By Brad Haynes and Guillermo Parra-Bernal
SAO PAULO (Reuters) - Nextel operator NII Holdings Inc <NIHD.O> is hanging on to its Brazilian unit even though the welterweight mobile carrier has filed for bankruptcy protection in the United States and sold off other Latin American operations.
To pull off a turnaround in Brazil, the carrier is counting on regulations and broadcast spectrum that, because of its razor-thin market share, could give it competitive advantages unavailable to major rivals.
Such advantages would disappear if Nextel Brazil merges with a bigger carrier, one reason takeover talks never got off the ground despite a wave of mergers in the Brazilian market, according to two sources with direct knowledge of the situation.
NII Holdings, which has already sold its Chile and Peru operations and is looking to exit Argentina, will restructure its business around core markets in Mexico and Brazil, the first of those sources said.
"In Brazil, the goal is not to pursue a quick fix and sell it," that source noted. Both sources requested anonymity due to the sensitivity of the bankruptcy proceedings.
After seeking protection from creditors in a New York bankruptcy court on Monday, Reston, Virginia-based NII Holdings said its subsidiaries in Brazil, Mexico and Argentina would continue with "business as usual" and not take part in the process.
NII Holdings, which posted its ninth straight quarterly loss in the second quarter, declined to comment further. Its shares, which fell 37 percent to an all-time low on Monday, were up nearly 4 percent at 8.6 cents in Nasdaq trading on Tuesday.
Nextel Brazil said in a statement on Monday that it "is confident in its growth outlook and reaffirms its commitment to carrying out its activities in the country."
The company had few other options. Brazil's top four carriers and a number of private equity firms had a chance to look over Nextel's numbers, but none ended up making a binding offer, the second source said.
With Nextel left out of the industry's consolidation, Grupo Oi SA <OIBR3.SA> and America Movil SAB de CV <AMXL.MX> should remain focused on their talks to break up rival TIM Participações SA <TIMP3.SA>, which is controlled by Telecom Italia SpA <TLIT.MI>. Telefonica Brasil SA <VIVT4.SA> could also take part in a joint bid for TIM, sources have told Reuters.
Oi, America Movil, TIM and Telefonica each control between 19 percent and 29 percent of Brazil's wireless market, while Nextel is languishing in fifth place with about 1 percent.
Nextel has gotten help from Brazilian regulators, which exempt smaller carriers from paying interconnection fees, allowing them to offer more competitive plans to subscribers. It is also building its fourth-generation (4G) cellular network in Brazil's biggest cities on leftover spectrum that bigger players cannot use without exceeding regulatory limits.
To expand its 3G coverage, Nextel struck a five-year network-sharing agreement with Telefonica in May. The deal gave Nextel nationwide reach with the stroke of a pen, but its own 3G and 4G infrastructure is still limited.
The Nextel network has not appealed to potential buyers because much of it is still dedicated to a decades-old technology that lets customers use their cell phones like walkie-talkies. Smartphones now have an array of instant messaging options that have made the push-to-talk function obsolete for most users.
By transitioning to a network built for modern smartphones, Nextel has begun to attract more subscribers for its 3G plans in Brazil, including 234,000 net sign ups in the second quarter. But much of that growth has come from its push-to-talk subscriber base, which still makes up 3.1 million of its total 4.2 million users in the country.
In Rio de Janeiro, Brazil's second-biggest market, where Nextel began rolling out its 4G network in June, the company has added 70,000 subscribers for its top-speed service, increasing its share of the surrounding state's postpaid market to 19 percent.
(Editing by Lisa Von Ahn)