China Mobile (CHL), the largest wireless carrier in China, is reportedly teaming up with tech giant Huawei in a joint takeover bid for Oi (OTC:OIBR.C), one of the largest telcos in Brazil, according to the Brazilian media outlet O Globo. However, Huawei subsequently denied that it was interested in Oi, while China Mobile hasn't commented on the matter.
Oi is Brazil's largest fixed-line carrier and fourth largest wireless carrier, but it filed for bankruptcy protection in 2016 to restructure roughly 65 billion reais ($15.7 billion) in debt. The restructuring was completed last July, and Oi ended last quarter with 16.9 billion reais ($4.1 billion) in consolidated debt.
China Mobile and Huawei aren't Oi's only rumored suitors. Reuters claims Spain's Telefonica (TEF 0.96%), Italy's Telecom Italia, AT&T (T -0.46%), and another Chinese company have all expressed interest in some of Oi's assets.
Telefonica's Vivo and Telecom Italia's TIM are already the first and third largest wireless carriers in Brazil, respectively, so a takeover of Oi could spark antitrust concerns. It also seems doubtful that AT&T, which is still trying to extinguish the debt from its $85 billion takeover of Time Warner, is eager to take on more debt by acquiring Oi. Therefore, China Mobile and Huawei might actually be serious contenders.
Understanding China Mobile and Huawei's troubles
China Mobile had 941.3 million wireless subscribers at the end of August, up from 938.6 million in July. Its total number of wireline subscribers also rose month-over-month from 178 million to 180.8 million.
Those growth rates look healthy, but China Mobile faces three major headwinds: a government-mandated reduction in wireless fees, the rising costs for upgrading its networks to 5G, and the saturation of China's smartphone market. China Mobile previously tried to expand into the U.S. telco market by applying for a FCC license in 2011, but that approval remained in limbo until it was finally denied earlier this year.
Huawei sells mobile devices, PCs, networking hardware, and other networking infrastructure components. However, all of those businesses have come under fire over the past year as the U.S. accused Huawei of violating sanctions with sales of products to Iran and North Korea and stealing trade secrets from a U.S. chip designer.
In response, the Trump Administration banned American companies from providing components and software to Huawei, but subsequently eased those sanctions as part of the ongoing trade negotiations between the U.S. and China. Those headwinds caused sales of Huawei's phones, networking hardware, and other products to grind to a halt in the U.S.
How buying Oi addresses those issues
Oi had 35 million wireless customers, 14.7 million residential wireline, broadband, and pay TV customers, and 6.7 million business-to-business (wireline, mobile, and broadband) customers at the end of 2018.
That's only comparable to 4% of China Mobile's wireless base and 8% of its wireline base, but it gives the telco a firm foothold in a new overseas market to reduce its dependence on China. Until now, China Mobile's overseas expansion has been limited to the acquisition of a Pakistani carrier and investments in Africa and other developing markets.
Oi expects nearly all of its wireless customers to be upgraded to 4.5G plans by the end of the year, which would make it easier for a full 5G upgrade. Oi's network is currently powered by components from Nokia (NOK -0.42%) and Huawei, which both supply components for China Mobile's network in China.
China Mobile, as part of its deal with Huawei, might cut Nokia out of the loop for 5G upgrades in Brazil and exclusively order components from its partner. It could also offer big promotions for Huawei smartphones via Oi, which would help Huawei gain ground in a country mainly dominated by Samsung, Lenovo's Motorola, and Apple.
But that plan could run into resistance
In short, buying Oi could help China Mobile and Huawei offset some of their troubles in the U.S. and other like-minded markets. However, Oi is still loaded with debt, the Brazilian economy had an anemic GDP growth rate of 1% last year, and the Brazilian real shed significant value against the yuan over the past five years.
Moreover, Brazilian regulators could block the deal due to China Mobile and Huawei's links to the Chinese government. China Mobile is a state-backed enterprise, while Huawei has myriad connections to China's military and intelligence agencies. Letting those two companies take over one of Latin America's biggest telcos would definitely raise a few eyebrows.
It's all speculation for now
Investors should take all this with a grain of salt, since O Globo's report didn't cite any clear sources and Huawei already denied the report. China Mobile might still be interested, but it's all speculation for now since the risks could easily outweigh the potential benefits.