Remaking Portugal Telecom: An interview with CEO Zeinal Bava
Tue 03 May 2011
, Jürgen Meffert, McKinsey Quarterly
The need to build ‘second home markets’ in fast-growing emerging economies is high on the minds of many CEOs. But few have come as far, and know as much about the challenges, as Zeinal Bava, CEO of Portugal Telecom (PT), as Jürgen Meffert, a director in McKinsey’s Düsseldorf office found out.
Bava, 45, an investment banker before joining PT in 1999, and his management team set ambitious goals in early 2008: to raise the international share of PT’s revenues to 66 percent by year-end 2011, from 45 percent in 2007, and almost to double the customer base, to 100 million.
Bava was elected CEO in 2008, after PT finally thwarted a hostile-takeover bid by Sonaecom, a Portuguese competitor. Then, having turned around the performance of PT’s domestic and Brazilian operations, the management team faced another major challenge in 2010, when Telefónica acquired PT’s half of Brazil’s top mobile operator, Vivo. This left PT without its growth engine, which was contributing almost half of the company’s total revenues. Determined to revive the Brazil strategy, PT spent about half of the €7.5 billion proceeds from the sale of Vivo to buy a 25 percent stake in Brazil’s largest telecom company, Oi, thus starting anew with a similar level of exposure to the country.
In this interview, conducted at Portugal Telecom headquarters, in Lisbon, Bava talked with Jürgen Meffert, a director in McKinsey’s Düsseldorf office. They discussed the imperative of international expansion, what it will take to succeed in Brazil with Oi, and how a pay-TV offer helped transform PT’s domestic operations after the—as Bava describes it—“near-death” experience of the hostile-takeover bid.
The Quarterly: What are the drivers of Portugal Telecom’s international growth?
Zeinal Bava: The liberalization of the Portuguese telecom market, in the mid-’90s, ended PT’s monopoly, with inevitable losses of market share. Growth and scale are essential for competitiveness in this sector, which has high fixed costs. PT made some investments in Africa and Brazil and prioritized Brazil in the late 1990s because it has a large and growing population that shares our language and culture. The downside was perceived currency volatility and uneven distribution of wealth. The addressable market was mostly atop the income pyramid. In 1998, PT acquired a controlling stake in Telesp Celular, the leading wireless operator in populous São Paulo state, which represents a major share of Brazil’s economy. In 2001, believing that Brazil was moving toward a structure of national rather than regional operators, we joined forces with Telefónica’s complementary wireless investments—a strategic partnership that culminated in the launch of Vivo, in 2003.
The Quarterly: How did you approach the growth challenges when you became CEO, in 2008?
Zeinal Bava: The Portuguese telecom market is mature. Given that our number of lines per employee and our margins are already among the best in the sector, top-line growth will be increasingly critical for underpinning earnings and for cash flow growth. In addition, international growth provides diversification that allows us to reduce financial and operational risk. Our investors like that. When you consider the situation for Iberian sovereign risk today, we can rightly point out that PT is a company with half of its business outside Portugal. Moreover, we offer exposure to Brazil, the most important emerging economy after China and India. Access to talent is another point. Top students are attracted to us because they like what we’re doing with innovation and increasingly see us as a multinational that can offer an exciting international career.
So we continued to push for growth and concentrated on Brazil—with less focus on building footprint and more on collaboration with our partner, Telefónica, to extract synergies and create and maximize shareholder value. Both companies invested a lot of management and engineering capabilities in turning around Vivo. Following the recent Vivo and Oi transactions, we’ve crystallized value and got ourselves back into the growth cycle of the sector while maintaining scale and exposure to Brazil. In 2007, our share of Vivo was valued by the market at circa €3 billion. Telefónica bought it in 2010 for €7.5 billion after raising the offer several times.
The Quarterly: What was the rationale for switching from a mobile operator like Vivo to Oi, which is much larger in fixed line than in mobile?
Read the full interview in McKinsey Quarterly.
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