An investment firm backed by Russian billionaire Mikhail Fridman has proposed a transaction to Brazilian mobile operator Oi that would see it merge with rival TIM Participações.
An investment firm backed by Russian billionaire Mikhail Fridman (pictured) has proposed a transaction to Brazilian mobile operator Oi (BVMF:OIBR4) that would see it merge with rival TIM Participações (BVMF:TIMP3).
LetterOne has asked to enter exclusive talks with Oi and said it would be willing to inject up to US$4bn to help facilitate a tie-up with Telecom Italia (BIT:TIT) subsidiary TIM, according to a notice to the local bourse issued by Oi this morning.
Oi said it would study LetterOne’s proposal carefully with its legal and financial advisers. Oi’s shares soared almost 7% on the back of the news, TIM’s rose more than 2%, while Telecom Italia – which owns 67% of TIM – saw its stock rise more than 1%.
In response to the announcement, TIM and Telecom Italia told the market they were not engaged in negotiations with LetterOne or Oi regarding a potential consolidation deal.
A combination of Oi and TIM, which would reduce the number of nationwide Brazilian carriers from four to three, has been touted for years. The two operators already have a network sharing agreement.
Oi engaged BTG Pactual to explore a deal last year and the São Paulo-based bank has continued to offer the company strategic advice. BTG Pactual was tasked by Oi to develop viable structuring and financing alternatives to enable it to participate in consolidation, but without diluting the interests of current shareholders. It is not clear whether Letter One’s approach would see existing investors’ shares diluted.
LetterOne, BTG Pactual and Telecom Italia did not respond to requests for comment before the press deadline.
Turnaround target
LetterOne announced the formation of a US$16bn fund to buy mobile operators in April. It also holds Fridman’s 47.85% voting stake in Vimpelcom and 13.22% holding in Turkcell.
A number of industry heavyweights sit on the fund’s advisory board, including Digicel owner Denis O’Brien and former Vodafone deputy CEO Sir Julian Horn-Smith. LetterOne is particularly focused on acquiring distressed or under-performing cellcos, with a view to changing their fortunes.
Oi acknowledged Brazil’s tough macroeconomic environment when it reported its Q2 results, which revealed that its net debt had increased 6.4% since Q1 to R$34.6bn (US$9.03bn). In early October, Moody’s downgraded Oi’s credit rating to Ba3 and said the outlook for its ratings remains negative.
“Moody’s believes that despite the company’s cost cutting and efficiency efforts, its business will face further margin deterioration from an unfavourable product mix shift to pay TV and broadband and the price pressure inherent in its targeted value segment, especially during the ongoing economic slowdown in Brazil,” the ratings agency said.
At the end of last year, Telefonica’s Vivo subsidiary was Brazil’s largest mobile operator with 29% market share. It was followed by TIM with 26.2%, America Movil’s Claro with 25.4%, and Oi with 17.9%.