Oi's president saved the merger with PT.

By Brad Haynes and Guillermo Parra-Bernal

SAO PAULO (Reuters) - For Oi, the only stocks that seem to be rising currently are those of its CEO, Zeinal Bava.

When a default of 897 million euros ($1,21 billion) threatened the merger of the troubled Oi with Portugal Telecom, Bava played a key role in the talks and saved the deal. The new understanding shielded Oi from potential losses and forced Portugal Telecom to take the hit.

Bava, who left his position at Portugal Telecom to take the reins at Oi last year, calmed the nerves of Oi's shareholders and, at the same time, induced the Portuguese to reduce their stake in the joint venture known as CorpCo, according to two sources following the negotiations.

"He was determined not to let this deal fall apart," said one of the sources, who asked to remain anonymous.

Both sources said the resolution strengthened Bava's position, although Oi's remains delicate -- its financial health is rapidly deteriorating and a costly 4G broadband auction is approaching.

A few months ago, rumors surfaced that a newly capitalized Oi, under Bava's leadership, would lead the way in consolidating the Brazilian mobile telephony market, which currently has four major operators.

Now, the National Telecommunications Agency (Anatel) warns that CorpCo is at serious risk of being swallowed up by its rivals.

"It cannot be denied that entering the (4G) auction will be a challenge for Oi," Anatel's competition superintendent, Carlos Baigorri, told Reuters this week. "Any company that stays out of the next auction would become a niche 4G operator... It is very likely that the value of that company will start to bleed. Therefore, it is to be expected that it will be the company to be consolidated," he added.

CorpCo was founded with 48 billion reais in debt, almost six times the debt of the Brazilian unit of the Spanish company Telefónica.

To compete in the 4G auction, which is expected to take place in September, Oi may have to face heavy financing, said analyst André Baggio of JPMorgan. "If Oi doesn't buy frequencies, it could be at a competitive disadvantage in the long term," he said.

Reuters was unsuccessful in its attempts to speak with Bava, as well as with Portugal Telecom.

 

POWERFUL FRIENDS

Oi's shares fell about 25 percent last month, following revelations of Portugal Telecom's disastrous investment in a company owned by one of its largest shareholders.

Still, Bava's ace in the hole is an incipient alliance with BTG Pactual, the largest independent investment bank in Latin America and a shareholder in Oi, which used its influence to support Bava when he sought new deadlines for the merger this month, according to one of the sources.

With a background in finance, Bava, who earned the nickname "Zeus" for rescuing Portugal Telecom during his five years at the helm of the company, has already relied on BTG in a tight spot.

Bava was sounding out banks for an R$8,25 billion capital increase for Oi in April—the first step in the deal to create CorpCo. When some of them backed out, BTG, controlled by banker André Esteves, stepped in to support the operation.

BTG, whose goodwill secured it preferential treatment in the offer, channeled 2 billion reais to the company through a fund, which received 6,6 percent of CorpCo's shares.

Investors had hoped the new capital would help Oi improve its dwindling fourth-place ranking in the Brazilian mobile phone market, behind Vivo, TIM, and Claro, the latter controlled by the conglomerate of Mexican billionaire Carlos Slim, a personal friend of Bava.

EDGE OF THE ABYSS

Hopes were dashed this month when the investment group Rioforte defaulted on payments for debt securities purchased by Portugal Telecom, equivalent to 40 percent of its market value. Rioforte is owned by a Portugal Telecom shareholder who is under investigation for financial irregularities.

Oi was not informed of Portugal Telecom's investment in Rioforte prior to the merger.

The Brazilian National Bank for Economic and Social Development (BNDES), a partner of Oi through its investment arm BNDESPar, accused Portugal Telecom of poor governance, and some questioned whether the merger between the Portuguese group and Oi would survive.

Sources stated that Bava helped to calm tensions, convincing the Portuguese to assume the credit risk for the ill-fated loan and reducing his stake in CorpCo from the initially estimated 38 percent to 25 percent.

Oi's Finance Director, Bayard Gontijo, also went to the forefront of negotiations in Portugal, meeting with major investors such as the CEO of Andrade Gutierrez, Otávio Azevedo, according to the two sources.

Still, more than $1 billion in cash that Portugal Telecom should have invested in the merger is now out of the deal, without alleviating Oi's high leverage.

The mistrust that has arisen between Brazilian and Portuguese shareholders will also be a test of Bava's diplomatic skills, the second source said.

“The only reason he’s here is that he’s the last hope,” declared a prominent minority shareholder of Oi, who asked not to be named. “If he were fired now, the shares would easily plummet 30 percent. Things may be bad with him, but they would be worse without him.”

(Additional reporting by Alberto Alerigi Jr. in São Paulo and Andrei Khalip in Lisbon)