France’s Altice ATC.AE -1.45% could be the key that unlocks a telecom puzzle in Brazil.
Patrick Drahi, the billionaire behind telecom company Altice, is in talks to buy Oi OIBR4.BR -8.43% ’s Portugal Telecom, PT -2.87% which could potentially fetch as much as €7 billion ($8.9 billion).
A deal could help reduce the debt load at Brazil’s Oi; it has net debt of about five times earnings before interest, taxes, depreciation and amortization on a five-year-average basis, according to FactSet.
That, in turn, could help resolve a long-standing issue for Telecom Italia. TIT.MI -1.16%
Brazil delivers three-quarters of Oi’s revenues, but an economic slowdown and stiffer competition has hurt sales. Oi needs to invest in domestic infrastructure to stay in the game.
The company’s deal to buy Portugal Telecom, agreed to last year, should have strengthened its balance sheet but instead left Oi embroiled in the collapse of Espírito Santo Financial Group. Oi’s Zeinal Bava, the architect of the merger, resigned as chief executive Tuesday, which could clear the way for a sale.
Selling Portugal Telecom could give Oi more financial flexibility to buy TIM Brasil, TIMP3.BR +1.26% the mobile operator 67% owned by Telecom Italia. In a market where bundles of services are proving popular, Oi would then be well positioned, with its fixed-line network combined with the second- and fourth-largest wireless carriers.
Antitrust regulators would likely require some assets to be sold to remaining competitors. But a consolidation led by Oi—the only Brazilian-owned telecom group left among the four biggest operators—could pass muster.
If Oi could demonstrate its ability to invest in fixed-line coverage, that could work in its favor. And TIM’s net debt is only about 0.2 times Ebitda. Depending on how a deal is financed, the combined company’s leverage should drop to below four times Ebitda.
Telecom Italia has expressed reluctance to sell: It counts on TIM for growth. But the Italian operator is also financially strapped, with net debt of three times Ebitda and is under pressure to invest at home. Having lost out to Telefónica TEF.MC -0.21% in buying Vivendi VIV.FR -0.65% ’s Brazilian network provider GVT, it is running short on options strategically.
Ultimately, both Oi and Telecom Italia need to prioritize investment on home turf over international expansion. For Oi, the quickest way there is to bypass Portugal.