Oi Seen by Brazil as Breakup Candidate If It Skips Auction

Brazil’s regulator views Oi SA, the most indebted telecommunications company in the country, as the weakest operator and sees its independence in jeopardy if it misses out on the next wireless auction.

“What will happen with market consolidation will depend on the 700 megahertz auction -- it will define the future of telecom in Brazil,” said Carlos Baigorri, superintendent of competition at Anatel, in an interview in Brasilia yesterday. “The company that doesn’t win in the auction, the market will very probably want to break up.”

Baigorri said any carrier missing the auction would be at risk. He declined to elaborate on how the market would break up a company. The press office of Rio de Janeiro-based Oi declined to comment.

“We have to see which will be Oi’s priorities in its turnaround, what role the 700 megahertz auction will have,” Baigorri said. “If, for example, Oi can’t raise the funds to participate, which I hope they can do, probably Oi will be broken up.”

Analysts including Macquarie Group Ltd.’s Kevin Smithen see Oi as likely to skip the government’s 4G spectrum auction because it’s hamstrung by debt. Credit Suisse Group AG analyst Andrew Campbell has called the auction a “once in a lifetime” opportunity to gain capacity for high-speed data service.

Shrinking Pool

Oi, with a market value of 14.1 billion reais ($6.4 billion), had sales of 28.4 billion reais last year.

The four biggest wireless operators in Brazil are competing for a shrinking pool of new customers who have never used mobile phones, and their current subscribers are increasingly moving to smartphones and tablets that require more bandwidth. Missing out on a way to acquire better coverage for those users, with spectrum that’s cheaper to use, would put any carrier in jeopardy, Baigorri said.

The Brazilian government’s spectrum auction is scheduled for September, and the minimum price is expected to be announced by the end of this week. Using spectrum in the 700 megahertz frequency band requires 95 percent fewer antennas than trying to cover the same area with the same data speeds using 2.5 gigahertz airwaves, which were sold in a 2012 auction, Baigorri said. Companies that don’t win spectrum in the 700 megahertz auction will have to rent it at unregulated prices from winners or use the 2.5 gigahertz frequency, he said.

Anatel has an incentive to encourage companies to bid in the auction, since the sale raises money for the government. Still, Baigorri’s remarks come amid speculation in Brazil of potential mergers and consolidation in the phone industry.

M&A Options

Earlier this year, when Oi’s debt outlook was rosier, it explored a plan with competitor Telefonica SA to break up another rival, Tim Participacoes SA, people familiar with the matter said in May, asking not to be named because the deliberations were private. Tim’s parent company, Telecom Italia SpA, has resisted a sale.

Telecom Italia Chief Executive Officer Marco Patuano said yesterday that he could see advantages to a merger with yet another phone company, Vivendi SA’s GVT unit.

Patuano said yesterday that Tim plans to participate in the government’s wireless auction. Telefonica and Brazil’s other large wireless carrier, America Movil SAB, each have stronger balance sheets than Oi, putting them in a better position to win in a bidding competition.

Oi had 35 billion reais in total debt at the end of March. After a planned merger with Portugal Telecom SGPS SA this year, the company’s net debt will be four times bigger than its annual earnings before interest, taxes, depreciation and amortization, according to Standard & Poor’s.

Oi fell 4.9 percent to 1.55 reais at the close in Sao Paulo trading. Portugal Telecom closed down 0.7 percent at 1.76 euros in Lisbon.

Junk Rating

The ratings company cut Oi to junk after a Portugal Telecom debtor, Rioforte Investments SA, defaulted on about $1.2 billion of commercial paper owned by the Lisbon-based phone company. That would make it more costly for Oi Chief Executive Officer Zeinal Bava to borrow more money to bid on wireless airwaves.

As the only major phone carrier controlled by Brazilians, Oi’s attempts to use mergers to grow, such as the acquisition of Brasil Telecom SA in 2010, have long been backed by the government, leading Barclays Plc to once describe the company as the "national champion."

“There’s only so much the government can do to maintain the national champion,” Walt Piecyk, a telecom and tech analyst at BTIG LLC, said by phone from New York. “At some point the national champion becomes a national embarrassment.”

Under Brazilian law, the government can take control of companies that put telecommunications services at risk.

“A company the size of Oi isn’t a problem just for Oi. It’s a problem for the whole system,” Baigorri said. “That’s why we put so much faith in Zeinal to revert the situation.”

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