Portugal Telecom’s (PT) stake in its merger with Brazilian operator Oi will fall from 37.4% to 25.6% after diversified investor Rioforte was unable to repay €847m (US$1.1bn) of commercial paper owed to the Portuguese incumbent.
Rioforte missed…
Portugal Telecom’s (PT) stake in its merger with Brazilian operator Oi will fall from 37.4% to 25.6% after diversified investor Rioforte was unable to repay €847m (US$1.1bn) of commercial paper owed to the Portuguese incumbent.
Rioforte missed yesterday’s due date amid a wider crisis at its parent, Espirito Santo International. Rioforte now has a seven-day grace period, although it is said to be preparing to file for creditor protection.
In May auditor KPMG found irregularities in Espirito Santo’s accounts and said that it was in a serious financial condition.
For PT this means that the value of its business falls, thus compromising its share of the combined Oi/PT entity. The Lisbon-headquartered telco had contributed 100% of its assets to the Brazilian operator as part of a rights issue earlier this year. In exchange it received 37.4% of the merged telco, which was determined by PT’s balance sheet. Following the missed repayment, the size of the stake will be reduced to 25.6%.
Under the new arrangement PT has the option to buy more shares in the enlarged telco to take its stake to where it would have been. PT is returning 474 million common shares and 949 million preferred shares to Oi that it would have held, and this equity will be held as treasury stock by Oi.
PT then has a six-year call option whereby it can repurchase the shares at R$1.85 for the common stock and R$2.01 for the preferred stock, which will rise by the Brazilian CDI rate plus 1.5% annually.
However, the amount of shares PT is allowed to purchase will also fall over time. The number will go down 10% after the first year and then 18% annually thereafter.
PT said the structure was designed to minimise the loss from the Rioforte investment, while also allowing for the merger to complete as soon as possible.
PT – with the help of Oi – said it will pursue Rioforte “to the full extent of the law” to secure repayment. Rioforte owes PT a further €50m which is due tomorrow, taking the total to €897m (US$1.2bn).
Rioforte holds a 49% stake in Espirito Santo Financial Group, which in turn holds 20% of Banco Espirito Santo. The investment bank owns 10% of PT’s stock.
Last week Bndes criticised PT’s investment, which it made during the merger process and only recently disclosed. The development bank released a statement saying that the debt deal was “inconsistent with minimum standards of good corporate governance”.
