The long awaited cross-country merger between
Portugal Telecom SGPS S.A.
) and a leading Brazilian telecom operator
) is nearing completion. On Oct 2, 2013, the two companies had
reached an agreement to merge in order to strengthen Oi's
operations in Brazil and will also give Portugal telecom a strong
foothold in the largest emerging market of Latin America. The joint
venture will be known as "CorpCo."
However, trouble broke out earlier this month. The issue was
Portugal Telecom's purchase of €897 million (approximately $1.22
billion) in debt (commercial papers) of Luxembourg banking giant
Espirito Santo Financial Group's RioForte Holding Company.
In the meantime, Espirito Santo declared serious financial
problems cropping from its dubious investments in several
businesses. Notably, Espirito Santo holds a 10% stake in Portugal
Meanwhile, RioForte failed to repay its first portion of debt
amounting €847 million (around $1.15 billion) to Portugal Telecom
within the stipulated time. Accordingly, RioForte can be held a
defaulter unless it restructures the whole debt within the next 7
days. The remaining €50 million of debt repayment is due today.
The impending merger deal of Portugal Telecom and Oi got
disrupted once it was clear that Portugal Telecom had kept Oi in
the dark regarding its disputed investments in RioForte. Oi has
also raised serious concerns over Portugal Telecom's corporate
In such an unfavorable scenario, Portugal Telecom was compelled
to sign new Memorandum of Understanding (MOU) with Oi for the
proposed merger. Per the new MOU, Portugal Telecom will hold just
25.6% stake of CorpCo instead of the previously agreed 39.6%.
In addition, the Portuguese telecom giant will also take back
bad Espirito Santo debt earlier transferred to Oi and its
affiliates. Further, Portugal Telecom in association with Oi will
pursue legal proceedings against RioForte.
Brazil is the most lucrative emerging market in Latin America.
At present, the country has around 2.2 million 4G LTE subscribers
and its mobile broadband penetration rate is just about 42%,
indicating vast opportunities for telecom operators.
We believe the combined Portugal Telecom-Oi entity will have the
much needed scale and technical skill to compete with
America Movil S.A.B. de CV
). Currently, Portugal Telecom carries a Zacks Rank #3 (Hold)
whereas Oi has a Zacks Rank #4 (Sell).
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