Oi Sees M&A Surge After Portugal Telecom Deal: Corporate Brazil

Oi SA, the second-worst performing telecommunications service provider in Latin America this year, is open to further consolidation in Brazil as it merges with Portugal Telecom SGPS, Chief Executive Officer Zeinal Bava said.

“The industry is in agreement that consolidation is something that improves returns while at the same time allows telcos to be able to continue to invest in beefing up the network,” Bava, who took the top job in June, said in an interview during an investor conference in Barcelona yesterday.

Last month, Oi agreed to combine with Portugal Telecom to create a trans-Atlantic carrier with almost $17 billion in revenue. The merger is projected to generate cost savings and additional sales valued at 1.8 billion euros ($2.4 billion), helping the new company challenge Telefonica SA, Telecom Italia SpA and America Movil SAB in the world’s fifth-biggest wireless market of some 270 million accounts.

Oi is focused on boosting cash flow, reducing debt and completing the Portugal Telecom merger in five to six months, Bava said. That transaction involves a share sale by Oi. In the event of another M&A deal, he wouldn’t rule out further capital increase in the future, depending on the size of a transaction and the funding needs.

“I’m not concerned about that now,” Bava said, adding he has no information of any talks among rivals in Brazil or with regulators about potential mergers and acquisitions.

Vivo, Tim

Telefonica Brasil SA, operator of the Vivo brand, is the country’s biggest wireless operator with a market value of $21 billion. Tim Participacoes SA, Telecom Italia’s local unit, is valued at almost $12 billion. As Telecom Italia’s biggest shareholder, Madrid-based Telefonica would be forced to sell assets in Brazil if it gains control of the Italian carrier.

In September, Telefonica agreed to increase its stake in the vehicle that holds 22.4 percent of Telecom Italia, without boosting its voting rights.

“In order to sell the asset we would need to receive the right price,” Telecom Italia CEO Marco Patuano said of Tim during the same conference, stressing that the asset is “strategic.” “If I had to evaluate, it won’t only be how big is the check. The real question is what I tell shareholders I’m going to do with the big check. Are you ready to design a strategy in case a big check comes in?”

‘Three Priorities’

Oi’s preferred shares fell 0.3 percent to 3.50 reais at 4:32 p.m. in Sao Paulo, bringing their decline this year to 58 percent and valuing the company at $2.8 billion. Brazil’s benchmark Ibovespa index is down 13 percent.

Tim rose 2.6 percent to 11.14 reais, after climbing as much as 5 percent. The stock is up 36 percent this year, partly on speculation that a new investor may acquire Telecom Italia’s 67 percent holding, or the carrier may be broken up among existing operators.

Bava has said he would reduce Oi’s annual investments and focus on efficiency. Oi invested 1.5 billion reais ($650 million) in the three months through September, compared with 2 billion reais in the same period of last year. Third-quarter costs fell 6 percent to 4.96 billion reais from the previous three-month period.

“I have three priorities,” Bava said in the interview during the conference, organized by Morgan Stanley. “We need to correct the cash-flow profile; we need to consolidate the business model and boost productivity; and we need to continue to grow in the Brazilian market, where there are huge opportunities.”

Shrinking Market

Still, Portugal remains a tough market as the country struggles to emerge from the economic crisis, Miguel Almeida, the CEO of cable operator Zon Optimus SGPS, said in a separate interview in Barcelona.

“The Portuguese telecommunications market will continue to shrink at least for the next couple of years in terms of total revenues in single-low digits,” Almeida said.

Zon Optimus, created from the combination of cable-TV provider Zon Multimedia with mobile-phone business Optimus, is seeking to win market share from Portugal Telecom and Vodafone Group Plc, Almeida said.

“The industry will stabilize as the economy recovers, but that will still take a while,” Almeida said, declining to give specific forecasts before the company presents a new business plan.

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