Oi’s Dividend Cut Only Dents Looming $12 Billion Debt

Oi SA, the most indebted Brazilian telecommunications company, is still starved for cash to pay its long-term debt and improve its network, even after scrapping a $444 million dividend and selling $1.5 billion in assets.

The carrier failed to cut net debt to a self-imposed maximum of three times earnings, a condition of paying the dividend, Oi said yesterday in a filing. The stock gained 5.2 percent yesterday, bringing its eight-day rally to 39 percent.

While recent moves will bolster results this year, a capital injection is still needed to match the network quality of competitors and pay off debt, said Robin Bienenstock, an analyst at Sanford C. Bernstein & Co. Shareholder Portugal Telecom SGPS SA, which already dispatched its top executive to run Oi, is unlikely to fork over cash because of its own debt load, which may force partners Andrade Gutierrez SA and La Fonte Participacoes SA to shoulder the burden, she said.

“The most likely thing is a change of control, and the question is how does Portugal Telecom find the money to do that because they are also seriously indebted,” Bienenstock said in a telephone interview from London. Andrade Gutierrez and La Fonte may already have agreed to put capital into the company since “their stake is pretty massively underwater.”

The three companies, along with state-owned pension funds and Brazilian state development bank BNDES, control Oi’s parent, Telemar Participacoes SA, known as TmarPart. Oi rose 6.5 percent to 4.93 reais at the close in Sao Paulo.

Showing Discipline

Rio de Janeiro-based Oi had net debt of 27.5 billion reais ($12.1 billion) at the end of March and is investing 6 billion reais this year, the most among peers, to compensate for a network that gets the most consumer complaints.

“Oi has shown discipline in respecting the self-imposed leverage limits established in its dividend policy,” Susana Salaru and Gregorio Tomassi, analysts at Itau BBA, wrote in a note yesterday. “Nevertheless, we maintain our cautious view of Oi, as the operator’s current shareholder structure does not seem to be sustainable in the long run.”

Oi’s controlling shareholder group is highly leveraged and needed the Oi dividend payment to pay its debt, they wrote.

“There are several restructuring formats that could be applied to address this problem, but each of them includes the inevitable need for a capital increase,” they said.

An outside press official for TmarPart, Andrade Gutierrez and La Fonte declined to comment on behalf of the companies. A press official for Oi declined to comment, and a Portugal Telecom official didn’t return an e-mail request for comment.

Too Soon?

It’s too early to assume that Oi will need to raise capital, said Alex Pardellas, a Rio de Janeiro-based analyst at CGD Securities. Infrastructure investments will be maintained, and asset sales are contributing to reduce debt, he said. Oi has announced the sale and rights transfer of undersea cables and towers this year totaling about 3.4 billion reais.

“I don’t see any reason for a capital increase,” he said.

Oi’s recent moves are a sign of a change in focus to cash-flow generation and cost cuts, said Andres Medina-Mora, an analyst at Corporativo GBM SAB, who said he’s upgrading the stock to the equivalent of a buy from a hold.

Chief Executive Officer Zeinal Bava joined the company last month, leaving the same post at Portugal Telecom to replace CEO Francisco Valim, who was ousted in January.

“What we are seeing right now is the beginning of a shift in strategy which I would say is very positive,” Medina-Mora said. “It’s a shift in strategy toward long-term value generation for all shareholders and a deleveraging approach from the new management.”

Oi’s need for cash will “depend very much on the next few quarters,” he said. “What they have gained right now is a little bit of room in order to maneuver and operate their business and to assess the next steps going forward.”

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