Oi SA investors weighing a merger with Portugal Telecom SGPS SA got opposing recommendations from the two biggest shareholder advisory firms, setting up a showdown in a vote on the deal later this month.
Both Glass Lewis & Co. and Institutional Shareholder Services Inc., the advisory firms, agreed that the merger would improve Oi’s corporate governance. They differed on whether the dilution of minority investors’ stakes was enough to object to the deal, and whether Oi is using the best method to value Portugal Telecom’s assets. Glass Lewis recommended a vote in favor, while ISS advised opposing the deal.
Oi has sought the merger, in which it plans to raise at least 7 billion reais ($3 billion) in capital and then pool its assets with Portugal Telecom’s, to gain purchasing power with suppliers and to have more diverse sources of revenue. Minority shareholders such as Tempo Capital criticized the deal in part because it will hurt the value of their stakes.
“Despite the potential corporate governance benefits of the transaction, there are serious concerns regarding the way the company structured the proposed corporate reorganization,” ISS, which is owned by MSCI Inc., said in a report published today. The firm advises more than 1,700 clients.
While Glass Lewis agreed the deal would dilute the value of minority investors’ stakes, “we note such placement structures are not uncommon, particularly in those instances that require a minimum level of proceeds, as is the case here,” it said yesterday in a document obtained by Bloomberg News. The firm provides advice on shareholder votes around the world to institutional investors that manage a combined $15 trillion in assets.
Oi fell 2.9 percent to 3.30 reais in Sao Paulo trading, its lowest closing price since 1998.
“The deal terms have been confusing to us and the company has not been helpful in providing additional details,” said Walt Piecyk, an analyst with BTIG LLC, in a telephone interview from New York. “Maybe the management team needs to figure out clear terms that are more fair to minority shareholders.”
Portugal Telecom said this week in a filing that Oi still doesn’t have an underwriting agreement for its capital increase. That “raises the possibility that the capital increase may not be successful,” said Karim de Baecque, a JPMorgan Chase & Co. analyst, in a note this week.
“Any development that is seen to put the PT/Oi deal at risk may be seen as lowering the likelihood of near-term consolidation,” the analyst said.
Brazilian securities regulator CVM sided with the smaller investors in a technical ruling in January, saying that Oi’s controlling ownership group can’t participate in calculating the price of some assets involved in the transaction. Oi’s vote is scheduled for March 27, the same day Portugal Telecom investors will decide on the transaction. Oi has appealed the CVM technical ruling, which the regulator is evaluating.
Press officials for Rio de Janeiro-based Oi, Lisbon-based Portugal Telecom and Tempo Capital declined to comment, while a Glass Lewis spokesman didn’t reply to requests for comment.