Oi and LetterOne enter exclusive talks to consolidate Brazil

Oi and LetterOne Technology are in exclusive talks to develop structuring and financing options to enable Oi to participate in Brazil’s telecoms consolidation, which will likely see it attempt to merge with rival TIM Participações.

Oi (BVMF:OIBR4) and LetterOne Technology are in exclusive talks to develop structuring and financing options to enable Oi to participate in Brazil’s telecoms consolidation.

LetterOne, backed by Russian billionaire Mikhail Fridman (pictured), made a US$4bn proposal to Oi on 23 October that would see it merge with rival TIM Participações (BVMF:TIMP3).

Oi, advised by BTG Pactual, said it had presented a counterproposal for an exclusivity period of seven months, which LetterOne had accepted.

The Brazilian operator said that, if a transaction completes, this would likely lead to a reduction in its leverage and investment from LetterOne, the largest shareholder in VimpelCom, which could generate important synergies and economies of scale.

“A potential business combination of Oi and TIM Participações should [also] result in the creation of a more complete and well-positioned telecommunications operator that would be able to compete against global players already operating in Brazil,” Oi added.

Confirming the talks, a LetterOne spokesperson said it is “a long-term investor with its team having ten years’ experience in the telecoms sector in emerging and developed markets”.

Fridman set up the US$16bn LetterOne Technology fund in April to buy and turn around distressed or under-performing mobile operators. It also holds Fridman’s 47.85% voting stake in Vimpelcom and 13.22% holding in Turkcell.

Alexey Reznikovich, CEO and managing partner of the fund, said targets would benefit from its expertise drawn from other markets, and gain access to its 200 million-plus global customer base.

Commenting on a potential Oi-TIM merger earlier this week, the CEO of Telecom Italia (BIT:TIT) – which owns 67% of TIM – said there needed to be clarity around fixed-line concessions before any tie-up could be considered. Marco Patuano reiterated Telecom Italia’s commitment to the Brazilian market, while also telling local newspaper Valor that he was open to discussing an industrial cooperation with LetterOne.

Valor cited one source as suggesting both Telecom Italia and Letter One could end up with 35% stakes in a combined Oi-TIM, but another source disagreed and said, given TIM’s greater value, the Italian telco would be the controlling shareholder. A pitch from Oi and LetterOne to Telecom Italia could be made before the end of November, the report said.

The situation is further complicated by the increasing influence of two French investors in Telecom Italia. Vivendi has close to 20% of the Italian incumbent and Xavier Niel this week acquired a double-digit stake through derivatives. Their thoughts on the company’s future in Brazil are not known.

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.

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%.