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Portugal Telecom, Oi SA merging, creating trans-Atlantic behemoth with around 100m subscribers

3 Oct 2013

Brazilian-owned telecoms group Oi SA has agreed terms to merge with Portugal Telecom (PT) in a move that will create a new trans-Atlantic player with around 100 million subscribers, and help it compete more effectively against rivals Telefonica and America Movil (AM). Under the plan being hammered out, shareholders of Oi SA, formed through the restructuring of Telemar Participacoes’ former operating divisions Brasil Telecom, Tele Norte Leste Participacoes, Coari Participacoes and Telemar Norte Leste, will take a majority stake in the new, enlarged entity. News of the deal, which requires the Rio de Janeiro-based carrier to sell new stock to the tune of around EUR2.7 billion (USD3.7 billion), sparked a 12% rise in its share price in Sao Paulo, while PT – which will take 38% of the combined group – saw its own shares jumping 23% on the Lisbon bourse.

The two groups hope that by combining their businesses they will be better positioned to take advantage of nascent growth in Latin America, and counteract stagnation in PT’s home market of Portugal. The tie-up will also result in cost saving and additional revenue of EUR1.8 billion, aiding the group as it fights off Telefonica (Vivo), Telecom Italia’s TIM Participacoes (TIM Brasil) and AM’s Telecom Americas Claro unit in Brazil – the world’s fifth largest wireless market. However, whilst the enlarged PT/Oi SA will have a global total of around 100 million fixed, mobile and pay-TV customers, it still falls far short of Telefonica and AM which claimed proportionate mobile subscriber bases of 249.53 million and 251.94 million respectively as at 30 June 2013, according to TeleGeography’s GlobalComms Database. Furthermore, whilst the enlarged entity will boast annual revenue of almost USD17 billion, it remains a comparative minnow given that Telefonica booked revenue of around USD80 billion in FY2012 while AM generated USD59 billion.

The Oi SA/PT merger will now face the scrutiny of local regulators, although reports cite Brazil Communications Minister Paulo Bernardo as saying that he sees no major obstacles to it going ahead. Speaking in Brasilia, the minister is quoted as saying: ‘The majority of the capital will be Brazilian … It looks like there are plans for a big capitalisation and big investments’. Meanwhile, in Portugal, PT confirmed that both groups have informed the Portuguese government of the merger plan. It is understood that as part of the deal, each PT share will be worth 0.633 of a share of the new combined company, along with the equivalent of EUR2.29 in the new entity’s shares at the price of the planned capital increase. Meanwhile, Oi SA shareholders will receive one new share in the enlarged group for each Oi SA voting share, or 0.92 of a share for each non-voting Oi SA share. As it stands, the Portuguese carrier owns 12.1% of Tmar Participacoes – the holding group that controls Oi SA – and 19.4% of the Brazilian telco’s non-voting shares.

Going forward, Oi SA is looking to raise EUR2.7 billion in cash, backed by its shareholder Telemar Participacoes and an investment vehicle managed by Brazilian investment bank Banco BTG Pactual, which have agreed to take up approximately EUR700 million of that figure. Separately, PT is looking to contribute assets worth EUR2 billion, reports say, increasing the venture’s new capital increase to EUR4.7 billion.

Brazil, Portugal, Oi, Pharol (formerly Portugal Telecom SGPS [PT SGPS])

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