| SAO PAULO, July 25
SAO PAULO, July 25 For Brazil's struggling Grupo
Oi SA, it seems the only stock rising these days is
that of its Chief Executive Officer Zeinal Bava.
When an 897 million euro ($1.21 billion) default threatened
to scuttle Oi's merger with Portugal Telecom SGPS SA,
Bava played a key role in talks that saved the deal. A new
accord shielded Oi from potential losses and forced Portugal
Telecom, his former employer, to bear their brunt.
Bava, who left the top job at Portugal Telecom when he took
the reins at Oi last year, soothed the nerves of Oi's Brazilian
shareholders while coaxing the Portuguese into reducing their
stake in the combined company known as CorpCo, according to two
sources with knowledge of the negotiations.
"He was determined not to let this deal founder," said one
source, who asked not to be named because the talks were
Both sources said the resolution strengthened Bava's hand.
But his company's position is as delicate as ever, with debt
ratings sliding into junk territory and a costly auction of
fourth-generation (4G) broadcast spectrum around the corner.
Just a few months ago, rumors swirled that a freshly
capitalized Oi with Bava in charge would lead the consolidation
of Brazil's stagnant four-way mobile market. Now regulators warn
that CorpCo, the combined company, is at the greatest risk of
being gobbled up by rivals.
"You can't deny that entering the auction will be a
challenge for Oi. It's going to have a harder time raising
cash," Carlos Baigorri, the superintendent of competition at
industry regulator Anatel, told Reuters this week.
Skipping the auction would make CorpCo a niche 4G player,
exposing it to takeover attempts by rivals, Baigorri added.
CorpCo was born with 48 billion reais ($21 billion) in debt,
nearly six times the indebtedness of Telefonica SA's Brazilian
To compete in the 4G auction, expected in September, Oi may
have to take on expensive financing, said André Baggio, an
analyst with JPMorgan Securities. "If Oi does not buy spectrum,
it could be under a long-term competitive disadvantage."
Oi declined to make Bava available for comment. Oi and
Portugal Telecom both declined to comment.
Over the past month, Oi shares fell about 25 percent after
revelations of Portugal Telecom's disastrous investment in a
company owned by one of its own major shareholders. Five-year
credit default swaps, an instrument by which Oi bondholders can
insure against a potential default, jumped 21 percent in the
Still, the ace up Bava's sleeve is a burgeoning alliance
with shareholder Grupo BTG Pactual SA, Brazil's
largest independent investment bank, which threw its weight
behind Bava as he pushed for new merger terms this month,
according to one source.
With a background in finance, Bava, who won the nickname
"Zeus" for turning around Portugal Telecom during his five years
in charge, has already counted on BTG Pactual in a pinch.
This spring, Bava was rounding up banks for an April capital
increase of 8.25 billion reais - the first step in the deal to
create CorpCo. When some banks got cold feet, BTG Pactual, led
by CEO André Esteves, stepped in to backstop the deal.
BTG Pactual, whose eagerness earned it the lead mandate for
the offering, funneled 2 billion reais into the company through
a fund, giving it a 6.6 percent stake in CorpCo.
Investors hoped fresh capital would help Oi climb out of its
fading fourth place in the Brazilian wireless market, taking on
the well-financed local units of Telefonica, Telecom Italia SpA
and America Movil SAB de CV, owned
by Mexican tycoon Carlos Slim, a personal friend of Bava.
BACK FROM THE BRINK
Those hopes were rattled this month when holding company
Rioforte failed to repay a debt investment from Portugal Telecom
equal to 40 percent of its market value. Rioforte is owned by a
Portugal Telecom shareholder that is under investigation for
Oi was not told of the investment before the merger.
Shareholders Andrade Gutierrez SA and LF SA quit Portugal
Telecom's board in protest. Brazilian state development bank
BNDES accused Portugal Telecom of faulty corporate governance,
and some questioned if the merger would survive.
Oi's largest shareholders declined to comment.
Sources say Bava helped bridge the transatlantic divide,
convincing the Portuguese to take on the credit risk for the
ill-fated loan and cut their initial stake in CorpCo to 25
percent from 38 percent.
Oi Chief Financial Officer Bayard Gontijo also took to the
front lines of negotiations in Portugal, joining major investors
including Andrade Gutierrez CEO Otavio Azevedo, according to two
Still, more than $1 billion in cash that Portugal Telecom
should have brought to the merger is now off the table, leaving
Oi in a familiar, highly leveraged position. Fitch Ratings
stripped Oi's investment-grade credit rating last week.
The distrust that has sprung up between key Brazilian and
Portuguese shareholders will also put Bava's diplomatic skills
to the test, the second source said.
Yet investor confidence in Bava, which boosted Oi shares
over 15 percent on the day he was named CEO, shows little sign
of flagging. Even some of Oi's minority shareholders, who have
long feuded with controlling owners and criticized the current
merger, acknowledge the industry savvy that Bava provides.
"The only reason he is still here is that he is the last
hope," said a prominent minority shareholder in Oi, who asked
not to be named. "If you fired him now, shares would easily fall
30 percent. Things may be bad with him, but it would be worse
($1 = 2.225 Brazilian reais)
($1 = 0.743 euros)
(Additional reporting by Alberto Alerigi Jr. in Sao Paulo and
Andrei Khalip in Lisbon; Editing by Todd Benson and David