SAO PAULO, Oct 1 (Reuters) - Brazil's auction of next-generation wireless spectrum was most notable for what was missing: one of the country's four big carriers and, with it, the heated competition that officials hoped for.
The auction on Tuesday was a glimpse into the future of one of the world's most hotly contested communications markets as a sharp slowdown in growth and the rising cost of new technology has spurred a wave of takeover talk.
At the crest is Grupo Oi SA, the carrier absent from the auction. With its soaring debt load and fading fourth-place market share, Oi was already front-and-center in merger speculation.
And by passing up a chance at the latest fourth-generation (4G) cell spectrum, Oi gave tacit confirmation its future hinges on a big takeover, either as hunter or hunted.
In the auction, rivals Telefonica Brasil SA, TIM Participações SA and America Movil SAB de CV bid a total of 5.8 billion reais ($2.4 billion), well below the more than 8 billion reais that officials hoped to raise.
"Missing out on (the) spectrum further increases the likelihood of Oi playing an active role in market consolidation, albeit with its equity holders in a somewhat weaker bargaining position," telecom analysts led by Mark Chapman at CreditSights wrote in a note to clients.
Oi, the only majority-Brazilian player in a market dominated by some of the world's biggest telecom operators, hired local investment bank BTG Pactual in August to study an acquisition of No. 2 wireless carrier TIM. Mexico's America Movil has said it would be interested in partnering with Oi to bid for TIM.
But Oi's whopping net debt of 46 billion reais ($19 billion), three times its current market value, has raised questions about whether it has the firepower for such a move.
Media reports have suggested TIM's parent company, Telecom Italia SpA, is studying a counter-offer to acquire Oi. Telecom Italia has said it was not in talks with Oi.
"There is no alliance," the Italian company's chairman, Gisueppe Recchi, told reporters on Wednesday.
The relentless takeover speculation comes as many in the industry argue that the four closely matched players in Brazil, whose market shares range from 19 percent to 29 percent, are running out of room.
For years, Brazil has largely avoided the consolidation sweeping other markets because of its robust growth. Companies were loathe to sell local units as Brazilian cell subscriptions more than tripled in eight years, reaching over 260 million by the end of 2012.
Since then, the market has expanded just 5 percent, but a growing middle class with a healthy appetite for mobile data makes Brazil one of the world's most promising telecom markets.
Still, the recent bonanza has spurred a price war. Many of the nearly 200 million people in Brazil learned to use cell phone chips from multiple carriers to catch every promotion.
"Suscriptions grew but revenue per user plunged. You just fragmented the spending," said Alex Pardellas, a telecoms analyst with CGD Securities in Rio de Janeiro. "Brazil doesn't have the income to sustain so much competition."
As the boom fizzled, profits at most carriers have eroded and revenues have grown slower than inflation.
It is also getting more expensive to expand the high-speed networks needed to support all of the new consumers. Brazil is still filling out its 3G coverage, but the government has pushed companies into 4G with two spectrum auctions in two years.
A 4G cell signal offers mobile Internet at speeds up to ten times faster than 3G, but few Brazilians are interested in paying a premium for the service, which has attracted just 4 million users in about two years.
Carriers who were slow to build out their networks have paid a price. Spotty service sparked a wave of consumer complaints, and regulators dished out heavy fines. Companies may find it hard to keep up, but they cannot afford to shirk the investments.
As a result, several companies in Brazil have completed deals to bulk up fiber optic networks for fast-growing carriers, such as TIM's takeovers of long distance carrier Intelig in 2009 and broadband provider Atimus in 2011.
Telefonica's $9.3 billion acquisition of Brazilian broadband unit GVT from Vivendi last month added a strong brand name and healthy market share, and saved the Spanish company billions by acquiring GVT's vast fiber network.
While any deal between Brazil's mobile carriers to reduce the number of players would offer relief to the remaining operators, officials and antitrust regulators are reluctant to reduce competition.
The current presidential campaign may also keep the subject on the back burner. Any proposal to leave consumers with fewer options is not likely to be settled before this month's election is over. ($1 = 2.45 Brazilian reais) (Additional reporting by Guillermo Parra-Bernal in Sao Paulo, Leila Abboud in Paris and Francesco Guarascio in Brussels; Editing by Todd Benson and Jeffrey Benkoe)