Analysis: Oi’s 'make-or-break' strategic plan

As Oi paves the way to exit the bankruptcy protection it filed for in June 2016, the Rio de Janeiro-based telecom group presented a new multi-year strategic plan.

Unlike previous plans, this one is fiber-centric operationally speaking, putting the company’s vast national fiber backbone at the core of the turnaround push. 

There is also for the first time a structured wholesale business strategy. And, financially, the plan centers around more and massive divestments and the injection of more capital.

The plan was presented on Tuesday in a conference call by its CEO and other top executives. The Boston Consulting Group, Oliver Wyman and Bank of America Merrill Lynch advised Oi on the new strategy.

The company said it is exploring all strategic options to maximize shareholder value and is pursuing a new program to cut costs by more than 1bn reais (US$266mn) in about two years. 

If all goes well, the plan is expected to generate 2% annual revenue growth and increase by more than two times the company’s market value, the executives said on the call.

“This is a very important milestone for the company,” Oi’s to-be-named CEO Rodrigo Abreu said. Abreu, who in the past ran Oi rival TIM, was recently appointed to join the company’s board and is expected to take over as CEO in December.

To fund its new strategy, Oi plans to divest non-core assets and release cash through non-operational actions, foreseeing a potential impact of 14.5bn reais by 2021, which includes 4bn reais in an already cashed in capital increase.

The divestment of non-core assets could generate another 7.5bn reais by 2021. These include the sale of towers, with cash-in estimated for 4Q19; the divestment of Angolan telco Unitel, expected to take place by the end of this year; the sale of datacenters in the first half of next year; and divestment of real estate properties by the first quarter of 2021.

Additionally, the telco is expecting favorable court decisions regarding tax credits to bring in up to 3.1bn reais. About 2bn reais have already had a favorable ruling and the next months could see around 650mn reais pouring in as a result of such decisions, the company said.

According to Abreu, the overall capex level should be near 7bn reais, which is slightly less than what the company has been investing. 

“I think they’ve got a strategic plan that makes sense and at least for the next two or three years they’ve got the funding in place to execute it before interest payments and principal amortizations really begin again in 2022 and 2023,” Sul Ahmad, associate director of corporate ratings at Fitch LatAm and an expert on Oi, told BNamericas.

The overall sense is that Oi will now be able to “breathe.”

“Oi has been having tough moments even before entering judicial restructuring, And dealing with that two-year long bankruptcy process while its rivals were all able to invest and the company was just really focusing on its debt restructuring was hard,” Ahmad said.

Fiber

The strategic plan is all structured around Oi’s 360,000km of fiber optics, which is said to be two times longer than that of the closest competitor.

“I think Oi is on the right track with this plan. The fiber network is a highly valuable asset for the company, probably the most valuable of all, while its mobile operation has presented a lower ARPU and the company is only the fourth mobile player in Brazil,” Ari Lopes, principal telecom analyst at Ovum, told BNamericas.

To Fitch’s Ahamad, the nationwide fiber backbone is Oi’s competitive strength and it makes sense for the company to put it first instead of mobile. “And the mobile landscape in Brazil is much more competitive than fixed line and fixed broadband,” he added.

Oi said it aims to leverage on its non-replicable fiber network to become the fiber-to-the-home (FTTH) national leader, but also a “5G enabler” as the next generation of mobile technology will strongly rely on high-capacity transport networks. 

Under the plan, on the retail side the goal is to take fiber optics to 16m homes by 2021, which is 66% more than what was announced in the plan’s first version. For this year, Oi said that execution is on track to upgrade the homes-passed (HP) target to 4.6mn homes from 3.7mn. 

The telco serves 2,270 cities with fiber optics, 1,000 cities more than its rival Vivo, and claims to have the highest integrated infrastructure among the country’s telcos, with 43,000km of ducts.

Oi estimates 30% CAGR from fiber revenues between 2019 and 2014, which it expects will offset an expected copper revenue decline in the period.

The company is betting on cheaper and faster FTTH deployment, with superior quality and lower churn, by working with a network reuse approach. 

Oi said that fiber construction costs are 30% lower with the reuse, which builds up on its existing fixed network. Furthermore, Oi claims that fiber would have 30-50% lower maintenance costs versus copper.

Wholesale

The company said it aims to become a national provider of transport networks for ISPs and other telcos, and projects nearly doubling its wholesale revenues to 3.2bn reais by 2024. 

In 2018, the wholesale market in Brazil was valued at 9bn reais, according to Oi.

To achieve the goal, Oi plans to expand opportunities to exploit the full potential of the unregulated fiber market, by selling IP connection to ISPs, expanding fiber to the site/antennas, and increasing duct/fiber sharing with other operators and ISPs.

B2B

In its new strategy, Oi is also focusing on the corporate business side.

The company's B2B unit has now been rebranded as Oi Solutions and the idea is to position it as an integrator and provider of telecom and ICT solutions, accelerating partnerships with startups and consolidated IT players.

ICT revenue is expected to be the main driver of growth in this segment, offsetting the corporate revenue decline from 2021 onwards, the executives said. 

Oi aims for ICT as a share of corporate revenues to reach 32% in 2024, or 1.04bn reais, compared to 10% in 2018.

Mobile

The strategy for the mobile segment was also tweaked, although changes in this case have been less comprehensive.

In essence, mobile is more than ever a service of the fixed business. The company estimates 1.5bn reais in capex for mobile this year, which would be 7% less than last year's capex.

Oi said it will seek to optimize and capture all pockets of value to maximize strategic options - and the sale of the mobile operations remains on the table.

The possibility of a merger is extremely complex and according to some analysts would not occur before Oi leaves its judicial recovery behind.

There would also be regulatory issues since a rival's purchase of part or the totality of Oi's mobile operation would clash with current spectrum cap limitations.

 “Our plan preserves all options for the future, including eventual inorganic [growth] and M&A possibilities, so if new possibilities appear, we will consider [them],” Abreu said on the call.

“The plan opens multiple alternatives and the group's sustainability does not depend on the sale of the mobile segment,” he added.

Fitch does not see a reason for Oi to sell its mobile business.

“I don't think that the company necessarily needs to sell its mobile business to finance its expansion," Ahmad said. "Based on my projections and on what we’ve been looking at here, when you take the company cash flow from operations versus their investment needs, we are not factoring any sale of the mobile unit.”

In Ahmad's opinion, the cash flow presents stabilization and is sufficient to sustain the 7bn reais in planned investments for the next years, including the 1.5bn reais for the mobile business provided for in the new plan.

But the clock is ticking. To Fitch, the make-or-break period for Oi to successfully execute its turnaround strategy is 2-3 years.

2020 auction 

Because of all the variables in place, Oi is still studying whether to take part or not in the 2020 spectrum auction. 

This auction will award remaining 700Mhz bands from the 2014 second 4G auction - of which Oi, which was already in financial troubles, did not participate - and 5G frequencies. 

According to Abreu, the presence of Oi in next year’s auction will depend on the tender terms, on the evolution of the business plan, and whether it will generate value for shareholders.

“If the spectrum licenses are too expensive, I don’t think Oi will take part. Unless further new capital comes in,” Ovum’s Lopes said.

It is also possible that Oi only bids for the beefy 700Mhz bands. 

"Planning for the future of 5G, which may be three to four years down the road, is really as important as shoring up its 4G network?" Ahmad said.