VIV Telefonica Brasil SA

Spanish telecom giant Telefonica SA (TEF) is restructuring its operations for an efficient online business. The company will construct a new business unit, Telefonica Digital, which will be headquartered in London.

The new business unit will include Spain’s popular social networking site Tuenti, Internet telephony provider Jajah, Internet portal Terra and other businesses. With the new division, Telefonica will streamline its operations in two regions –– Europe and Latin America. Spanish operations will be included in Europe.

Telefonica’s Spanish operations are suffering from the lingering economic downturn at home and intense competition. In the first half of the year, Telefonica generated lackluster revenue in its Spanish division. Customers are switching to cheaper offers from smaller rivals, leading to lower revenues and earnings for the company.

In addition, the company’s Spanish revenue continues to be affected by the ongoing reduction in mobile termination rates, which is the fee that operators charge each other to connect calls.To improve its domestic profitability, Telefonica recently planned to lay off 6,500 employees over a three-year (2011–2013) period.

Telefonica Europe is gaining market share from increasing smartphone penetration and data growth. The company continues to prepare the ground work for future growth by improving network capability to support mobile data services. Latin America remains one of the best performing regions for Telefonica, particularly Brazil and Mexico.

Brazil is expected to become the major source of revenue following the integration of the fixed and mobile businesses. The consolidation of two Brazilian units Vivo Participacoes and Telecomunicacoes de Sao Paulo SA (VIV) would generate synergies of €3.7–4.6 billion, up from the previous expectation of €3.3–4.2 billion. With respect to Mexico, Telefonica is gaining market share and improving its mobile broadband growth on the back of spectrum wins in 2010.

The move is similar to other telecom carriers in the industry that are struggling to offset the continued erosion in fixed line business in favor of high-speed data mobile services. We believe the restructuring will benefit Telefonica by taking full advantage of digital world opportunities. 

The restructuring will also result in the creation of a Global Resources unit that will strengthen the profitability of the business by leveraging and benefiting from economies of scale.

We are maintaining our long-term Neutral recommendation on Telefonica. For the short term (1–3 months), the stock retains a Hold rating with a Zacks #3 Rank.

 
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