(Updates with Oi closing price in seventh paragraph.)
Oct. 2 (Bloomberg) -- Oi SA, Brazil’s biggest phone company, agreed to merge with Portugal Telecom SGPS SA to create a trans-Atlantic carrier whose 100 million customers make it more competitive against Telefonica SA and America Movil SAB.
Shareholders of Oi will own the majority of the combined company after the transaction, which requires the Rio de Janeiro-based carrier to sell new stock for as much as 2.7 billion euros ($3.7 billion). Its shares soared as much as 12 percent in Sao Paulo. Portugal Telecom, whose investors will get 38 percent of the new Brazil-based entity, jumped as much as 23 percent in Lisbon.
The combined company, with almost $17 billion in annual sales, would be positioned to take advantage of the growth in Latin America as Europe’s phone market shrinks. The merger will generate cost savings and additional revenue valued at about 1.8 billion euros, helping the new company challenge larger rivals Telefonica, Telecom Italia and America Movil in the world’s fifth-biggest wireless market.
“Portugal Telecom gets 38 percent of new company without getting involved with the rights issue per se, and Oi gets more operational and financial flexibility, additional assets and de- risks,” said Guy Peddy, an analyst at Macquarie Group Ltd. in London. The deal “will help turn Oi into a clean equity and investment story.”
Zeinal Bava, the former Portugal Telecom chief executive officer who became the head of Oi in June while continuing to run the Portuguese carrier’s domestic operations, will lead the enlarged company, which will be incorporated in Brazil. Oi Chairman Jose Mauro will have the same role in the new company, while Portugal Telecom Chairman Henrique Granadeiro will be vice chairman.
“The new company will have access to capital at much more competitive prices,” Bava said today on a video-conference. “It’s definitely going to attract many investors.”
Oi jumped 5.2 percent to 4.44 reais at the close in Sao Paulo, valuing the company at 7.4 billion reais ($3.4 billion). Portugal Telecom, the country’s biggest phone company, rose 6.5 percent to 3.62 euros. The stock had lost 63 percent in the past three years as stiffer competition in a saturating market weighed on calling and data prices.
Oi’s $1.5 billion of dollar bonds due 2022 rose the most on record, climbing 4.6 cents to 91.8 cents on the dollar, sending yields down 0.8 percentage point to 7.066 percent.
While Oi has the most landlines in Brazil, it trails Madrid-based Telefonica, Milan-based Telecom Italia and Mexico City-based America Movil in wireless subscribers. By joining forces with Portugal Telecom, it can apply more pressure to phonemakers and network-equipment suppliers to offer discounts, reducing costs.
Telefonica owns a minority stake in Telecom Italia and is increasing its influence in the company, agreeing last month to gradually buy out co-investors. That could pave the way for a possible sale of the Italian carrier’s Brazil unit, Tim Participacoes SA.
While regulators will review the transaction, Brazil Communications Minister Paulo Bernardo said he saw no problem with it.
“The majority of the capital will be Brazilian,” he said today in Brasilia. “It looks like there are plans for a big capitalization and big investments.”
Portugal Telecom Chairman Granadeiro said today the companies have also informed the Portuguese government of the transaction.
As part of the terms of the Oi transaction, each Portugal Telecom share will be exchanged into 0.633 share of the enlarged company, plus the equivalent of 2.29 euros in the new entity’s shares at the price of the planned capital increase. Oi investors will get 1 share in the new company for each Oi voting share or 0.92 share of the new company for each non-voting Oi share.
Currently, Portugal Telecom owns 12.1 percent of the investor group known as TmarPart that controls Oi, and 19.4 percent of the Brazilian carrier’s non-voting shares, according to Oi’s annual report.
“The merger will consolidate the position of both companies as the leading operator for Portuguese-speaking countries,” Portugal Telecom said in a statement.
Oi is seeking to raise as much as 2.7 billion euros in cash, with shareholder Telemar Participacoes SA and an investment vehicle managed by BTG Pactual having agreed to subscribe to about 700 million euros of that. Portugal Telecom will also provide assets worth 2 billion euros to Oi, bringing the total capital increase to 4.7 billion euros.
Bava joined Oi to lead the company’s restructuring after profit declined in two straight years. His first step was to cut the dividend by 75 percent and reduce capital expenses.
The merged carriers had 2012 combined revenue of 12.4 billion euros and earnings before interest, taxes, depreciation and amortization of 4.2 billion euros.
The transaction extends telecommunications mergers and acquisitions that have totaled about $239 billion this year, according to data compiled by Bloomberg. Last month, Vodafone Group Plc agreed to sell its stake in Verizon Wireless in the U.S. for $130 billion. Today, Dutch carrier Royal KPN NV’s shareholders approved the sale of its German business E-Plus to Telefonica for more than $11 billion.
The cost of protecting Portugal Telecom’s debt against losses plunged as much as 96 basis points to 370 points in London, the biggest one-day drop in more than three years. The contracts were the best performer on the iTraxx Crossover index of credit-default swaps on 50 European companies with speculative-grade ratings.
The companies expect to complete the deal in the first half of 2014, pending regulatory review and shareholders’ approval. The agreement has the backing of Portugal Telecom’s two biggest shareholders, Avistar SGPS, controlled by Banco Espirito Santo SA, and Ongoing’s Nivalis Holding BV, the phone company said.
Bank of America Merrill Lynch, Morgan Stanley and Banco Espirito Santo are advising Portugal Telecom. Banco BTG Pactual SA is Oi’s adviser.
--With assistance from Manuel Baigorri in Madrid and Arnaldo Galvao in Brasilia Newsroom. Editors: Crayton Harrison, Niamh Ring