Watching for opportunity

A hard-nosed investment fund has seized control of two of Brazil's most profitable mobile operators and a PCS licensee covering a further 41 million people

The fund in question is Opportunity, a powerful, but sometimes shady, Brazilian investment channel for money from inside and outside the

One of its main international backers is known to be Citibank but its real make-up remains hidden in a labyrinth of holding companies. The PCS licensee is Brasil Telecom, a fixed operator which covers Brasilia and the prosperous south of the country. The mobile operators are Telemig and Amazonia Celular, two formerly state-owned enterprises with over three million subscribers and dominant market shares in the centre and north.

Opportunity achieved control of the three operators with a ruthlessness worthy of a boardroom thriller. At Brasil Telecom it used to share the reins with Telecom Italia but the two fell out over universal service targets. Telecom Italia needed Brasil Telecom to anticipate the targets in order for aTelecom Italia Mobile (TIM) - to be able to use its PCS licences, bought at a cost of $900m. Opportunity decided that meeting the goals was not in Brasil Telecom's interest and persuaded other stakeholders, mostly pension funds, to back it. With TIM losing millions of dollars a week because it could not launch a service, Telecom Italia was forced to sell some of its shareholding (to Opportunity) and relinquish its seats on the board. Brasil Telecom later bought its own PCS licences for a mere $53m.

Telesytem International Wireless was the victim at Telemig Celular and Amazonia Celular, which have identical shareholdings. By cleverly wresting the voting rights away from the same pension funds that had supported it at Brasil Telecom, Opportunity effectively emasculated the Canadian company, which had led the buy-out consortium at privatisation. When no redress could be achieved in the courts, Telesystem decided to get out, selling its interest to Opportunity for a paltry $65m in March.

With Opportunity in charge, the three companies - known informally as the 'Grupo Opportunity' - are seeking to leverage their position with equipment vendors. The shopping list comprises a new network for Brasil Telecom and overlays for Telemig and Amazonia. Brasil Telecom plans to invest up to $350m on network build-out over three years and the two active operators estimate it will cost about $180m to migrate their networks from TDMA.

But this is unlikely to be a straightforward deal. First, Brasil Telecom, which has debts of $1.2bn but is underwritten by a profitable fixed line business, expects to extract exceptionally favourable terms from suppliers.

Financing of 120 per cent is one term being demanded, according to Teletime, a Brazilian newswire. Nor is it certain that GSM will be the standard, despite the fact that Brasil Telecom's licences are in 1800 MHz spectrum.

The chief executive told analysts this May that a CDMA 1800 platform from Samsung was under consideration. Given that CDMA 1800 is not used in the Americas this is probably a negotiating ploy. "Choosing CDMA would be a very risky strategy for them," says Juliana Abreu, Pyramid Research's wireless analyst for Brazil.

But some voices are questioning whether Brasil Telecom will build much of a network at all after it announced it was investigating network-sharing with TIM. The reasoning is that in most of its areas it will be entering as a fourth operator. This is an unenviable position in Brazil as the experiences of Oi and TIM have shown: by March this year Oi had 1.7 million subscribers while TIM, coming in as a fourth operator (in part because of the quarrel between Telecom Italia and Opportunity), had only 444,000 despite its nationwide footprint. Network-sharing would allow Brasil Telecom to offer a competitive service to its existing customers, particularly corporations, and thus protect its revenue streams from any fixed-mobile substitution in the future. TIM's interest would be getting a quicker return on investments in Brasil Telecom's vast territory.

Juliana Abreu of Pyramid, however, thinks network sharing at a switching level is unlikely. She points out that Brasil Telecom's licence is linked to the use of its spectrum and that regulations still do not permit MVNO type arrangements. "Also it was quite recently that Telecom Italia and Opportunity were in a fierce dispute so they would not be easy bed-fellows" she says. Sharing infrastructure through co-siting of base-stations, however, is more or less inevitable given the precedents set by TIM, Oi and Telecom Americas.

But even as Brasil Telecom, Telemig and Amazonia Celular iron out their plans and talk to suppliers, Opportunity's real direction is hard to read.

A merger of the three companies could probably take place only if Brasil Telecom bought the two cellular operators. Significantly, Opportunity has been moving to increase its control of the fixed operator. But even a merged company would be unbalanced - dominant in some regions, a fourth player in others, and absent in the big cities of Rio and Sao Paulo. Clearly Grupo Opportunity does not plan to stop here.