The Canada Pension Plan Investment Board is joining a fund managed by Banco BTG Pactual SA to make a binding offer for the fiber unit of Brazilian telecom carrier Oi SA, according to people familiar with the matter.
The bid is expected Jan. 22, along with two other binding offers, said the people, who asked not to be identified because the matter is private. Highline do Brasil, part of Digital Colony, and Ufinet, which is backed by Italy’s Enel SpA, both plan to make bids for the business, they said.
Oi is planning to sell as much as 51% of its subsidiary, known as InfraCo, with a value for the whole company of at least 20 billion reais ($3.6 billion).
Representatives for Oi, the Canada Pension Plan, BTG and Digital Colony declined to comment. Ufinet didn’t immediately respond to a request for comment outside of business hours.
Oi has been working to pare down its operations while under bankruptcy protection. The struggling carrier raised 1.4 billion reais with the sale of towers and data centers last year. It also announced the signing of a deal with Brazil’s regulatory agency Anatel reducing the fines it need to pay by half, to 7.2 billion reais.
In December, Oi got approval from Rio de Janeiro Justice to sell its mobile-phone business to Telefonica SA, Telecom Italia SpA and America Movil SAB for 16.5 billion reais, but the deal still needs to be cleared by Anatel and the antitrust body Cade.
The minimum price of 20 billion reais for InfraCo is “just a start” and was set after the telecom operator received many nonbinding proposals, Oi Chief Executive Officer Rodrigo Abreu said in an interview in August. At the time, he said he saw “huge” growth prospects for the company, adding that it could be valued up to 30 billion reais.
After receiving the binding proposals for InfraCo, Oi will schedule an auction to sell the asset.
Oi’s voting shares rose 156% in Sao Paulo last year.
Brazil’s biggest landline carrier has been trying to push through a major debt restructuring since filing for bankruptcy protection in 2016. Oi, which has seen losses mount since 2019, divided its assets into five units. Proceeds from its divestments will be used to repay debt and fund the expansion of its broadband fiber network.
Even though the bid is expected on January 22, it's clear that CPP Investments and its partner, BTG, are putting together a serious bid for InfraCo, Oi's fiber unit (subsidiary).
In early December, it was reported that Oi was expecting to receive binding offers for up to 51 percent of its fibre assets, grouped under InfraCo, in January or February at the latest, according to VP for customers Bernardo Winik. Also, according to Teletine, the timetable is for the sale to be completed by the third or fourth quarter of this year.
The Brazilian telecom giant which filed for largest bankruptcy in Brazilian history at $19bn back in 2016, is expected to use the proceeds to pay down its massive debt and fund the expansion of its broadband fiber unit.
In June of last year, Reuters reported that Oi amended its bankruptcy plan to add the sale of its mobile unit:
Brazilian telecoms firm Oi SA announced late on Monday a proposed plan that, if approved by creditors, would allow the company to exit a long bankruptcy restructuring process that began in 2016.
Under the plan, Oi hopes to sell its mobile unit for at least 15 billion reais to refocus the company on its fiber network.
Brazil’s largest fixed-line carrier had approximately 65 billion reais ($12.65 billion) of debt when it filed for bankruptcy protection.
After selling some non-core assets, including its 25% stake in Angolan carrier Unitel, to release cash for the expansion of its fiber-to-the-home (FTTH) broadband service, Oi now seeks to amend its bankruptcy plan to add its mobile unit to the list of divestments.
All major rivals have expressed interest in buying Oi’s mobile business.
In March, TIM Participações SA and Telefonica Brasil SA informed Oi’s advisor Bank of America of their interest in kicking off talks for a potential acquisition of all or part of Oi’s mobile division.
Then, last month, Total Telecom reported that Brazil’s mobile market consolidates as Oi carved up by TIM, Claro and Telefonica. The joint bid of around $3.2 billion will see major rivals divide Oi's mobile business between themselves:
Back in summer, Brazil’s Oi, having struggled under financial pressure for some time now, made plans to split off its mobile business and prepare for a sale. The company sought around 15 billion reais ($2.9 billion) for the unit, with the funds raised to be used to reduce debt and further Oi’s fibre rollout.
The announcement quickly generated interest from all three of the company’s major rivals – TIM Brasil, Telefonica Brasil, and Claro Brasil – and ultimately a joint bid from the trio was the only one registered for the business.
TIM will be taking the lion’s share of Oi’s assets, taking on 40% of Oi’s customers (around 14.5 million people), over half of the company’s spectrum allocation (49 MHz), and 49% of its mobile sites (around 7,200 locations). Accordingly, it paid the largest portion of the bid, around 7.3 billion reai ($1.44 billion).
Telefonica paid around 5.5 billion reai ($1.08 billion), gaining 10.5 million customers, 43 MHz of spectrum, and 2,700 mobile sites. Meanwhile, Claro’s 3.6 billion reai ($710 million) gained the company around 11.6 million customers and 4,700 mobile sites, but no spectrum.
These pieces of the pie were carved out with national regulations in mind; TIM, with the smallest current share of the market, was allowed to buy up the largest share to ensure that market competition was not jeopardised.
With expensive 5G to rollout throughout the country, especially with an even further delayed spectrum auction, this purchase will provide a major boost to the three operators.
The deal will require regulatory approval from both the national regulator and the Administrative Council for Economic Defense, and is expected to close in 2021.
I expect this deal to close, and I expect CPP Investments and BTG's binding offer InfraCo will ultimately prevail.
In Brazil, Banco BTG Pactual (BTG) is the partner of choice, they're in the loop on every major deal taking place in the country.
Why is CPP Investments and BTG making an offer for InfraCo? Simply put, it sees a great long term opportunity to acquire these assets now from Oi which is focusing its attention on funding the expansion of its broadband fiber unit.
Brazil is growing, it needs to modernize its telecommunications infrastructure to remain competitive, and Oi will play an integral part in this.
And this is crucial as Brazil is still reeling from the pandemic and needs to move ahead.
Of course, some critics are warning that Bolsonaro’s mixed China policies could burn Brazil:
Brazilian President Jair Bolsonaro seemed to be walking on a tightrope, apparently favoring cooperation with China at the recent BRICS summit but doing his best to ban Huawei and Chinese-made vaccines from Brazil. These contradictory postures risk sinking the Brazilian economy and worsening the country’s Covid-19 epidemic.
At the 12th BRICS Summit last month, Bolsonaro pledged to work with the other four leaders (of Russia, India, China and South Africa) to address Covid-19 and economic recovery in the post-pandemic period. God only knows that Bolsonaro needs the support of his fellow BRICS leaders because it is the third-worst-hit country, after the US and India, in the world, in terms of infections and deaths from the disease.
The Brazilian economy was also one of the hardest hit by the pandemic, sinking nearly 10% in the second quarter of this year. But thanks in part to trade, particularly with China, the economy was expected to register positive growth in the last half of 2020, reducing economic contraction by only 4.7% for the full year.
But that economic “improvement” may evaporate if Bolsonaro succeeds in blocking Huawei and other Chinese-made equipment from the country’s 5G (fifth-generation telecommunications) rollout. In the first place, it will be costly and delay the country’s establishment of the 5G network because Huawei equipment accounts for more than half of Brazil’s four major telecom companies’ hardware, which explains why those firms were contemplating legal action against the Bolsonaro government.
Dismantling and replacing Huawei equipment could take years and cost telecom companies billions of dollars for no reason other than Bolsonaro “idolizing” his American counterpart Donald Trump. Brazilian telecom companies have been using Huawei products for more than two decades, yet there have never been any “national security” issues.
As well, installing Ericsson, Nokia or Samsung equipment is no guarantee that the country’s security will not be breached, because some parts of their equipment are produced in China or integrated into the same ecosystem.
As for Bolsonaro banning Chinese-made Covid-19 vaccines, it has nothing to do with safety or caution, but is just another decision influenced by his hero, Donald Trump. His excuse was that since the pandemic “originated” from China, Chinese vaccines are “untrustworthy.”
Such ideological biases against China and inept management of the Covid-19 pandemic could exacerbate Brazil’s health-care problems and increase the number of deaths from the disease.
Indeed, The Guardian reported on December 13 that one of Brazil’s news portals, Folha de Sao Paulo, had said Bolsonaro’s decision not to use Chinese vaccines amounted to “homicidal negligence.” The Brazilian news outlet complained that the government had abandoned the people, leaving them to die necessarily for ideological or political reasons.
Should Bolsonaro succeed in banning Huawei and Chinese vaccines, Brazil’s economy could “burn” for a number of reasons. First, the additional cost and delay in replacing Huawei equipment could distort the economy. Because 5G technology speeds up business decisions, thus making production and distribution of goods and services more efficient, its delay would put Brazilian industries at a disadvantage relative to other economies.
For example, Brazilian soybean farmers using Huawei 5G products increased production, one reason for the third-quarter economic expansion. The Chinese company’s 5G equipment offered fast broadband communication and real-time data processing, enabling farmers to retrieve the necessary information in one hour as compared with three days using older technology.
Furthermore, the rise in the cost of telecommunication services could reduce real household income, thus reducing consumption. Accounting for more than 85% of GDP in 2019, according to World Bank figures, an erosion in private consumption would undermine economic recovery.
Allowing policies to be dictated by Trump and personal or ideological biases, Bolsonaro could lead Brazil down the garden path, prolonging the recession and costing more human lives.
China is Brazil’s largest trade partner, with two-way trade exceeding 100 billion in 2019. A June 2020 Forbes report revealed that China bought 40% of Brazilian exports, mostly agricultural products and commodities such as iron ore.
As export markets dried up in the West and other major economies, China became even more important to Brazil. Surging numbers of Covid-19 infections in the West, Japan and India forced the imposition of harsher lockdown measures, prompting further economic downward movements.
China, on the other hand, is the only major economy expected to record positive growth of 2% and 8% in 2020 and 2021 respectively, allowing it to buy large quantities of natural resources from Brazil.
Chinese economic growth is maintained by domestic demand, and increasing consumption through urbanization and infrastructure investments. Building new cities and high-speed railways to connect them will require considerable iron and other commodities from abroad.
Taking the analysis to its logical conclusion, caving in to Trump’s demand that Bolsonaro “get tough” on or decouple from China would not only set the country burning, but could end the Brazilian president’s political career. Bolsonaro has only 37% of the people’s support, after all.
Indeed, Bolsonaro should consult with Australian Prime Minister Scott Morrison before he pursues his anti-China agenda. Australia’s economy is struggling to remain above water even though Morrison has strong public support for his anti-China policies, whereas many of Brazil’s political and business establishments are opposing Bolsonaro’s anti-China stances.
Biting the hand that feeds you can only lead to disaster, particularly if the reason for doing so is largely if not solely based on perceived threats. China has done nothing to Brazil, except help its economic development.
Brazil's economy is inextricably tied to China, as are those of many other nations, but Brazil is walking a tightrope here.
I think Brazilian President Jair Bolsonaro will allow cooler heads to prevail now that President Trump is on his way out, but I'm not sure the Biden administration won't have its say as to how Brazil rolls out its 5G network and whether it should use China's equipment.
All this won't impact CPP Investments' bid to acquire Oi's fiber unit but I'm giving you an important background as things are far from simple in Brazil and if its economy does falter for any reason (more than it already has), then that can impact the value of these assets CPP Investments is looking to acquire (over the short term, not over long term).
I'm more optimistic and so are markets as Brazilian stocks (most resource plays like Vale) are being bid up nicely lately:
We shall see how this all plays out but suffice to say that CPP Investments is looking to score a major deal in Brazil and I hope its binding offer prevails.
In other related news, last week, CPP Investments announced it committed up to €245mn to its U.K.-based platform – Renewable Power Capital Limited (RPC), in support of RPC’s first investment in European renewables. RPC was launched by CPP Investments in December 2020. See details here.
Below, CGTN Correspondent Paulo Cabral looks into Brazil’s economy in 2020 and its impact on the country’s politics. Like I said, Brazil is a powerhouse but it has its share of challenges. This is why investors like CPP Investments need strong partners when entering into these markets.