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SAO PAULO, July 25 (Reuters) - For Brazil's struggling Grupo Oi SA, it seems the only stock rising these days is that of its Chief Executive Officer Zeinal Bava.
When an 897 million euro ($1.21 billion) default threatened to scuttle Oi's merger with Portugal Telecom SGPS SA, Bava played a key role in talks that saved the deal. A new accord shielded Oi from potential losses and forced Portugal Telecom, his former employer, to bear their brunt.
Bava, who left the top job at Portugal Telecom when he took the reins at Oi last year, soothed the nerves of Oi's Brazilian shareholders while coaxing the Portuguese into reducing their stake in the combined company known as CorpCo, according to two sources with knowledge of the negotiations.
"He was determined not to let this deal founder," said one source, who asked not to be named because the talks were private.
Both sources said the resolution strengthened Bava's hand. But his company's position is as delicate as ever, with debt ratings sliding into junk territory and a costly auction of fourth-generation (4G) broadcast spectrum around the corner.
Just a few months ago, rumors swirled that a freshly capitalized Oi with Bava in charge would lead the consolidation of Brazil's stagnant four-way mobile market. Now regulators warn that CorpCo, the combined company, is at the greatest risk of being gobbled up by rivals.
"You can't deny that entering the auction will be a challenge for Oi. It's going to have a harder time raising cash," Carlos Baigorri, the superintendent of competition at industry regulator Anatel, told Reuters this week.
Skipping the auction would make CorpCo a niche 4G player, exposing it to takeover attempts by rivals, Baigorri added.
CorpCo was born with 48 billion reais ($21 billion) in debt, nearly six times the indebtedness of Telefonica SA's Brazilian unit .
To compete in the 4G auction, expected in September, Oi may have to take on expensive financing, said André Baggio, an analyst with JPMorgan Securities. "If Oi does not buy spectrum, it could be under a long-term competitive disadvantage."
Oi declined to make Bava available for comment. Oi and Portugal Telecom both declined to comment.
Over the past month, Oi shares fell about 25 percent after revelations of Portugal Telecom's disastrous investment in a company owned by one of its own major shareholders. Five-year credit default swaps, an instrument by which Oi bondholders can insure against a potential default, jumped 21 percent in the same period.
Still, the ace up Bava's sleeve is a burgeoning alliance with shareholder Grupo BTG Pactual SA, Brazil's largest independent investment bank, which threw its weight behind Bava as he pushed for new merger terms this month, according to one source.
With a background in finance, Bava, who won the nickname "Zeus" for turning around Portugal Telecom during his five years in charge, has already counted on BTG Pactual in a pinch.
This spring, Bava was rounding up banks for an April capital increase of 8.25 billion reais - the first step in the deal to create CorpCo. When some banks got cold feet, BTG Pactual, led by CEO André Esteves, stepped in to backstop the deal.
BTG Pactual, whose eagerness earned it the lead mandate for the offering, funneled 2 billion reais into the company through a fund, giving it a 6.6 percent stake in CorpCo.
Investors hoped fresh capital would help Oi climb out of its fading fourth place in the Brazilian wireless market, taking on the well-financed local units of Telefonica, Telecom Italia SpA and America Movil SAB de CV, owned by Mexican tycoon Carlos Slim, a personal friend of Bava.
Those hopes were rattled this month when holding company Rioforte failed to repay a debt investment from Portugal Telecom equal to 40 percent of its market value. Rioforte is owned by a Portugal Telecom shareholder that is under investigation for financial irregularities.
Oi was not told of the investment before the merger. Shareholders Andrade Gutierrez SA and LF SA quit Portugal Telecom's board in protest. Brazilian state development bank BNDES accused Portugal Telecom of faulty corporate governance, and some questioned if the merger would survive.
Oi's largest shareholders declined to comment.
Sources say Bava helped bridge the transatlantic divide, convincing the Portuguese to take on the credit risk for the ill-fated loan and cut their initial stake in CorpCo to 25 percent from 38 percent.
Oi Chief Financial Officer Bayard Gontijo also took to the front lines of negotiations in Portugal, joining major investors including Andrade Gutierrez CEO Otavio Azevedo, according to two sources.
Still, more than $1 billion in cash that Portugal Telecom should have brought to the merger is now off the table, leaving Oi in a familiar, highly leveraged position. Fitch Ratings stripped Oi's investment-grade credit rating last week.
The distrust that has sprung up between key Brazilian and Portuguese shareholders will also put Bava's diplomatic skills to the test, the second source said.
Yet investor confidence in Bava, which boosted Oi shares over 15 percent on the day he was named CEO, shows little sign of flagging. Even some of Oi's minority shareholders, who have long feuded with controlling owners and criticized the current merger, acknowledge the industry savvy that Bava provides.
"The only reason he is still here is that he is the last hope," said a prominent minority shareholder in Oi, who asked not to be named. "If you fired him now, shares would easily fall 30 percent. Things may be bad with him, but it would be worse without."
($1 = 2.225 Brazilian reais)
$1 = 0.743 euros Additional reporting by Alberto Alerigi Jr. in Sao Paulo and Andrei Khalip in Lisbon; Editing by Todd Benson and David Gregorio