Oi's absence from 700MHz auction opens M&A door - Moody's

Brazilian telecoms carrier Oi's decision not to bid in the upcoming 700MHz auction for 4G LTE technology is negative in the longer run and could pave the way for it to be acquired or merged, credit ratings agency Moody'ssaid in a report.

According to Moody's, the decision is seen as "credit neutral" in the short term, but could weaken the company's competitiveness and reduce its ability to survive alone in the longer term.

"Eventually, it will pressure the company and probably force it to seek a merger," the agency wrote.

Moody's said Oi's "persistent negative free cash flow" combined with high leverage has been forcing the operator to pull back on investments. Analysts BNamericas spoke to said that Oi's decision was "coherent" with its financial situation and frequencies strategy.

However, the absence in the tender could be negative in the future if the company is not able to acquire new bands in other upcoming auctions or to join a competitor operating on other frequencies, according to Moody's.

"We see this as a strategic auction for the four largest companies in the sector in the country, amid a context of growing 4G coverage and improvement of broadband speed to support data consumption," said Moody's.

In a statement, Oi said it expects to acquire bands in the 1.8GHz spectrum, currently used for the declining 2G technology.

Moody's reference to a competitor of Oi seems to be Nextel Brasil, which also decided not to take part in the tender but has important frequencies.

Like Oi, Nextel claimed it was looking at the 1.8GHz bands, mostly to serve the São Paulo metropolitan region. Currently, the operator owns 1.8GHz bands in other states and regions.

According to some analysts, Nextel, whose parent company recently filed for bankruptcy, could well merge with Oi and is a cheaper asset than TIM, which Oi hinted it is aiming to buy.