Shareholders in mobile operator Oi will vote on its merger with Portugal Telecom (PT) tomorrow after Brazil’s securities commission, the CVM, dismissed an appeal from minority investors unhappy with the deal.
The tie-up is structured so that Oi is…
Shareholders in mobile operator Oi will vote on its merger with Portugal Telecom (PT) tomorrow after Brazil’s securities commission, the CVM, dismissed an appeal from minority investors unhappy with the deal.
The tie-up is structured so that Oi is recapitalised to the tune of R$8bn (US$3.5bn) through a new stock offering. But smaller shareholders have argued that the terms of the merger favour larger investors.
The complaints from minority investors, led by Tempo Capital, centre on PT’s assets, which they argue have been overvalued in the merger agreement, thus diluting their stock.
Telemar Participacoes is Oi’s controlling shareholder – a holding company that consists of the operator’s largest investors, including PT – and the CVM said it would be allowed to take part in the shareholder vote, which includes approving the valuation of PT’s assets.
Earlier this month, proxy advisers Glass Lewis and ISS released reports making recommendations to shareholders, but they had differing opinions.
Glass Lewis noted that it was “certainly worth acknowledging the projected public offering and share swap stands to be considerably dilutive to minority Oi shareholders”, and that “any dilution will largely be avoided by major Oi shareholders Telemar Participacoes”.
However, the proxy firm said that while the deal had caused some unrest, its opinion was that the strategic rationale for the deal and the rights afforded to shareholders following completion meant that minority investors should vote in favour of the tie-up.
Rival firm ISS agreed that the corporate restructuring was a plus, but had concerns over how the deal was structured, citing Telemar Participacoes’ decision to approve the valuation of PT’s assets.
In conclusion, ISS said: “In the absence of a more compelling rationale to offset the concerns presented by the terms of the proposed transaction and the significant dilution to minority interests, and in light of sharply negative market reaction to the announcement, shareholder support for these proposals is not warranted.”
Equity analysis firm Bernstein Research said in a memo that although the terms of the merger would be hard for smaller investors to swallow, closing a deal at the effective price of R$3.40 was the best deal minority shareholders were going to get.
Bernstein expected the deal to be approved, “not least because the alternatives for all Oi stakeholders in the case a deal fails (politicians, managers, minority shareholders and controlling stakeholders alike) are so very poor”.
If a recapitalisation cannot be agreed, PT may have to inject funds instead – which it may struggle to do – or the company could be put into the hands of creditors and then be effectively nationalised by the Brazilian Development Bank, Bernstein said.
Providing shareholders approve the merger, the recapitalisation is set to take place in mid-April. BTG Pactual is leading a syndicate of 14 banks which have committed to buy up R$6bn (US$2.5bn) of the shares.
