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After a long period of negotiations, Telecom Italia agreed to sell Digitel Venezuela to Telvenco S.A. for US$425 million. Telvenco is controlled by Oswaldo Cisneros, a former executive in the Venezuelan Bell South operations, which are now owned by Telefonica Moviles. At the regional level, this acquisition reiterates Telecom Italia’s intentions to reduce its portfolio in Latin America, while at the local level, it is the beginning of a new competitive scenario in the mobile industry through the emergence of a new and stronger national GSM player.
Initially, America Movil was considered a strong potential candidate to acquire Digitel, since Venezuela is one of the few countries where the pan-regional player does not have a presence. Given that Telmex hasn’t invested in Venezuela, either, we believe that the political risk of investing in Venezuela is detracting foreign investors from entering the market, at least for the time being.
The new competitive scenario represents an opportunity for GSM players to build a reinforced player with national coverage. Telvenco has announced an agreement with Infonet and Digicel to merge operations with Digitel, and build one consolidated national GSM player. The potential synergies will be based mainly on coverage and spectrum. Digitel is stronger on the central region, while Infonet and Digicel have more advantages on the western and eastern regions of Venezuela, respectively. Additionally, the GSM platform offers the advantage of lower infrastructure costs to operators, principally because of competitive prices of equipment compared to CDMA, and lower handset costs for subscribers.
With current penetration rates at 44 percent YE2005 and potential expansion in data usage, the mobile sector in Venezuela still has room to grow in terms of subscribers and revenues. Based on current conditions, revenues will grow at 4 percent CAGR from 2005 to 2010. Pyramid Research expects that the new Digitel will raise the level of competitiveness in the market, but its success will depend heavily on three internal factors: The ease of integration with Infonet and Digicel—taking advantage primarily of synergies on national coverage and spectrum, the capacity to invest on infrastructure to compete nationally, and the customer acquisition strategy.
On the external environment, two factors will play a key role in Digitel steps in the short term: Regulatory entities and the competitors Movistar and Movilnet. Pyramid Research expects Conatel to approve the deal since neither of the major operators (Movistar or Movilnet) are involved, eliminating any anti-trust concern that in the past was used to block CANTV’s acquisition agreement with Digitel. In the new scenario we will see Movistar and Movilnet be more aggressive in the market than in the past in order to shield their current market share and penetrate lower segments of the population. This factor, plus new Digitel strategy, will potentially boost penetration in 2006.
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