Portugal Telecom-Oi merger now at risk, say analysts

A planned merger between Portugal Telecom and Oi to form a new company called CorpCo is now wreathed in uncertainty in the view of some analysts, and will most likely need to be renegotiated in order to have the best chance of success.

"PT's complex merger with Oi is now at risk, in our view," said Jefferies analysts in a research note. "While the strategic imperative remains inexorable, surely the terms must now be renegotiated."

The background to this growing uncertainty is the recent revelation that, prior to a capital raising exercise undertaken by Oi in May--in which Portugal Telecom participated--Portugal Telecom had subscribed for €847 million ($1.15 billion) and €50 million of commercial paper issued by Rioforte to mature on July 15 and 17 2014 respectively.

As Jefferies explained, Portugal Telecom's shares have tumbled since then on fears it may not get the money back after auditors revealed financial irregularities at Rioforte's parent company, Espirito Santo International. Rioforte's unit Espirito Santo Financial Group is the largest shareholder in Banco Espirito Santo, which in its turn is the largest single shareholder in Portugal Telecom, with a 10 per cent stake, raising concerns as to unethical governance at Portugal Telecom. Oi has criticised Portugal Telecom for not disclosing this investment in advance.

"Investors must now see PT's equity through the prism of a complex merger with Oi, the key terms of which are still pending," Jefferies commented.

Meanwhile Brazil's government continues to stress that it does not believe the planned merger is at risk. Citing unidentified sources, Reuters said officials do not believe that the situation will get to the point of scuppering the deal.

"That would be a lose-all situation," the sources told Reuters, adding that "both sides need the merger" to grow.

For more:
- see this Reuters article

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