Oi Taking On More Debt to Pay Dividend as Stock Declines
Oi SA (OIBR4), struggling to placate holders of its sinking stock, is digging deeper into debt to maintain the biggest payout of any major telephone company in the world.
Brazil’s largest landline carrier handed out 4.36 reais ($2.24) a share in dividends over the past 12 months, or 62 percent of its stock price, the highest yield among the 79 phone companies with market values of $5 billion or greater, data compiled by Bloomberg show. Rio de Janeiro-based Oi is shelling out an additional 51 centavos a share this month as net debt nears a self-imposed limit of three times earnings.
Net debt rose 61 percent last year to 25.1 billion reais to maintain Oi’s dividend and fund an increase in investment designed to offer television and faster Internet speeds. After ousting Chief Executive Officer Francisco Valim in January for failing to fulfill 2012 growth targets, Oi is planning to sell non-core assets and cut capital expenditure to reduce debt.
“A dividend of this size is only sustainable if you have very strong earnings,” said Richard Dineen, a New York-based analyst at HSBC Holdings Plc. “But in this case, Oi is borrowing a lot of money and immediately paying it out with only the promise that earnings will grow strongly in the future.”
Oi fell 27 percent through March 8 after a transaction to simplify its share classes on March 30, 2012. That compares with a 9.4 percent decline for the benchmark Bovespa index. The shares rose 2.1 percent to 7.28 reais at 2:02 p.m. in Sao Paulo trading.
Chief Financial Officer Alex Zornig said the plan to sell non-core assets, to share the cost of investment with other carriers and recent capital expenditures are yielding results that signal Oi will resume growth. Oi will also benefit from its efforts to lengthen its debt profile, whose average maturity rose to 5 years from 2.7 years at the end of 2009, he said. Almost 60 percent of Oi’s debt matures after 2017.
“The shareholder remuneration policy announced depends on the financial conditions of the company and is an important pillar in corporate governance, since it provides predictability to the market,” said Zornig in a written response to questions. “We have sufficient funds in our equity that can be distributed.”
While five analysts recommend buying the stock, nine have the equivalent of a neutral rating, and two advise selling it, according to data compiled by Bloomberg.
Together with the dividend, the increased use of cash is exposing Oi to more risk. Net debt of 25.1 billion reais at the end of 2012 was up from 15.6 billion reais a year earlier, to reach 2.85 times earnings before interest, tax, depreciation and amortization, or Ebitda. While total debt rose less than 5 percent last year, available cash dropped by 45 percent, meaning Oi is taking on more leverage.
If Oi is in danger of going past a self-imposed debt ratio of three, it won’t cut the dividend or its investments, according to a regulatory filing. Instead, it can sell assets that aren’t essential to its strategy, Zornig said.
“Non-core asset sales is, I would say, our hedge for us to fund whatever is necessary in order to meet capex and our dividends and our debt payments,” he said. Oi would consider seeking buyers for properties such as the 1,200 towers it sold last quarter, he said.
The company invested 6.6 billion reais last year, 10 percent higher than forecast and 32 percent more than in 2011. Of last year’s investments, 70 percent went to improve its network. It plans to spend 6 billion reais this year, part of a plan to transform itself from an old phone utility to a telecommunications powerhouse offering video, Internet and voice calls on mobile devices and landlines.
Net revenue rose 0.8 percent to 28.1 billion reais, “reversing the downward trend of recent years,” Oi said in a regulatory filing. Ebitda rose 0.4 percent to 8.8 billion reais in 2012, and Ebitda margin was little changed at 31.3 percent, compared with 31.4 percent in 2011.
Fourth-quarter residential revenue rose 4 percent from the previous three months because of Oi’s bundled service offerings, according the company. Oi is focused on expanding its mobile post-paid customer base and increasing revenue from its corporate segment, according to a regulatory filing.
Still, last year’s sales were 2.8 percent less than forecast, and residential subscriptions of 19.1 million were 3.5 percent lower than Oi’s projections. Oi forecasts net revenue from services of 28 billion reais to 29 billion reais this year and Ebitda of 9 billion reais to 9.8 billion reais. After dismissing Valim on Jan. 22, Oi appointed board President Jose Carneiro da Cunha as acting CEO.
The pressure to invest is also coming from Brazil President Dilma Rousseff, whose government has issued more fines and complaints to Oi than any other carrier as it pushes companies to drop fewer calls and reduce consumer bills.
In 2011 and 2012, Oi was fined 122 times, compared to 33 times for Tim Participacoes SA (TIMP3) and 26 times for Telefonica Brasil SA, according to the telecommunications regulator, known as Anatel. It also registered the most complaints of all providers, with 6 of every 10,000 users contacting Anatel.
The agency prohibited Oi and other wireless providers from selling new lines in some states last year for about 10 days, only relenting when they offered up plans to improve service. Forcing companies to invest could lead to lower profits, said Marco Aurelio Barbosa, an analyst with Coinvalores in Sao Paulo.
“Anatel is really on top of this,” he said in a phone interview. “Companies are going to have to invest a lot, and that could increase costs and lower profit.”
After years of lagging behind its competitors, Oi’s 2012 investments were the second-highest in the Brazilian industry when compared to sales, at about 21 percent, according to data compiled by Bloomberg. Embratel Participacoes SA, a unit of Mexico’s America Movil SAB (AMXL), was the only one higher, at 24 percent.
Oi is rated one level above junk by Moody’s Investors Service and Standard & Poor’s. Moody’s said in October it may downgrade the rating because it will take Oi longer than expected to reduce its debt leverage.
Oi’s investments may pay off with improved results over time, said Alex Pardellas, an analyst from CDG Securities in Rio de Janeiro.
“The company has been presenting a gradual and consistent evolution both in terms of sales and Ebitda,” he said. For 2013, Oi is forecasting profit growth of as much as 11 percent, with sales expanding as much as 3 percent.
“By any measure, it had underinvested compared to competitors,” Dineen said. “It has a lot of catch-up.”