Why is Oi’s fiber unit drawing the interest of power firms?

Infraco, the fiber unit division put up for sale by battered Brazilian telecom operator Oi, is starting to attract interest not only from other telcos and telecom infra players, but also from electric power firms, which want to leverage the carrier’s vast fiber optic network.

Some 10 companies, including energy giants, banks and investment funds, have already looked closely at Infraco, which has about 388,000km of fiber in Brazil. These firms are reported to include Highline, infrastructure funds managed by BTG Pactual, Italian energy group Enel, Brookfield Asset Management and Canada Pension Plan Investment Board, according to local daily O Globo.

However, the number of interested parties could well increase, since Chinese companies are also expected to take part in the process.

Highline made a binding offer worth 1.08bn reais (US$197mn) for Oi's tower unit, according to a regulatory filing on July 18.

Wholesale telecoms provider Ufinet, jointly owned by Italian energy group Enel and UK buyout firm Cinven, made a preliminary offer to acquire Infraco, Reuters reported, citing sources close to the talks. Ufinet provides fiber infrastructure and transmission services to telecom operators across 14 Spanish-speaking markets, including Colombia, Panama, Guatemala and Costa Rica.

Enel had already bid on its own for Infraco, reported Brazilian magazine Exame. When contacted by BNamericas, Enel said it would not comment on the report.

Ari Lopes, head of Latin America at telecom consultancy OMDIA, said that these moves confirm the appeal of the fiber market and how this asset has a large intrinsic value that can be monetized.

“Of all the telecom services, fiber is the only one that has been growing strongly, and the big operators have let that slip away in recent times; they have left the growth to the small ISPs. Investors see a segment that has been growing a lot and which has become even more essential with the pandemic. It's a long-term investment that has become more interesting for different players,” said Lopes.

According to a report by energy consultancy Scott Madden, electric utilities can either monetize their fiber networks by creating a telecom unit and selling it directly to users via a retail approach or by leasing or licensing excess fiber capacity to telcos and ISPs via a wholesale approach.

The business consultancy says that one particular advantage for utilities is that their fiber networks are frequently installed on their transmission towers using optical ground wire, which has a measurable reliability advantage over ground-based networks.

OMDIA’s Lopes said that the current interest of utilities in the fiber networks of telecom operators is a curious change, since in the past the trend was the opposite, with the carriers interested in buying these networks from utilities.

TIM, for example, structured its entire fiber business in Brazil on top of the network it acquired from distributor AES Atimus in 2011.

BACKBONE

Oi operates a fiber optic network of more than 388,000km in Brazil and has about 14.7% of the country's fixed broadband market, or 4.98mn customers, of which 1.62mn are fiber clients.

Oi's FTTH service also reaches 800,000 commercial addresses (mostly small businesses) in 127 cities around the country. The company's goal is to double the base of these corporate customers who have access to internet via its fiber optic service by the end of this year.

In June, the group, which posted losses of 6.28bn reais in the first quarter, announced a far-reaching structural separation plan as part of its strategy to prevent insolvency.

The plan, which creditors still need to vote on in a meeting expected to take place in September, includes spinning-off and tendering four production units: mobile operations, towers, datacenters and infrastructure (Infraco).

According to the plan presented by Oi, the winning bidder for Infraco, the tender for which is expected to take place in the first quarter of 2021, will have to shell out a minimum of 11.5bn reais, of which 6.5bn reais will be for 51% of the common shares and a further 5bn reais for capitalization.

Oi will retain a minority stake in Infraco, of which it will also be a customer.

OMDIA’s Lopes said that no single buyer is expected to take on all of Oi’s fiber network due to its size and complexity.

In any case, the analyst believes that the market scenario in the fiber sector will become significantly more competitive and diversified in the coming years, with moves that include larger players buying smaller fiber optic operations and investors and private equity firms possibly forming partnerships to cash in on this market.

MOBILE

Meanwhile, the competition for Oi's mobile operation remains fierce. 

Lopes believe that the most likely scenario – although it would be far from simple to obtain regulatory approval – will be the purchase and division of the operation by the three biggest players in Brazil, Claro, TIM and Vivo.

On Friday, Oi announced that it entered into period of exclusivity with the trio after they presented a new joint offer for 16.5bn reais, outbidding the previous frontrunner DigitalColony/Highline. 

The agreement is intended to guarantee the security and speed of ongoing negotiations and allow bidders to be pre-qualified in the competitive process for the sale of the mobile assets once the negotiations are successfully concluded.

The exclusivity agreement may be renewed one or more times.