CADE blocks deepening of business relations between Vivo, Telefonica, and Tim

On December 4th, the Brazilian Administrative Council for Economic Defense – CADE approved with restrictions the acquisition of 50% of Brasilcel owned by Portugal Telecom and PT Móveis by Telefonica S/A (Merger file no. 53500.021373/2010). The restriction aims at blocking the acquisition of the total control of Brasilcel – majority shareholder of Vivo S/A – by Telefonica, considering that Telefonica already is an indirect holder of Tim.

Given that Tim and Vivo compete at the Brazilian telecommunication market, and that the operation results in concentration, once the major shareholder of Tim would acquire the total control of Vivo, Commissioners identified a potential risk for competition.

CADE’s Tribunal decided that the operation could be authorized if Telefonica, Vivo’s majority shareholder, did not hold any direct or indirect financial position on Tim Brasil. Alternatively, the acquisition could be approved upon the entrance of a new holder in Vivo’s shares, with experience on the sector and without participation in other telecommunication company in Brazil. The application of any of those remedies aim at creating a new competitor that would share the control of Vivo and Telefonica.

According to Reporting Commissioner Mr. Eduardo Pontual, “The presence of Telefonica at Telecom Itália, without the presence of an independent controller partner in Vivo, facilitates the coordination between competitors aside from other anticompetitive issues at the mobile phone market, main Brazilian telecommunication market, hence compensation was needed”.

CADE determined a confidential deadline for the adoption of one of the alternatives and only then the acquisition is to be approved.

Second case – The need to maintain Vivo and Tim groups separate was determined by CADE in other decision announced on December 4th. Telefonica was fined BRL 15 million for the undue indirect participation increase in Tim. It is a contract that brings an increase of Telefonica’s interest in Telco, also addressing the possible acquisition by Telefonica of the total of Telco’s shares, which considerably increases its influence at Telecom Itália and Tim.

The Council understood that the last September increase of Telefonica’s participation in Telco harms the Performance Agreement (“TCD” for its acronym in Portuguese) signed in 2010 as a condition to approve the merger file no. 53500.012487/2007.

At that time, CADE authorized Telco S.p.A.’s entry (in which Telefonica is a shareholder) in Telecom Italia (controller of Tim Brasil Serviços e Participações S/A’s) based on the signature of a TCD, that states several obligations to maintain Telefonica (Vivo) and Telecom Italia (Tim) activities separate and independent.

President Mr. Vinicius Marques de Carvalho, highlighted that the TCD does not hold any provision open to the deepening of relations between the competitors, once “any change in Telefonica’s participation in Telecom Italia’s capital shares could compromise the competition market balance”.

Besides the fine for the TCD non-compliance, CADE determined the undoing of any unjustified increase of Telefonica’s shares in Telco S.p.A’s total share. Also, due to TCD non-compliance – based on the contracting service provider company related to Telefonica – Tim was fined BRL 1 million.