By Guillermo Parra-Bernal
SAO PAULO (Reuters) - Brazil's No. 4 wireless carrier Oi SA faces long odds in trying to reorganize under the country's complex bankruptcy code, offering rivals a chance to bolster their market dominance while leaving hopes for consolidation in the $45 billion industry on hold for now.
Brazil's largest ever bankruptcy filing at 65.4 billion reais ($19.4 billion), Oi's petition is fraught with challenges due to a complex debt structure and wide creditor base, analysts said. Similar cases such as airline Viação Aérea Riograndense SA's have taken at least four years to resolve in the past.
The byproduct of a state-sponsored merger eight years ago aimed at building a national champion in a market dominated by foreign players, Oi had been in discussions with creditors on ways to cut its debt by half.
A debt restructuring is essential to facilitate a takeover of Oi, which would help narrow the gap with larger rivals Spain's Telefónica SA <VIVT4.SA> and Mexican billionaire Carlos Slim's América Móvil SAB <AMXL.MX>.
Yet talks collapsed after key shareholders balked at the prospect of a restructuring dramatically cutting their stakes. The rift led to the exit of Chief Executive Officer Bayard Gontijo this month, speeding up the request for bankruptcy protection, a source familiar with the situation said on Monday.
Filing for court protection is Oi's last chance to avoid liquidation. Still, the law has failed to speed up recoveries as financial debt ranks below tax and labor obligations in repayment order, meaning wrangling over a bankruptcy can drag on for years.
The time-consuming nature of bankruptcies in Brazil will extend "the status quo for another two to three years, during which competitors may be able to continue to gain market share," said Michael Morin, an analyst with Morgan Stanley in New York.
Even if Russian billionaire Mikhail Fridman and Egyptian tycoon Naguib Sawiris resume their pursuit of Oi, other elements could make the process protracted. Brazil's harshest recession in decades and a political crisis that has delayed a long-sought overhaul in industry rules could work in favor of Telefónica and other rivals.
Officials at Oi said they were unable to comment, beyond the documents released as part of the company's bankruptcy petition.
While Oi has vowed to maintain service quality, operations could suffer as potential customers opt for rival carriers, or existing clients and suppliers severe ties with the company, analysts said.
"Oi's competitors were already facing a more favorable competitive scenario, which may improve further with Oi in trouble," said Luiz Azevedo, an analyst with Bradesco BBI.
In February, Fridman's investment firm LetterOne Holdings ditched an offer to pump $4 billion into Oi to finance the takeover of rival TIM Participações SA <TIMP3.SA>. Grupo BTG Pactual SA, which co-owns a sizable stake of Oi along with some clients, was brokering the deal.
Sawiris told Bloomberg News on Tuesday that he would be ready to invest in Oi if the company agrees on a restructuring, obtains fresh capital and outlines a strong industrial plan. Sawiris did not respond to calls seeking comment.
"There are bidders out there looking for assets with scale to buy," said Arturo Profili, who helps oversee 2 billion reais in fixed-income investments at São Paulo-based money manager Capitânia. "In Oi’s case, a buyer could negotiate to buy out the creditors at a significant discount."
Oi's common and preferred shares plunged around 20 percent on Tuesday, the day after the filing.
The process would be Latin America's largest in-court reorganization ever, dwarfing the 46 billion-real bankruptcy process of former billionaire Eike Batista's mining, energy and logistics conglomerate Grupo EBX in 2013, data compiled by Thomson Reuters showed. The EBX proceedings have not been completed yet.
After receiving the proposal, the judge in charge of the case usually rules on the petition within 10 days. Approval of the filing would give Oi 60 days to submit a recovery plan, granting the company a 180-day standstill period.
Risks of companies sinking during bankruptcy proceedings is high. According to Brazilian Corporate Recovery Institute estimates, half of the 1,287 companies that requested court protection last year may go bankrupt during the turnaround.
Given Oi's role in managing critical aspects of Brazil's telecommunications, including the largest fixed-line network, the government may seek to accelerate the process, Morgan Stanley's Morin said.
On Monday, industry watchdog Anatel said Oi will not be stripped of any operating license unless serious customer disruptions take place. The watchdog also pledged to assist Oi and its clients during the process.
The Communications Ministry vowed to discuss rules that could significantly reduce Oi's mandatory capital spending on its fixed-line network - which loses money on a regular basis.
Competitive challenges will mount throughout the process, adding to the very problems that accelerated Oi's downfall, analysts said.
Combined revenues at Telefónica, América Móvil, Oi and TIM Participações SA <TIMP3.SA> fell 1.7 percent last quarter, with Oi suffering most.
Earnings before interest, tax, depreciation and amortization (EBITDA) have slowed faster at Oi than rivals, especially in services, data compiled by Thomson Reuters showed.
Oi's mobile customer base has the highest disconnection rate in Brazil. Average first-quarter revenue per user at Oi fell 6 percent on an annual basis, while growing or holding steady at its three larger rivals.
(Additional reporting by Ana Mano in São Paulo and Sophie Sassard in London; Editing by Daniel Flynn and Tom Brown)