Oi, PT Ready Merger, Capital Raise

Portugal Telecom (PT) and Brazil’s Oi have agreed to merge, the two say, in a transaction that will hinge on the market providing a capital increase of at least BRL5bn ($2.28bn). The deal is motivated by synergies – though analysts are skeptical about the savings involved – and a simplification of Oi’s shareholding structure. In the transaction, PT shareholders will come away with 38% of the combined company, and Oi’s holders 62%. The new Brazil-based entity combining PT and four Oi vehicles is to have a single share class listed on the Novo Mercado, and be led by Oi CEO and former PT CEO Zenial Bava. The deal is contingent on a capital increase of BRL13.1bn-BRL14.1bn, consisting of BRL6.1bn in assets and BRL7.0bn-BRL8.0bn cash. Current shareholders of Oi controller Telemar Participacoes and a BTG Pactual investment vehicle have agreed to subscribe BRL2.0bn, leaving at least BRL5bn for the market to buy, likely in a transaction coming in 1H2014. The two parities estimate the merger should bring synergies of BRL5.5bn. The deal was somewhat expected given the pair’s existing association, Alex Pardellas, analyst at GCD Securities tells LatinFinance, though its speed was surprising. Synergies, liquidity and a better structure are the positives, he adds. “The structure is now much simpler. Telemar Participacoes had very high debts and Oi had to pay a dividend above its capacities,” he says. Pardellas notes a risk of the synergies being less than BRL5.5bn, and of the market’s appetite for the full capital raise. “The BRL5.5bn present value of synergies announced by the firms will be very difficult to realize, as some of the savings will be needed for customer retention and growth efforts,” Morningstar says in a report. The merger should create value, Morningstar says, but the shop’s “enthusiasm is tempered” by the planned rights issue, as European rights issues historically are priced at deep discounts. S&P put Oi’s BBB minus rating on negative watch due to worries about