An announcement hit the news feeds this morning that Oi (NYSE:OIBR) is planning a merger with Portugal Telecom. This has been speculated about for some time, but has finally hit paper. Because of the length of the conditions divulged, I will summarize below:
· Oi will execute a share offering equal to about R$7 billion
o Of this, R$2 billion has already been claimed by BTG Pactual
· Oi will receive assets from Portugal telecom worth approximately R$5 billion
· A new company named "CorpCo" will be created, specifically to receive Oi and Portugal Telecom
· Both Oi and Portugal Telecom will be absorbed by CorpCo, and will be traded in Brazil, Lisbon, and on the NYSE
If you are keeping track at this point, you notice that Oi will need to execute an offering that is approximately equal to its current market cap, creating a substantial dilution for shareholders, though with the promise of a conflict-free company at the end of this operation. However, one particular note in the release has me very much concerned: Portugal Telecom has the right to not move forward with the transaction if the assets that they intend to contribute are valued, by an independent company, at less than the expected amount. If this occurred, Oi shareholders could be left holding the bag, with a massive capital increase, 50% dilution of future earnings, and no improvement in the governance of the company.
If the transaction goes through as planned, there could be an attractive company to invest in at the end. For the time being, though, it is not worth being an OIBR shareholder. I recommend staying clear of the company until the operation is complete, and refer everybody to my recent article about Vivo and Tim for further information about exposure to the telecom sector in Brazil. For the brave, it could be worth waiting a couple of days for the initial reaction, and then opening a short position in OIBR, if you can get your hands on it, as short interest has been high for some time.