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Elliott adds to position in Brazilian telecom Oi

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Elliott Management and Oi

Elliott added to its position in Oi SA (OIBR) during the third quarter that ended in September 2014. The position accounts for 0.63% of the fund’s 3Q14 portfolio. At the end of 3Q14, the fund owned 75,271,747 shares in OIBR, up from 60,368,720 shares in the quarter ended in June.

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Overview of Oi

Oi is one of the main telecommunications service providers in Brazil. It offers a range of integrated telecommunications services for residential customers, small, medium, and large companies and governmental agencies.

Oi cited data from ANATEL and said as of December 31, 2013, it had an 18.6% market share of the Brazilian mobile telecommunications market. It ranked behind other players in the sector such as Vivo (owned by Telefonica of Spain), Tim Participacoes SA (controlled by Telecom Italia), and Claro (owned by Mexican billionaire Carlos Slim’s America Movil). As of April 30, 2013, Oi had a 41.4% market share of the Brazilian fixed-line market.

Oi rocky merger with Portugal Telecom

In October, 2013, Oi agreed to merge with its major shareholder Portugal Telecom (PT) to create a combined entity called CorpCo. Both companies together had $17 billion in revenue in 2012. A release said the combination will “create a leading telecoms operator with 100 million subscribers. The merger will consolidate the position of both companies as the leading operator for Portuguese-speaking countries.” The combined entity was expected to compete effectively against Oi’s rivals Telefonica, Telecom Italia, and America Movil.

However, in mid 2014, PT was forced to renegotiate terms and lower its stake in the merged entity to 25% from 38%. PT’s shares were impacted after a unit of Portugal’s troubled Banco Espírito Santo failed to repay more than $1 billion it owed to the company.

Oi also saw its CEO Zeinal Bava stepping down from the post in October. Oi is reported to have around $18 billion in debt and is seeking to unwind its merger with PT by selling assets in Africa and Portugal.

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Oi to participate in Brazil telecom consolidation

In October, Oi stated that it intends to participate in the consolidation of telecom industry in Brazil and to reduce its debt via asset sales. It announced plans to sell its 75% stake in Africatel Holdings BV. It said recently that Luxembourg-based cable holding company Altice will acquire its assets in Portugal. The deal is valued at around 7.4 billion euros ($9.2 billion). Altice is owned by Franco-Israeli billionaire Patrick Drahi.

Oi said it will use the proceeds to buy a stake in rival company Tim Participacoes SA. Reports noted that Tim’s parent Telecom Italia is also interested in acquiring Oi.

Posts decline in revenue and profit

The company said its monthly average net revenue for October and November rose 3.7%, compared with the monthly average for 3Q14. Adjusted EBITDA in the same period was 544 million reals (up 3.8%). In 3Q14, consolidated net revenues totaled 8.842 billion reals ($3.43 billion), down by 4.5% when compared to the 3Q13 pro forma revenue.

Total revenues from the operations in Brazil decreased 5.1% y-o-y, while revenues from the Portuguese operations dropped 4.5% y-o-y. Net income fell 96% to 8 million reals compared to a profit of 172 million reals a year earlier.

Elliott’s notable positions in 3Q14

The fund’s new holdings in the quarter include Family Dollar Stores (FDO), Time Warner Cable (TWC), and VMware, Inc. (VMW). It raised its positions in EMC Corp (EMC), Interpublic Group of Companies (IPG), 21st Century Fox (FOX), and Brazilian telecom giant Oi (OIBR). Notable exits were Mallinckrodt Plc (MNK) and Allergan, Inc. (AGN), while a stake in Juniper Networks (JNPR) was lowered.

The next part of this series will highlight the fund’s exit from Mallinckrodt Plc (MNK).

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