Portugal Telecom to Buy Stake in Brazil's Oi for $4.8 Billion

Portugal Telecom SGPS SA agreed to buy a stake in Telemar Norte Leste SA to remain in the Brazilian telecommunications market as it sells its shares in the country’s biggest mobile-phone operator to Telefonica SA.

Portugal Telecom will pay a maximum of about 8.4 billion reais ($4.8 billion) for indirect and direct stakes equivalent to 22.4 percent of Oi, as Telemar is known, the companies said today in regulatory filings. Telemar also plans to acquire 10 percent of Portugal Telecom, replacing Telefonica as the Portuguese company’s biggest investor.

The Oi deal came as Portugal Telecom agreed to sell its stake in a venture controlling Brazil’s largest wireless operator, Vivo Participacoes SA, to its Spanish partner. Telefonica agreed to buy out the Lisbon-based company’s stake for 7.5 billion euros ($9.7 billion) after it had raised its bid three times.

Exiting Vivo and investing in Oi leaves the Portuguese company with a similar size and a stronger balance sheet, it said in a presentation today. It’s leaving a company that’s focused on wireless service and entering one that’s No. 4 in Brazil’s wireless market and No. 1 in fixed-line service.

Scope for Improvement

“Brazil is a market that PT management knows extremely well and we see scope for improved operating performance at Oi,” Goldman Sachs Group Inc. analysts including Tim Boddy said in a note after the announcement. They have a “neutral” rating on Portugal Telecom.

The remainder of Portugal Telecom’s proceeds from the Vivo sale may be used to reduce debt, for a special dividend or share buybacks, the analysts said. The company hasn’t decided what to do with that money, Chief Executive Officer Zeinal Bava said at a press conference today in Lisbon.

The Portuguese company’s shares climbed 23 cents, or 2.8 percent, to 8.53 euros at the 4:30 p.m. close of trading in Lisbon, boosting its market value to 7.65 billion euros.

Oi provides Internet access, mobile, fixed-line and pay- television services. It had a record first-quarter profit after acquiring its smaller rival Brasil Telecom SA in 2009. The Rio de Janeiro-based company had a 20.1 percent share of the country’s wireless market in June, while market leader Vivo had 30.2 percent, according to Brazil’s telecommunications regulator.

Mobile Competitors

Oi’s mobile business also trails America Movil SAB, controlled by Mexican billionaire Carlos Slim, and Tim Participacoes SA, a unit of Telecom Italia. Oi’s land lines are present in most of the country except the most populous state, Sao Paulo, where Telefonica’s Telecomunicacoes de Sao Paulo SA is the traditional fixed-line carrier.

About two-thirds of the purchase price will be reinvested in Oi’s growth, Portugal Telecom’s Bava said.

Telefonica’s previous offer for the Vivo stake won approval from Portugal Telecom’s shareholders on June 30. The Portuguese government blocked the sale because it was concerned the former phone monopoly would be left without a fast-growing asset.

Revising its 2009 results to exclude Vivo and include Oi, Portugal Telecom would have had annual revenue of 6.24 billion euros instead of 6.88 billion euros. The company will have 83 million clients with Oi, and it maintains its goal of 100 million clients by the end of 2011, Bava said.

The companies aim to complete the transaction in the first quarter, Bava said. The companies didn’t specify a price or timetable for Oi’s purchases of Portugal Telecom shares. They will take place on the market once the Portuguese company’s investments have taken place, Bava said on a conference call.

Telemar Norte Leste’s parent company is Tele Norte Leste Participacoes SA, which in turn is controlled by closely held Telemar Participacoes. Portugal Telecom will be able to consolidate Telemar Participacoes results in its own earnings, Bava said.

Asked if Portugal Telecom would consider buying more shares in Oi, Bava said on the conference call, “We’re quite happy with what we’ve announced.”

To contact the reporters on this story: Anabela Reis in Lisbon at areis1@bloomberg.net.

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