(VIV) Telecomunicacoes de Sao Paulo S.A.-Telesp Upgraded on Vivo Merger

We are upgrading our long-term recommendation on Telecomunicacoes de Sao Paulo S.A.-Telesp (VIV) to Outperform from Neutral following its merger with the mobile phone service provider Vivo Participacoes. The stock retains a Zacks #1 (Strong Buy) Rank for the short term.

The Spanish telecom giant Telefonica (TEF) completed the merger of its two Brazilian units. The wireless subsidiary, Vivo Participacoes, is now fully absorbed into the fixed-line unit Telecomunicacoes de Sao Paulo SA, known as Telesp.

Effective from June 7, the merged entity is trading with an old company name Telecomunicacoes de Sao Paulo S.A.-Telesp but a new ticker symbol VIV. Vivo’s shareholders would receive 1.55 shares of Telesp for each Vivo share. The new Telesp has full control over Vivo with consolidated market share of about 27%.

The merger is a part of Telesp’s corporate restructuring plan that aims to simplify its organizational structure. This represents the company’s first step in becoming an integrated telecom operator in Brazil that also boosts its competitive position in that country. The combined entity is now a full-service operator offering competitive bundled (fixed-line and wireless) services.

Vivo reported a solid first quarter, with net income soaring 270% year over year. The company gained 1.7 million subscribers, bringing its total customer base to 62.1 million.

On the other hand, Telesp’s fixed-line operation is struggling with disappointing first quarter net income, which was down 13% year over year. The company lost 38,000 customers, bringing the total subscriber base to 15.06 million. Thus, we believe the Vivo integration would bring back the company’s profitability through its strong mobile service business.

Despite the falling subscriber base of its legacy voice telephony operation, we believe Telesp has been investing in new business opportunities such as video, broadband Internet and Pay TV to boost long-term growth.

The merger of Vivo with the company’s fixed-line business will expand its opportunities beyond the current expectations and will improve its profitability going forward. Further, the combined Telesp-Vivo is much stronger than the stand-alone entity.

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