1. OI Challenges
Introduction
OI Telemaristhe biggesttelecommunicationproviderinBrazil.Currentlythe companyisfacingserious
issuesassociatedwithitsdebt. The creditorshasbeendumpingtheirOI bonds asthe Brazilianfinancial
and political crisisisdeepening.The real hasbeendevaluatingsteadily,the countryisina political
turmoil andthe investorsare bearishandbanksare facingissuesof theirown.Whatismore, the
completionhave beensteadilytakingalwaysmarketshare fromOI. Therefore,financingitsoperations
ishard for OI.The biggesthope forthe investorsnow isthe perspective of consolidation.
Crisis in Brazil
Currentlythe countyisfacingchallengesdue tothe high-costof long-termfinancingwithinthe country.
The Brazilianreal haslost 26% of itsvalue againstthe dollaroverthe last6 months andalmost3 quarter
of itsvalue overthe last3 years,due to the loosenedfiscal policyof Roussef’sgovernment. Thiscan also
be attributed due tothe decreasedgrowthandneedforcommoditiesbyitsmajortrade partner,
China.(1)Thisisexpectedtocause recessionof about3%.However,the decliningprice of the Brazilian
currencycan be an opportunityforthe exportingoriented businessesinthe country.(2) There isalsoa
lotof political instability,the currentgovernmentishighlyunpopularwithitsleftleaningpoliciesand
hightaxation. Publicspendinghasalsosurgedsince the currentrulingpartywaselectedin2001.(11)
Thisyear the governmentfailedtosetaside moneyforcoveringitsdebt.Althoughthe nationaldebtis
not that big,just66%, it hasa highinterestrate of 14%. Furthermore,there are several corruption
scandalsinvolvinghigh rankingofficials withone of the biggestpubliccompanies,Petrobras.This
political instabilityhascreatedpanicamongthe investorsandtheywere bumpingtheirassetsthe last
couple of months.
Due to the recentdowngradingbyS&Pof the Brazilianbondsto –BBB statusthe companiesare facinga
seriousliquidityproblem.Soitwouldbe hardfor mostof the companiestoissue new bondsnow
therefore theywouldhave toturnto the banks. Brazil has highconsolidate bankstructure.Publicbanks
alsoholdstrongpositions.(3) Actuallypublicbankshave beenlendingalotof moneyand have createda
great amountof bad debt.Thisisalso one of the reasonsthe Brazilianbondshave beendowngraded.
Furthermore,the internationaldebtsecurities(generallydenominatedineuroandUS dollars) of the
Brazilianbankshave beensteadilydecreasingsince 2013. Theywere around75 billionatthe firsthalf of
2015. The publicbankshave alsohave startedgivingcheapsubsidizedloans toassistthe businesses
whichare lookingtoborrowmoney,since asmentionedabove the interestratesforthe Brazilianstate
bondsare veryhigh.(11)
OI-background and history
OI wasfoundedin1998 as a mergerof a numberof 16 smallerpublicutilitycompanies. Thiswasa
resultof the breakup of Telebras in1998 the total value of the consortiumwas3.434 billionreals.At
the beginningTelemarcouldofferonlylocal services,howevernow the company offers longdistance
and internationalvoice anddataservices,besidesagrowingmobile phonenetwork. Bythe endof 2013
Oi was the biggesttelecommunicationcompanyinLatinAmericaintermsof bothrevenuesand
subscribers.

2. CurrentlyOi has3 majorsubsidiaries
OI Movel
Thisis the mobile networkof OI.Itwaslaunchedin2002. Now the companyalsooffers3G internet.
OI Internet
Thisis the Oi’sinternetserviceitwaslaunchedin2004.
Brasil Telecom
In 2009 OI purchasedBrasil Telecom.However,there were certaindifficultiessince the legislationdid
not allowapurchase of anotherfixedmobile company.
OI debt
CurrentlyOi isfacinga seriousdebtissue.Fromthe financial reportwe cansee that the total assetto
debtratiofor 2014 is 1.32 (111,215,133/ 84,062,056) whichingeneral isa good rationitmeansthat the
companyhas enoughassetstocoverits debts.(fromthe financial statements).Howeverthe current
ratioof the companylooksmuch better itis1.2(51,353,735/ 42,687,747)(pg 409-410, Financial
statements).The networkingcapital tototal assetsis NetWorkingcapital(51,353,735-
42,687,747=9,271,988)/Total assets(111,215,133), all thisequalsto0.83. The numberisclose to1 which
tellsusthat the companyhas generallygoodshorttermliquidity. Furthermore,the companyhasanet
lossof 4408 000 000 realsfor2014, whichshouldbe a grave concernfor itspotential abilitytopayits
debts(pg411). The CFO Guimaraesclaimsthatthe companywouldbe able to pay all itsdebtsupuntil
2017(5)(9). The thingsare evenworse consideringthe factthat mostof the OI’sdebtisin foreign
currency. What ismore inorderto reduce itstotal debtOIhiredRotschildto“to assessthe most
effectivewaytohandle proceedsfromsale of PTPortugal asit seekstoimprove itsdebtprofile.”What
ismore OIis on the wayto merge with EspiritoSantoInternationalbutthisverycompanyhasdefaulted
on itsdebt.(5) Despite thisOIsoldsome of itsassetsof Portugal TelecomtoAltice andthusto reduce
theirdebt.(6) The companyislookingtosell otherassetsinordertostart debtrestructuring,sothat it
can clear the prospectsof potential mergersthisSeptembershareholdersapprovedrestructuringplans
whichinclude the sale of some of the company’sfixedassets.(9) OIhasdecidedthatitwill sell PT
Portugal
Some of the mainreasonforthisfinancial misperforomance are the inflationrate of the Brazilianreal,it
affectsnotonlythe expensesof the companysince itpurchasesequipmentfromthe USA butalsoits
real-denominateddebtanditsdebtinUS dollars. Asitwas mentionedearlierthe crisisinBrazil affects
seriouslythe abilityof OItoborrowfunds both onthe exchange marketand throughbanks.(pg140,
Financial statements).The EuropeanCommissionhasagreedwiththatsale,the total value of PT
Portugal is6 900 millioneuro.(pg143, Financial Statements)
Foreign assets
Actuallythe companyhassharesin foreigntelecommunicationcompanies.MainlyinAfricaandAsia.
In fact,OI had netoperatingrevenue of 28millionrealsandnetlossof 4 millionrealscomingfromits
sharesinAfricaand Asia.(pg139 fromthe financial statements)

3. OI and the Brazilian telecommunication market
AlthoughOIisthe biggestprovidertolandlinephonestheyhave the smallestmarketshare inthe
internetmarket.Whatismore OI “lostpositionsonboththe fixedandmobile telephonyandfixed
broadbandin2014 In the reference period,itsmobiletelephonymarketshare droppedfrom18.5
percentto 18.4 percent,anditsfixedbroadbandmarketshare fell from26.4percentto 25.8 percent. Oi
onlygainedmarketshare inthe pay-TV segment,where itrose from4.6 percentto5.7 percent.“
The numberof the fixedlinesof OIhasdeclinedwithaboutamillionandcompanyis statingconcerns
overitsabilitytosustainrevenue growthtakingintoaccountthe slowdownof growthinbrazil(139,
Financial reports).Accordingtothe companythisisdue tothe risingcompetition inthe Brazilianmarket.
The recessioninPortugal has alsoaffectedOI.
Since,OIisseriouslyindebtedthiscanaffectalsoitscompetitiveness.The telecommunicationmarket
requiresconstantinvestmentinnewtechnologyinordertobe competitive.However,withitslimited
finance thiswouldbe areal challenge forOI.
OI talks of consolidation
Last monthTelcomItaliadeclaredthattheyare consideringamergerwithOI.HoweverItaliaTelecomis
wearybecause of OI’spolicytoexpandinthe fixed-line sectorinsteadof the mobileandinternet
market.(7) Anotherpotential mergeriswithTIM,the Russianbillionaire Mikhail Fridmanpromisedto
pour 4 billiondollarsintoOIif the mergertakesplace.However,the problemisthatthe governmentis
not verykeenonallowingamergerinthe telecomsector inorderto avoidtoomuch concentrationin
the industry. AccordingtoBloombergOIisone of the top 25 Braziliancompaniesthathave the greatest
chance to defaultontheirforeigndenominateddebt.(8)
Personal comments
The Braziliancrisisdoesn’tseemthatitwill endsoon,the nextelectionisin2018 and up until thanthe
PT party wouldremaininpowerandwouldmostprobablycontinue itsanti-businesspolicies.Despite
this, recentlyRouseff’soffice declaredthattheyitwill trimthe budgetwith10billionreals(2.6US
dollars),howeverthiswouldnotbe enoughtoavoidthe missingtheirgoal of annual surplus(12).All in
all,there isone thingthat makesinvestorshopefulaboutBrazil’sabilitytodeal withitsfinancial
problems.Firstly, Brazil isamemberof the so-calledBRICs.While someinvestorsandanalystspointout
that the Petrobrasscandal and the suffocatingBrazilianeconomyare the preludetothe collapse of
BRICs otherssaythat India,RussiaandChinawouldn’tletBrazil downthe slide andif adefaulttakes
place Chinaor any othercountrywouldmake sure to bail-outBrazil.
There isone good newsforthe Brazilianeconomy.Withthe Russianplane beingtakendownbyTurkish
anti-aircraftmissiles,RussiahasimposedsanctionsonTurkey’sexports.(13) Turkeygenerallyimports
foodsandtextilesinRussia,nowRussiaislookingfornew trade partnerandthat wouldmostprobably
be the LatinAmericancountriesandBrazil inparticular. Thiswouldhopefullygive someairtothe
Brazilianeconomyandturninvestorsbearish.ThatwayOIas well asotherstrugglingBrazilian
companieswouldbe able toborrowmoneyagain.

4. I thinkOi doesn’thave onlyfinancial troubles butalsosome veryseriousmarketingproblems. So,far
the company’sprioritywasto enlarge itsmarketshare inthe fixedlinesanddidnotpaythat much
attentiontothe potential of adsl and3 G internet.Asitismentionedinthe reportthe companyhas
beenlosingmarketshare inboththe internetandinmobile services. Generally,worldwidemobile and
internetserviceshave agrowingdemand,while the demandforfixedtelephonelinesisstable.Thiscan
be a seriouschallenge forOIasit desperate forhigherrevenues.
Investorsare lookingforaconsolidationandapotential purchase of OIbyFridman.Asmentioned
earlier,itis likelythatthiscanbe a seriouschallenge as the Brazilianlegislationdoesn’tgive muchspace
for majorconsolidationsinthe industry.Ithinkinvestorsshouldconsiderthe fixedassetsandgoodwill
that the companyhas can pay itsdebtsincase OI bankrupts.AsI have calculatedthe total assetsare
more than the total liabilities,the assettodebtratiois1.3.