Update: Oi Will Merge With Portugal Telecom Under What Conditions?

| About: Oi S.A. (OIBR)
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Oi has asked clarification from PT regarding a €897M subscription of commercial paper issued by Rioforte, a member of Grupo Espirito Santo (GES).

GES has huge financial problems which means that probably Rioforte will default leading to highly significant losses for PT and an urgent need to modify the merger terms.

As we have predicted, it seems that GES alone has no acceptable options which may indicate not only default but its complete impossibility to find a solution on the medium-term.

Following the news of the PT purchase of debt issued by Rioforte, a Grupo Espirito Santo (OTC:ESFHF) subsidiary, what is also in question is how to save the merger between Oi SA (NYSE:OIBR) and Portugal Telecom (NYSE:PT). Naturally, if a default will happen - which is very likely - PT will be a very different company as its valuation will be cut by more than half. In fact, Banco Santander (NYSE:SAN) (Brasil) has valued PT Ex-Brasil at €1.75B and now it may lose €897M ($1.2B).

The financial difficulties of GES are overwhelming and Espirito Santo International is at a critical financial situation with debt of about €7.3B, of which around €6B is short-term.

In my last article I've stated that this was a tremendous problem for PT, but also for Oi as the merger could be undermined. At this juncture it's obvious that PT has still failed to give additional explanations to Oi as requested by this company on a press release of 2 July. Commercial paper of Rioforte purchased by PT will mature on 15 July (€847M) and 17 July (€50M). Given the magnitude of the operation and the severe problems of GES, only a hopeless government support could avoid an extremely serious loss to PT resulting from default.

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