Oi’s $1.1 Billion Asset Sale Safeguards Dividend Pledge

Oi SA’s $1.1 billion asset selloff is reassuring investors that Chief Executive Officer Zeinal Bava can turn around the fortunes of Brazil’s biggest phone company.

The sale of undersea cables and towers announced yesterday shores up funding for a company that has pledged to pay out 2 billion reais ($900 million) to shareholders this year, invest 6 billion reais in infrastructure and reduce its 27.5 billion reais in debt, the most among local peers. The stock rose the most in more than a month yesterday.

Oi needs the investments to catch up to Telefonica Brasil SA and Tim Participacoes SA in the wireless market as customers cut their landlines. This is the Rio de Janeiro-based company’s second tower sale announced this year, coming five weeks after Bava, formerly chief executive officer of Oi shareholder Portugal Telecom SGPS SA, took over the position.

“The company is going to be able to have the resources to lower debt and go ahead with its investment and dividend payment plan,” said Alex Pardellas, a Rio de Janeiro-based analyst at CGD Securities. “Oi has a lot more assets it can still sell.”

Oi has fallen 54 percent through yesterday in Sao Paulo trading since it ousted Chief Executive Officer Francisco Valim on Jan. 22, compared with a 24 percent drop for the Ibovespa index. It is trading at 6.4 times estimated 2013 earnings, compared with 12 times for Tim and for Telefonica Brasil, according to data compiled by Bloomberg. The shares fell 3.3 percent to 3.55 reais at 12:50 p.m. in Sao Paulo.

Bava’s Arrival

Bava, 47, joined Portugal Telecom in 1999 and was named CEO in 2008 before being dispatched to Brazil to help struggling Oi, in which the European phone carrier bought a stake in 2011. In his previous role, Bava helped slow the decline in Portugal Telecom’s profit margins, and Institutional Investor magazine named him Portugal’s CEO of the year in 2011.

Oi yesterday announced that it sold GlobeNet, its undersea cable subsidiary, to Grupo BTG Pactual for 1.75 billion reais and agreed to transfer the use and commercial rights of 2,113 towers to SBA Communications Corp. for 686.7 million reais.

After closing the first quarter with a net-debt-to-earnings ratio of 3.05, former Chief Financial Officer Alex Zornig promised to sell non-core assets in the company’s first-quarter earnings call with analysts in April to reduce the figure to three or below. Oi had set that bar to allow payment of 1 billion reais in dividends in August. Zornig left the company last month.

Soon Enough?

The question is whether Oi’s asset sales have come soon enough to support its dividend payment plan. While the transactions have improved Oi’s finances, the company probably still won’t be able to make its August dividend payment because they didn’t come before a self-imposed June 30 deadline to reduce debt, according to Bradesco BBI.

“We view both deals as positive as they seem to have been made at good valuations,” Bradesco analysts led by Luis Azevedo said yesterday in a report. “They should help Oi to control its debt level that is likely to return to under 3.0x after the influx of cash.”

A separate deal announced in May to transfer the use and commercial rights of towers to Providence Equity Partners Inc. was approved on July 2, also missing the close of the second quarter, regulatory agency Anatel said today.

A press official for Oi declined to comment on the sales. The company has 15,000 wireless and fixed towers, among other assets, that it could sell, the Bradesco analysts estimated.

While Oi got much-needed cash for its asset sales, it did give up infrastructure that can be lucrative. Phone companies often lease space on towers for competitors to use for their own equipment, and they can sell excess capacity on submarine cables.

Tower Discount

SBA purchased Oi’s towers at a 33 percent discount compared to others it acquired from Telefonica SA’s Brazilian unit in December, said Jennifer Fritzsche, an analyst with Wells Fargo & Co. in Chicago. That may be because of the falling value of the real and the location and quality of the towers, she said.

Oi will also need regulatory approval for the tower transaction, which means it will have to wait for that cash. Still, the company was able to make both deals faster and for a better price than Bradesco expected, which the analysts said bodes well for its future.

“This could help Oi to make steady progress in delivering better results despite the scenario of high cash consumption,” they said.

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