Oi Advised to Raise Cash While Ending Dividend: Corporate Brazil

Oi SA should stop paying dividends and become more aggressive in raising cash, according to the most accurate analyst monitoring the worst-performing telecommunications company in the Americas.

The company’s cash balance has dropped 67 percent from a year earlier to 5.08 billion reais ($2.51 billion), while net debt surged 63 percent to 27.5 billion reais, at the biggest Brazilian provider in an industry dominated by foreigners. Further deterioration may compel Oi to sell stock or even, in an extreme case, its wireless or landline units, said the analyst, Andres Medina-Mora of Corporativo GBM SAB.

Oi Chief Financial Officer Alex Zornig vowed in an e-mail to continue paying the highest dividend yield among global telecommunications providers, totaling 4 billion reais through 2014, as long as earnings keep pace with debt. Rio de Janeiro-based Oi is also investing 6 billion reais this year, the most among its local peers as a percentage of sales, further draining cash reserves.

“It’s very important for the company to start to make some changes in strategy and generate cash flow, recurring or not, and return to stability,” said Medina-Mora, who is based in Sao Paulo. “If they continue to spend more time not doing anything they will reach a very complicated point.”

His recommendations to sell Oi in August before switching to a neutral rating in November generated a return of 6.4 percent in the past 12 months, the best among five analysts tracked by Bloomberg. That compares to a 4.3 percent increase for the benchmark Bovespa index. Oi rose 0.2 percent to 4.56 reais in Sao Paulo trading at 2:18 p.m.

Cash Generation

“Oi has produced cash generation to address its needs,” Zornig said in an e-mailed response to questions last week. “Ebitda growth will be used as a source of financing for its operations and shareholder rewards. Beyond that, the company continues to work on the sale or monetization of non-strategic assets.”

Oi’s Ebitda, or earnings before interest, tax, depreciation and amortization, rose 6.6 percent to 2.15 billion reais last quarter from a year earlier.

Oi’s dividends may be difficult to cut because the company’s controlling group needs the money, Susana Salaru and Gregorio Tomassi, analysts at Itau BBA SA, said in a May 8 research note. The investor group, known as TmarPart, has about 3.5 billion reais in debt and paid 355 million in financial costs last year -- almost exactly the amount it received in dividend payments from Oi, the analysts said.

Shareholder Structure

Investors are concerned that “Oi’s current shareholder structure does not seem to be sustainable,” Salaru and Tomassi wrote. The controlling group may seek a capital increase through Oi, they said.

TmarPart’s owners include Brazil’s Jereissati and Andrade Gutierrez families, along with development bank BNDES and pension funds for state-run companies such as Banco do Brasil SA. That backing, plus government support of Oi’s acquisition of Brasil Telecom SA in 2010, led Barclays Capital Plc to describe the company as the nation’s “national champion,” set up to compete against foreign carriers.

Zornig said he couldn’t comment on decisions that are up to shareholders. A spokesman from FSB Comunicacoes declined to comment on Oi’s dividend and cash-flow situation on behalf of the Andrade Gutierrez family and TmarPart, as did a spokesman for the Banco do Brasil fund. E-mail and phone requests for a comment from the Jereissati family weren’t answered.

Portuguese Experience

The investors have sought strategic help from abroad, permitting Portugal Telecom SGPS SA to acquire a stake in TmarPart in 2011. The Lisbon-based company’s sales in its home country dropped 6.8 percent from a year earlier, and its net debt is more than three times earnings. A Portugal Telecom press official didn’t return phone and e-mail messages seeking comment on Oi.

In its first-quarter report, Oi said its ratio of net debt to earnings, a measure of liquidity, was 3.05, and said it aims to have it under 3 by the end of June to allow it to approve a dividend in August. Telefonica Brasil SA and Tim Participacoes SA have ratios of less than 1, indicating stronger balance sheets, according to data compiled by Bloomberg.

Oi is having to outspend peers to improve network quality. Its investment budget for the year represents 21 percent of sales, higher than Tim’s 18 percent and Telefonica’s 16 percent, according to analyst estimates compiled by Bloomberg. In 2011 and 2012, Oi was fined 122 times -- compared with 33 for Tim and 26 for Telefonica -- by regulator Anatel for failing to meet requirements for modernizing and expanding services.

Investment Level

Most of Oi’s investments will be to expand its coverage area and to boost network speeds, Zornig said.

“The commitment of the company is to maintain a strong level of investment to support the growth strategy mapped out for this year,” he said.

Oi’s board approved a plan last year that includes 1 billion reais of dividend payments each August and after each annual shareholder meeting for 2013 and 2014. Oi’s projected dividend yield over the next 12 months is 23.5 percent, compared with 7.4 percent for Telefonica and 3.9 percent for Tim.

Operations Focus

“The company can attain its dividend objective, but it should be more focused on operations,” said Eduardo Roche, an investment analyst at Rio de Janeiro-based Modal Asset Management, which manages 600 million reais, including Oi shares. “They have spent the last two years investing less than what was necessary.”

Shares of Oi have fallen 45 percent this year through last week, compared with an 11 percent gain for Telefonica and a 3.7 percent increase for Tim. Chief Executive Officer Francisco Valim was fired in January and replaced by Jose Carneiro da Cunha.

Oi has already committed to some asset sales. Brazil’s antitrust agency, Cade, this week approved the sale of rights to use 4,000 phone-line towers to Providence Equity Partners Inc. and GP Investments Ltd. That transaction was expected to bring in 1 billion reais, Zornig said in April.

While companies have to rent towers they have sold, their margins can improve because they spend less on maintenance, said Alex Pardellas, a Rio de Janeiro-based analyst at CGD Securities.

“Our recommendation for Oi is a buy as a long-term bet,” Pardellas said. “We expected a fall after the departure of Valim, but the drop was very steep.”

Oi also has about 6,000 wireless towers and real estate it can still sell, Zornig said. That will shore up the company until it starts generating cash from operations in 2015, he said.

Still, Oi may have to consider more extreme measures if its cash continues to erode, Medina-Mora said.

Oi is facing “tough decisions,” he said. “This is not the moment to pay out those dividends.”

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