Oi SA (OIBR4) shares surged the most in more than a year and its bonds rose as the Brazilian phone company’s merger with Portugal Telecom SGPS SA was rescued after being threatened by a crisis at the Espirito Santo group.
In exchange for defaulted debt owed to Portugal Telecom by Rioforte Investments SA, the Portuguese carrier will transfer Oi voting and nonvoting shares to its Brazilian partner, the companies said in statements. That would leave Portugal Telecom with a 25.6 percent stake in the enlarged company. When the merger was announced last October, Portugal Telecom would own as much as 39.6 percent of the combined entity.
Oi shares jumped as much as 19 percent in Sao Paulo while Portugal Telecom rallied in Lisbon and its credit default swaps fell. The new terms will help Oi Chief Executive Officer Zeinal Bava cement a deal that has been thrown into doubt by the Rioforte debt. Bava, also CEO of Portugal Telecom’s PT Portugal unit, is using the transaction to improve free cash flow at the Rio de Janeiro-based company and streamline its complex ownership structure.
Rioforte Investments, a subsidiary of Espirito Santo International, failed to repay 847 million euros ($1.15 billion) of short-term debt by yesterday’s deadline. Rioforte owes Portugal Telecom an additional 50 million euros due tomorrow. The Espirito Santo group owns 10 percent of Portugal Telecom.
The carriers “remain committed to the full completion of their business combination,” Portugal Telecom said in its statement, adding that it plans to work with Oi to “pursue its legal and procedural options against Rioforte and relevant related parties.”
Under the revised agreement, Portugal Telecom will transfer 474 million Oi common shares and 949 million Oi preferred shares to the Brazilian carrier, which will hold them in treasury. Portugal Telecom will have a six-year option to repurchase the shares. The size of the call option will decrease annually. A transfer would require approval from Brazil’s securities regulator CVM.
Telecommunications regulator Anatel will probably approve the new terms, Communications Minister Paulo Bernardo said in a telephone interview.
Common shares are known as ONs in Brazil and grant voting rights, while preferred shares are known as PNs and are non-voting. Oi had about 5.7 billion preferred shares and 2.8 billion common shares as of May, according to its website.
Oi has said it wasn’t aware that Portugal Telecom had purchased the Rioforte paper in April. Portugal Telecom hasn’t said why Oi wouldn’t have been informed despite the impact it would have on debt ratios after a merger. Portugal Telecom on June 30 called the debt a treasury operation.
Oi is scheduled to complete the transatlantic merger with Lisbon-based Portugal Telecom before the end of the year. The combined company, with $17 billion in annual sales, would be positioned to take advantage of the growth in Latin America as Europe’s phone market shrinks. The deal would generate cost savings and additional revenue and challenge Telefonica SA, Telecom Italia SpA and America Movil SAB in the fifth-biggest wireless market.
Under the agreement announced today, the companies will extend deadlines to complete their merger, according to the statements, which didn’t provide new dates.
Oi climbed 12 percent to 1.75 reais at 3:41 p.m. in Sao Paulo. Portugal Telecom rose 3.3 percent to close at 1.89 euros in Lisbon. The stocks had slumped 20 percent and 32 percent this month respectively through yesterday. Oi’s bonds maturing in 2022 gained 1.7 cents to 98.30 cents on the dollar, the biggest increase since Oct. 2.
Oi raised 8.25 billion reais ($3.7 billion) in a capital increase in April to seal the combination. The funding was supposed to help pay off debt held by Oi’s controlling group, Telemar Participacoes SA. The stock sold in the capital increase diluted the holdings of current investors -- a source of complaints from shareholders such as Leo Soong, a former Wells Fargo & Co. analyst and co-founder of Crystal Geyser Water Co.
Otavio Azevedo, an Oi representative on Portugal Telecom’s board, resigned on July 1, telling Valor Economico newspaper that he was “uncomfortable” because he only discovered the Rioforte operation through media reports. Fernando Magalhaes Portella, another Oi representative on the board, also resigned and hasn’t said why.
“To hear such people complain about the lack of good corporate governance is truly akin to hearing the pot call the kettle black,” said Soong, who bought Oi’s American depository receipts at 70 cents. He said he hopes to sell at about $1.10 after the merger is “satisfactorily renegotiated.” The ADRs closed at 68 cents yesterday.
“For long-term investment, however, I would need to see some evidence that the current cast of characters is reformed,” Soong said by e-mail. “As far as Zeinal Bava, I still think he is a good operator, but the current PT mess makes him look rather clueless.”
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