners and losers ...................................................................................................................4
Valuations: Wireline and integrated companies ........................................................................6
Valuations: Wireless companies ...............................................................................................7
Valuations: Media companies ...................................................................................................8
Telecommunications: Impact of financial crises............................. 9
Telecom sector is defensive .....................................................................................................9
Telcos are largely safe from the credit crunch ........................................................................10
Impact on telco and cable operations .....................................................................................11
Brazil: Consolidation and triple-play should accelerate............................................................13
Mexico: An opportunity for Telefonica to expand via acquisitions ..........................................14
Wireline vs. wireless – Old rivalry.................................................. 16
Slow and steady – traffic moves to wireless networks...........................................................16
Attraction of wireless..............................................................................................................19
What could spoil the party? ....................................................................................................22
Finally 3G – What to expect? ..................................................................................................24
Wireline vs. cable – New competitor ............................................. 28
Why Latam was slow in adopting triple plays.........................................................................28
The response from Latin telcos ..............................................................................................30
The US experience – Lessons for Latam ................................................................................33
Competition in Latam broadband............................................................................................34
Competition in Latam Pay-TV..................................................................................................36
Competition in Voice Services ................................................................................................38
Market share breakdown: DB Projections ..............................................................................38
Case Study: VTR versus CTC.......................................................... 40

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