Mired in Bankruptcy Court, Oi Earmarks Raise for Executives

  • Maximum pay set at 7% higher than 2015, tied to performance
  • Phone carrier under court protection with $20 billion in debt

Even with Brazil’s Oi SA in bankruptcy protection and the country in recession, its executives are still eligible for a raise.

The phone company filed June 20 to seek court protection from creditors with 65.4 billion reais ($20 billion) in debt. The same day, Oi said it expected to pay as much as 44.9 million reais to its management this year -- plans it reiterated three days ago. That’s 7 percent above what it forecast for last year, even as its finances deteriorated further and further.

Because of the company’s performance, Oi ended up paying its executives, fiscal and directors’ board a lot less than the top target in 2015 -- about 26 million reais. But the figure gives a glimpse into how the company is managing its affairs in a time of crisis.

Competitor Telefonica Brasil SA is forecasting paying as much as 50.4 million reais to its top executives this year, but it’s in a much different situation. Telefonica’s market value is 70.8 billion reais, compared with Oi’s 1.51 billion reais. Including debt, Telefonica’s enterprise value stands at 75.5 billion reais, compared with Oi’s 45.8 billion reais. Telefonica also has a smaller executive team than Oi.

“If these are the guys that brought the company down, then why on earth should they get a raise?” said Jorge Piedrahita, the chief executive officer at brokerage Torino Capital in New York. “In the bankruptcy process the objective is to preserve value by keeping the company as a going concern, which has a higher value than liquidation, so I believe the judge should deny this raise.”

Oi’s press office said in an e-mail that most of the pay is tied to financial and operational goals, with 3.1 million reais dependent on share performance. The targets were approved in a shareholder meeting, and final pay will be determined at the end of the year. The company also said tying pay to stock prices strengthens the alignment between shareholders’ and management’s interests.

Telefonica v. Oi

Telefonica provides the closest comparison to Oi because both are publicly traded in Brazil and have government-controlled licenses to run a combination of landline and wireless businesses. Telefonica declined to comment on executive pay.

Even as it careened toward the bankruptcy filing, Oi was doing a poorer job of containing costs than its bigger rival. In the first quarter, Oi’s total personnel expenses rose 11 percent from a year earlier to 657 million reais. The increase in personnel costs was due to an agreement with a labor union and the addition of a network-services business, which skews the comparison, according to Oi’s press office. The company fired about 2,000 staff members in May, it said.

Marketing expenses nearly tripled to 88 million reais as the company introduced new branding, which included TV ads and promotional material sent to journalists. It also sponsored the surfing championship in Rio de Janeiro. Operating expenses as a whole in Brazil fell 1.2 percent year over year. Oi said its operational goals remain the same even with the bankruptcy protection filing.

At Vivo, the brand name used by Telefonica, operating costs fell about 9 percent over the same span. Personnel costs rose 4.5 percent from a year earlier to 920 million reais. While the company doesn’t disclose marketing costs, it said expenses for third-party services fell about 5 percent “as a result of lower costs with call center services, sales promoters in retail stores and publicity and advertising.”

Messy Merger

In its heyday in 2012, Oi said it was planning to invest 6 billion reais a year and pay 8 billion reais to shareholders through 2015, even as the company was already under pressure to improve its services amid high competition and tougher regulation -- between 2011 and 2012, Oi was fined 122 times. After a messy merger with Portugal Telecom, it tried -- and failed -- to buy larger competitor Tim Participacoes SA.

For some, the earmarked pay raise -- which is slightly below Brazilian inflation, and lower than the minimum wage increase of about 12 percent announced by the government in January -- is the least of the company’s many troubles.

“It’s a chronicle of a death foretold,” said Mauro Cunha, the president of Brazil’s minority-shareholders association. “The company’s controllers became more and more complex over the years, always leveraging their bets on the back of public money and making decisions that were clearly not in the company’s best interest. Oi’s cash generation always went to the the controllers.”

Bonds are trading near 16 cents on the dollar, while shares have fallen 99 percent from their peak in 2008.

The company that was conceived in a megamerger less than a decade ago as one of Brazil’s “national champions” never managed to expand its market share in the country’s growing mobile-phone market beyond fourth place.

“Oi seems like a never-ending saga,” Piedrahita said. “You had an over-leveraged entity with poor operational performance and in a recessionary environment -- then it was a matter a time.”

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