Oi SA And Portugal Telecom Have Signed A New Memorandum Of Understanding For The Merger

 |  Includes: OIBR, PT
by: Antonio Carradinha


Confirming unsolvable financial problems Rioforte defaulted on the payment of €847M to PT.

This outcome is very negative for PT, but the two companies have signed a new Memorandum of Understandingfor the merger.

The likelihood of this situation was already being advanced in my previous article.

The merger between Oi SA (NYSE:OIBR) and Portugal Telecom (NYSE:PT) had definitely to suffer major changes in order to better define the market value of both companies.

It is now official that Rioforte - a member of Espirito Santo Group (OTC:ESFHF) - hasn't repaid commercial paper that was subscribed by PT. In fact, yesterday was the day of maturity of a tranche of € 847M which is in default, unless this debt may be restructured within 7 days.

The good news is that the two companies have signed a new Memorandum of Understanding. Under the conditions of this document it was agreed that:

  • PT will receive Rioforte debt from Oi in exchange for consideration of 474,348,720 Oi ON shares plus 948,697,440 PN shares;
  • PT will be granted an American-type call to repurchase the Oi Call Shares (strike prices of R$2.0104 ON and R$1.8529 PN), which will be adjusted by the Brazilian CDI rate plus 1.5% per year;
  • The Call on the Oi Call Shares will have a 6-year maturity, and the percentage of the Oi Call Shares that PT has the right to call will be reduced by 10% at the end of the 1st year and by 18% per year thereafter."

In my last update I've stated that the main goal would be to save the merger. That aim was reached, and it was provided "the time that may be necessary to minimize the loss in the value of the Rioforte debt". While a certain delay in the timetable of the merger of PT and CorpCo will be expected the key objectives shall remain.

The completion of the merger which was based for PT shareholders on 3.64 shares of CorpCo per share of PT implies a split in two components:

  • 2.10 shares of CorpCo per each PT share to be received upon implementation of the merger between PT and CorpCo corresponding to an ownership interest in CorpCo of 25.6%;
  • An interest in the Rioforte debt and the Call (with an underlying number of Oi shares equivalent to 1.54 CorpCo shares per PT share), the value of which depends on recovery of the Rioforte debt and on the value of the underlying Oi shares."

Source: PT press release

In this case, the fundamental aspects are closely followed by the technical evolution as can be seen on the chart below.

Click to enlarge

Charts courtesy of StockCharts.com

Since the market was aware of the possibility that PT could lost around 40% of its value PT shares have plummeted. Even OIBR - already hurt by dilution - was also hit by PT's problems and has suffered a sharp decline. On the medium-term, when the merger will be eventually carried out, it's expected that the new Oi's potential will appear again driving share prices upward.

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