UPDATE: Tele Norte Leste CFO Sees Growth In TV,Fixed Broadband

Brazilian telecommunications company Tele Norte Leste Participacoes S/A (TNE, TNLP4.BR), seeing limited growth in the mobile business, is betting heavily on its wireline network to deliver faster-growing fixed-broadband and pay-television service.

Tele Norte Leste, also known as Oi, will introduce an Internet-based TV service within the next six months, according to Chief Financial Officer Alex Zornig. He also expects the fixed-broadband business to triple over the next three years.

"The name of the game in Brazil is broadband and cable TV," Zornig said in an interview Tuesday.

While Oi is the nation's largest landline operator, it lags as the fourth-largest wireless service provider in Brazil because of its slower entry into the business. As a result, it is hoping to tap its considerable infrastructure to deliver services its more mobile-centric rivals won't be able to match.

The growth, however, could come at a cost. As a result of its push into new businesses, Zornig said he expects profits to come back down next year after strong gains in 2010. One such business, cable TV, was made possible after Brazilian regulators recently brought down barriers restricting the business.

"Finally they come to the 21st century," Zornig said.

With only 12% of the country paying for television services, Oi sees plenty of room for growth. Currently, Net Servicos de Comunicacao S/A (NETC, NETC4.BR) dominates the pay-TV business but has only targeted the upper-middle-income demographic and above. Zornig said in the more middle-class "B- to C" markets, where there is less of a push, the penetration rate is closer to 5%.

The demographic makes on average $1,200 a month, he said, adding that other companies won't be able to match its reach because they lack the fixed-telecom infrastructure owned by Oi that can be used to deliver Internet-based TV services.

Because of the existing infrastructure, Zornig said the cost to offer cable TV isn't significant. He said the largest cost would come from establishing a sales presence, which he estimates to be around $200 million, as well as new IT infrastructure. That stands in contrast to U.S. telecom providers such as AT&T Inc. (T) and Verizon Communications Inc. (VZ), which have each spent billions of dollars upgrading their networks. Zornig said Brazilian consumers aren't demanding high-definition content and higher speeds yet, reducing the need to improve the networks.

Oi plans to use cable TV as one leg of a bundle that includes wireless, landline phone and Internet services to better defend its customer base and attract new consumers, Zornig said.

Internet service is another area where the company expects to grow. Despite owning nearly half the market now, Zornig said he expects to continue to take share through its bundling efforts and aggressive pricing.

Zornig is less bullish on the wireless end, although he said the segment was crucial to maintaining its profitability. With nearly every Brazilian consumer owning a cellphone, he sees growth of around 5% a year for the wireless business. He was also reluctant to move to fourth-generation, or 4G, wireless services, noting that he would prefer to get a return on Oi's investment in the 3G network. The company, however, would look to the spectrum auction in 2012 before moving to 4G.

Portugal Telecom SGPS S/A (PT, PTC.LB), meanwhile, is in talks to acquire a stake in the Oi group. Zornig said he expects to have a shareholder agreement by the end of January.

In July, Portugal Telecom agreed to pay up to 9.4 billion Brazilian reals for a stake.

Zornig said he plans to use the cash to fund its broadband and TV initiatives and pay down debt. He wants to get the company down to a ratio of debt to earnings before interest, taxes, depreciation and amortization of 1.6, down from its current level of 1.8. He added that 1.6 is a good level for a Brazilian company.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

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