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Portugal Telecom and Brazil's Oi to Merge

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10/02/2013 | 05:16am EDT

Portugal Telecom SGPS SA (>> Portugal Telecom SGPS SA) and its Brazilian affiliate Oi SA (OIBR, OIBR4.BR) said they will combine operations to form a new Brazil-based company with more than 100 million subscribers as global telecommunication companies are looking to gain market share to guarantee profitability.

The deal is the latest in a wave of consolidations among telecommunications firms around the world. It's the second major trans-Atlantic telecom deal announced this year, after Mexican billionaire Carlos Slim's America Movil SAB (>> America Movil SAB de CV) launched a takeover of Dutch telecommunications firm Royal KPN NV (KKPNY, KPN.AE) in a deal that could be worth EUR7.2 billion.

Last week, Spain's Telefonica SA (>> Telefonica SA) unveiled plans to raise its stake in Telecom Italia SpA (>> Telecom Italia SpA), in a move that will also have global implications. Telefonica and Telecom Italia each own the two largest mobile phone operators in Brazil, Telefonica Brasil SA (VIV, VIVT4.BR), which operates as Vivo, and TIM Participacoes SA (TSU, TIMP3.BR), respectively.

"The market generally has lots of players and now there's less and less room for competition. We're going to see consolidation in this sector, as there just isn't room for all of these players," said Eduardo Carlier, an equity portfolio manager at Schroders in Sao Paulo. He said he's staying clear of telecom stocks because of the uncertainties.

Yet the merger comes at a difficult moment for both Oi and PT. The Brazilian firm is weighed down with enormous debt but must continue to invest to remain competitive. PT, meanwhile, has a small and struggling market at home. Portugal's economy has been in a prolonged recession as a result of government spending cuts implemented in the wake of the European sovereign debt crisis.

PT has played a key role in the Brazilian telecommunications market ever since it participated in the privatization of the state-owned telephone system in 1998, when it saw an opportunity to offset its stagnating business in Portugal. Back then, it partnered with Spain's Telefonica to buy up a fixed-line operator in Sao Paulo, and the two rapidly built up Vivo, now the country's largest mobile phone operator.

In 2010, PT sold its half of that venture to Telefonica, and used about half of the EUR7.5 billion in proceeds to buy a 25% stake in Oi, in March 2011. Oi simultaneously bought 10% of PT. An even closer tie-up was largely expected after former PT Chief Executive Zeinal Bava moved to head up Oi in June.

Brazil will continue to be the major source of the new firm's business, accounting for about 75% of revenues, with most of the rest coming from Portugal, along with a minor participation from operations in Africa and Asia. Mr. Bava, who will heed up the new company, transformed PT into a multi-service provider in Portugal, offering services from fixed lines to cable TV, something he wants to now replicate in Brazil.

The merger will pool all of the various shareholders in PT and Oi into one new company, which is temporarily being referred to as CorpCo, in a deal that has been valued by analysts at about EUR7.4 billion.

Mr. Bava said the management team will continue to focus on cutting the high debt load. The two firms said they have a combined net debt of 41.2 billion Brazilian reais, or $18.7 billion, and combined annual revenues of 37.45 billion reais.

As part of the merger plan, Oi will raise between EUR2.3 billion euros ($3.1 billion) and EUR2.7 billion in new capital to improve the balance sheet of the new company, PT said in a statement.

PT said its shareholders will own about 38% of the new company. It expects cost savings of about EUR1.8 billion with the merger, which is expected to be completed in the first half of next year.

"The merger will consolidate the position of both companies as the leading operator for Portuguese-speaking countries with leadership positions in all markets where it operates," PT said.

Shares of PT rose in Lisbon, closing up 6.5% at EUR3.62, while Oi's shares in Sao Paulo were up 11.61% at 4.71 reais.

Brazil's communication Minister Paulo Bernardo told reporters on Wednesday that he doesn't see any antitrust issues from the merger, although he said the government would meet with the companies to better understand the deal.

The move could further shake up Brazil's telecom sector, currently dominated by TIM and Vivo. Together, they account for about 56% of the country's 268.44 million mobile-phone subscriptions at the end of August, according to figures from Brazil's telecommunication agency Anatel.

Claro, controlled by America Movil, is the third largest mobile phone company in Brazil with a market share of 25%, while OI SA is the fourth with 18.64%.

Stocks mentioned in the article
ChangeLast1st jan.
AMERICA MOVIL SAB DE CV -0.59% 13.57 End-of-day quote.-2.29%
OI SA EM RECUPERACAO JUDICIAL 5.13% 1.64 End-of-day quote.23.81%
TELECOM ITALIA -2.90% 0.4423 End-of-day quote.-5.75%
TELEFONICA -0.61% 7.184 End-of-day quote.-2.11%
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