Oi S.A.; market cap (as of 14/11/2014): $4.16bn
PT Portugal SGPS S.A.; market cap (as of 14/11/2014): $1.46bn
Bain Capital LLC; AUM: $75bn
Apax Partners; AUM: $20bn

On November 12, 2014 two major private equity funds, Apax Partners and Bain Capial LLC, have submitted a €7.075bn offer for the Portuguese assets of Oi, the Brazilian provider of telecommunication services. The offer slightly exceeded the €7.025bn bid made earlier this month by Altice SA, Patrick Drahi’s France-based telecommunications group. The proposed acquisition also sparked waves of speculation about a potential bidding war, with Portugal’s recently-privatised postal service, CTT, emerging as a likely third competitor.

According to Oi’s press statement, Apax-Bain combined offer also includes two deferred payments, dependent on the business performance of Portugal Telecom’s assets: an earn-out payment of €400m related to future revenue generation, and another €400m related to the company’s EBITDA generation. Important to note, the offer refers to the sole Portuguese assets, without net debt assumption, excluding also PT Portugal’s 75% stake in Africatel and its investments in Rio Forte Investments S.A.

As if it was not complex enough, the interference of Isabel dos Santos, the daughter of Angola’s president and Africa’s richest woman exacerbates this scenario. Ms dos Santos affirmed to be willing to keep the Oi – PT group intact. Hence, she sought to stop the sale with a bid of €1.2bn for PT Portugal SGPS, the holding company that owns Portugal Telecom’s 25.6% stake in Oi. Indeed, if successful, Ms dos Santos would become a majoritarian shareholder and would make her voice heard in the board. Yet, in her pursuit, she has received fierce critiques by Oi: the Brazilian company has not supported the bid as it interfered with Oi – PT merger. Moreover, Portugal Telecom SGPS has veto rights over a sale of the Portuguese assets, according to two people familiar with the matter.
Oi merged with Portugal Telecom (PT) in May 2014, but the deal has since proved unsuccessful for the company, mostly due to PT’s investment decisions. Its €900m investment in Rio Forte S.A., a unit of Banco Espirito Santo, resulted in a disaster after Rio Forte defaulted on its debt. This caused PT’s stake in the merged company to fall from 38% to 25.6%. Allegations that soon emerged about PT’s management knowingly concealing information from Oi and the market, resulted in a ca.50% share price drop over the past six months and ultimately even the resignation of Zeinal Bava, Oi’s chief executive. The company has since been looking to dispose of these assets, along with its African business unit.

Oi’s €18bn debt and persistent negative FCF generation have constrained the company from making key investments for network upgrades, which has in turn hurt its market shares and revenue growth amid aggressive capital investments. At the end of the second quarter the group has reported a net loss of BRL221m (Brazilian reals), almost twice the last year’s BRL124m Q2 loss. Moreover, its 2014 Q2 debt has been around BRL46bn, up BRL30bn from the same period in the past fiscal year. Given such difficult financial position, the sale of assets seems quite likely to happen very soon.

The proposed sale would provide financial resources for Oi’s capex, estimated to be BRL5.5bn annually, which could improve the company’s operational competitiveness and help offset negative FCF, projected to continue at least until 2015. In addition, with the potential PT deal proceeds, Oi would be able to pursue the planned acquisition of TIM Participaçoes, Telecom Italia’s Brazilian unit, possibly in a joint offer with Telefonica SA, Spain’s largest telecommunications group, and America Movil SAB, the Mexican telecoms company. Thus, the strategic rationale behind the PT sale is not only Oi’s attempt to cut its high amount of debt and improve its cash position, but also its aim to further strengthen its presence in the Brazilian telecoms market, which has recently shown signs of a consolidation process.

“My objective is to create shareholder value, so I don’t have and won’t have any prejudice in how we’re going to do that,” Bayard Gontijo, Oi’s interim chief executive officer, said during a conference call with analysts on November 14 when asked whether Oi could merge with Tim.

PT Portugal’s assets would be highly valuable for a strategic buyer: the company has a leading position in fixed line and broadband, boasting a 53% market share in Portugal. According to Citigroup, for what concerns revenues, the company generates around 41.5% of the whole mobile market, competing with giants like Vodafone (41.6%) and smaller players like Nos (16.9%).

Altice SA has declared that its long term perspective and business plan would lead to better employment of PT assets due to its existing communication businesses in Portugal (Cabovisao and Oni), no binding conditions and an already fully financed deal (cash and debt). Moreover, people familiar with the matters said Altice intends to make investments and preserve jobs in Portugal, two issues local authorities are likely to be sensitive to. On the other hand, private equities may have an advantage over Altice because any regulatory process “is likely to be signficantly faster,” according to Pedro Oliveira, an analyst at Banco BPI SA.

Following the offer announcement, Oi’s shares increased by 2.24%, outperforming Sao Paulo’s main stock exchange, which made a 1.1% increase during the day.

(1 BRL = 0.384 dollars, as of 14/11/2014); (1 BRL = 0.307 euros, as of 14/11/2014)

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