In October 2022, the Chilean competition authority (“FNE”) approved the creation of a joint venture (“JV”) comprising the combination of telecommunications providers VTR and Claro Chile. The JV creates the largest fixed telecoms operator in Chile and a leading mobile network operator with nationwide coverage. Compass Lexecon provided economic advice to parent companies América Móvil and Liberty Latin America throughout the merger investigation.
America Móvil (Claro Chile) and Liberty Latin America (VTR) first announced the JV in September 2021. The JV will focus on fixed and mobile services, such as internet, Pay TV, fixed and mobile telephony, and enterprise telecom services. VTR is Chile’s historical market leader in fixed telecommunications, whereas Claro’s core business is mobile telecommunications, while it is also the country’s fourth largest fixed internet and Pay TV operator.
Compass Lexecon advised the JV Parties throughout the merger proceedings before the FNE. Our advisory consisted of multiple reports submitted to the FNE throughout Phases 1 and 2 of the merger investigation. Our key findings were instrumental in securing the FNE’s final approval.
The Compass Lexecon team adjusted the methodologies of several economic analyses to take into account the dynamic nature of the sector, such as the investment in Fibre-to-the-Home (“FTTH”), 5G deployment and the impact of Over-the-top (“OTT”) services on Pay TV. For instance, we proposed a market share and HHI analysis for all segments based on a ‘gross adds’ perspective (i.e., based on the flow of new customers instead of the stock of legacy customers). The FNE agreed with this assessment, finding out that both Claro and VTR had faced falling gross adds over the past three years, in contrast with the behavior of all their rivals (who had sustained increases in their gross adds figures over the same period). The developments in the market also underpinned the economic rationale of the merger: the JV would help the parties unlock meaningful cost and revenue synergies on the back of fixed-mobile convergence, leading to freed up resources and consolidate complementary infrastructure to strengthen their FTTH and 5G deployment efforts. We also estimated potential price effects from the transaction based on a GUPPI analysis for which we estimated diversion ratios based on client data and a self-designed customer survey, concluding (in line with the FNE’s assessment) that any eventual incentives to increase prices would be effectively curtailed by the competitive pressure of rivals.
The FNE approved the JV after a Phase 2 investigation and dismissed the risk of potential anti-competitive effects on all fixed and mobile telecommunications services from a horizontal perspective. The FNE also ruled out any risks to competition stemming from vertical or conglomerate effects, in line with our assessment and despite complaints by competitors and upstream suppliers. In fact, we illustrated the pro-competitive impact of the JV (and thus, the uproar by the parties’ competitors during the investigation) by conducting an event study, where we found out that the JV announcement caused a fall in the stock price of one of the parties’ main rivals, which would be explained by the perceived increase in the competitive potential of VTR and Claro after the merger. The FNE only raised concerns due to the concentration of the parties’ radioelectric spectrum holdings –an asset which it considered an “essential input” for the provision of mobile services– beyond legal limits. The FNE finally approved the JV subject to the divestiture of two 10MHz blocks of wireless spectrum (10MHz in the AWS band and 10MHz in the 3.5GHz band). The Parties also announced the carve-out of Claro’s satellite Pay TV services, to comply with the regulation imposed previously on VTR by the Chilean Competition Court.
The Compass Lexecon team included Fernando Coloma, Jorge Padilla, Gabriel Fernandez, Daniel Urdaneta, Magdalena Martin, Vicente Munita and Joaquin Urria. They worked alongside the parties’ legal counsels, FerradaNehme and Pellegrini & Rencoret. FerradaNehme, legal counsel of Liberty Latin America, was led by Nicole Nehme, Benjamín Mordoj, Diego Hernández and Sebastián Dufeu, and Pellegrini & Rencoret, legal counsel of America Móvil, was led by Pedro Rencoret, Julio Pellegrini and Catalina Sierpe.