Telecom Italia Deal Has Brazilian Downside
News that Telefónica has increased its indirect ownership of Telecom Italia has drawn criticism from regulatory authorities in both Brazil and Argentina , where the two companies have been fierce competitors for almost two decades . The increased investment in Telecom Italia do es not - yet - jeopardise Telefó nica's Latin American business. However, further entrenchment may prove unavoidable, in which case BMI believes there are significant potential long-term downside risks with which the operator will need to contend.
The Spanish incumbent has agreed to increase its ownership of Telco - the holding company owning the single largest stake (22.4% ) in Telecom Italia - to 66%. The move is aimed at both protec ting its long-held strategic in vestment in the Italian incumbent and preventing Telecom Italia from falling victi m to a hostile take-over bid . Increased ownershi p of Telco does not raise Telefónica's voting rights: these remain at 46.2% of Telco, meaning that there has been n o substantive increase in Telefó nica's ability to influence management-level strategic decisions, includin g those invol ving TIM Brasil , Telecom Italia's Brazilian fixed and mobile unit.
Nevertheless, Telefónica does have the right to convert its non-voting shares in Telco into ordinary shares with commensurate voting rights for 70% of the holding company . Such a move would give it the opportunity to buy out the rest of the shareholders in Telco. Although Telefónica says it has no plans to do so, it could be forced down this route if the remaining Telco shareholders were to withdraw for any reason. If Telefónica became the dominant shareholder of Telco, it would become a direct investor in Telecom Italia and contravene competition laws in both Brazil and Argentina, wherein it is forbidden for a single entity to own or control more than one specific telecoms concession in the same service area.
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