Thursday, June 23, 2016

Oi goes Bankrupt, But Has Not Made History, Yet

The former Brazilian monopoly provider now called Oi has filed the largest bankruptcy protection request in Brazil’s history. The request for a reorganization--not a dissolution--is not unprecedented.

Also, the action essentially will wipe out equity shareholders and force bondholders and other creditors to “take a haircut.” Oi obviously hopes that by doing so, it can reemerge as a sustainable entity.

What would have been remarkable, and history-making in a more profound way, was if Oi had filled for complete liquidation. That would have made it the first former monopoly telecom provider to completely disappear (not just be acquired). Oi bought the assets of the former monopoly provider Brasil Telecom and also acquired Portugal Telecom.

So far, no former incumbent telco, in any sizable country, has gone completely out of business.

Low market share in both mobile and high speed access were among the chief business model problems.

Brazil’s market leader is Telefónica Brasil (Vivo, owned by Spain’s Telefónica). TIM Participações (Telecom Italia) is number two while Claro (owned by Mexico’s América Móvil) is third. Oi ranks fourth.

Lots of U.S. telecom firms have gone bankrupt, notably many competitive service providers during the bursting of the the telecom and bubbles in 2001. In fact, the Dow Jones communication technology index has dropped 86 percent; the wireless communications index, 89 percent, between 2000 and about 2002, representing about $2 trillion in equity value.

At least 23  telecom companies went bankrupt, mostly in chapter 7 liquidations, many preceded by chapter 11 reorganizations. WorldCom’s bandruptcy was the the single largest in U.S. history up to that point, to be eclipsed only in 2008 by Lehman Brothers and Washington Mutual during the Great Recession of 2008.

So far, business model stress has not caused the disappearance of any former monopoly carrier. But neither does it appear such a possibility is impossible, either.

Restructuring is not dissolution. Oi might survive by shedding debt, shaving obligations to existing creditors and taking other actions. Eventually, Oi is likely to be sold, so its complete collapse and disappearance seems unlikely.

But Oi’s predicament illustrates the industry change. Even if a former monopoly firm were to completely disappear, it is virtually certain that other suppliers would have arisen to take its place. So, in answer to an old hypothetical question--can a telco go completely out of business?--the answer might now clearly be “yes.”

But even if that were to happen, the traditional arguments against such a fate--a nation would lose its communications services--no longer are true. There are other suppliers. And, in many cases, the newer suppliers have the upper hand.

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