Citigroup, Itau Said to Weigh Leaving $2.65 Billion Oi Offering

Citigroup Inc. (C), Itau Unibanco Holding SA and Banco Bradesco SA are among banks considering dropping out of a plan to underwrite 6 billion reais ($2.65 billion) in new shares as part of Oi SA (OIBR4)’s capital increase, according to two people familiar with the matter.

The firms, which also include Goldman Sachs Group Inc., may withdraw their commitment because Brazil’s securities regulator CVM asked that banks be required to buy any remaining shares of the phone company even if there’s no demand from investors, the people said. They requested anonymity because the discussions are private.

More than half of the 14 banks that originally were participating have agreed to the new terms, and that will prevent the deal from falling apart, said two other people involved in the negotiations. Grupo BTG Pactual, the lead underwriter, is talking to banks following the CVM request, the people said.

The agreement, part of a 14.1 billion-real capital increase, is a condition of Oi’s planned merger with Portugal Telecom SGPS SA. Oi, Brazil’s largest landline phone company, hasn’t been notified of any change in the banks’ commitment to the deal, three people said.

Under the previous agreement, the banks would need to step in to buy shares only if investors placed orders totaling between 1 and 1.3 times the offering size, according to the prospectus.

Oi, Itau, Bradesco, Citigroup, Goldman Sachs, BTG and Brazil’s securities regulator declined to comment. Itau and Bradesco are Brazil’s two biggest banks by market value. New York-based Citigroup is the third-largest U.S. lender by assets.

Cutting Debt

Oi needs the merger to help reduce debt and give it more flexibility to compete with bigger rivals such as Telefonica SA, Telecom Italia SpA and America Movil SAB. Rio de Janeiro-based Oi was the most indebted phone company in Brazil at the end of last year, with a ratio of net debt to earnings of 3.43, according to data compiled by Bloomberg. After the merger, the ratio will drop to 3.3, Chief Executive Officer Zeinal Bava has said.

Oi agreed to the deal last October, aspiring to create a trans-Atlantic carrier with almost $17 billion in revenue and more than 100 million subscribers. The merger was projected to generate 5.5 billion reais in cost savings and additional sales of 1.8 billion euros ($2.4 billion), creating a more solid competitor in the world’s fifth-biggest wireless market, with some 270 million accounts.

Controlling Shareholder

Under the deal, current Oi shareholders would own the majority of the combined company after the transaction, which requires the carrier to sell new stock for as much as 2.7 billion euros ($3.7 billion). Oi’s controlling shareholder, Telemar Participacoes SA, and an investment vehicle managed by BTG Pactual agreed to buy about 700 million euros of that total.

Securities regulator CVM last week suspended Oi’s stock sale after CEO Bava was quoted on the deal in the Brazilian media on March 26. The ruling delays the offering by as many as 30 days.

Bava has said the transaction aids all shareholders by strengthening Oi and simplifying its ownership structure, partly by eliminating the 4.5 billion-reai debt of controlling shareholders, who give up special voting powers in exchange.

Oi’s controlling investor group, Telemar Participacoes SA, includes Brazil’s Jereissati and Andrade-Gutierrez families, along with development bank BNDES and pension funds for state-run companies such as Banco do Brasil SA.

Oi minority shareholders led by Tempo Capital have said the transaction is unfair, and the sale of new shares will dilute the value of their stakes.

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net Stephen West, Crayton Harrison

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