Oi SA tumbled in Sao Paulo trading by the most since October after Brazil’s securities regulator sided with majority shareholders in a dispute over a planned merger with Portugal Telecom SGPS SA.
Controlling shareholders won a victory as regulator CVM ruled last night that they’ll be allowed to vote tomorrow on a capital increase of as much as 14.1 billion reais ($6.1 billion) and the valuation of assets involved in the merger. Minority investors led by Tempo Capital in Rio de Janeiro fought to block their vote in a meeting happening tomorrow because the deal involves paying off 4.5 billion reais in the controlling group’s debt in addition to diluting holdings.
The merger is “a transaction that many perceived as not only being dilutive, but one in which the company failed to provide any details,” said Walter Piecyk, an analyst with BTIG LLC, in a telephone interview from New York. “They claim they want to go on the ‘Novo Mercado,’ but they aren’t offering any transparency. That’s probably a good indication to exit the stock.”
Oi’s preferred shares plunged 11 percent to 3.19 reais in Sao Paulo, bringing its total loss since the deal was announced on Oct. 2 to 28 percent. Trading volume was four times the three-month daily average.
The Novo Mercado is a section of the Sao Paulo Stock Exchange that sets higher corporate governance standards.
The CVM’s ruling confirms “there is no impediment to the exercise of voting rights by the other shareholders of Oi,” the company said in a statement today.
Oi’s press office in Rio de Janeiro, where the company is based, declined to comment further by phone.
CVM’s decision may have a dilutive effect to minority shareholders and creates a “negative precedent” for future transactions, Tempo Capital said in e-mailed statement.
The ruling contradicts a preliminary CVM technical committee decision in January that said the controlling group, Telemar Participacoes, and its investors couldn’t participate in tomorrow’s vote. Oi’s ownership group includes the Jereissati and Andrade-Gutierrez families and pension funds Petros, Previ and Funcef.
Oi Chief Executive Officer Zeinal Bava is pushing for the merger to help the phone carrier compete with America Movil SAB and Telefonica SA in Brazil. The deal would allow Oi and Portugal Telecom to create a company with more than 100 million subscribers.
The merger won the backing of Brazil’s largest pension fund, known as Previ, which said the transaction will be worth the share dilution that investors will suffer. The tie-up, the biggest Brazilian deal announced in 2013, is pivotal to Oi’s efforts to clean up a complicated ownership structure at the wireless carrier and expand to compete in the country’s overregulated market, Marco Geovanne, executive director of holdings at Previ, said in a Feb. 19 interview.
The two biggest shareholder advisory firms, Glass Lewis & Co. and Institutional Shareholder Services Inc., 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 in a report this month recommended a vote in favor, while ISS advised opposing the deal.
A group of banks -- including Banco do Brasil SA, Credit Suisse Group AG and Banco BTG Pactual SA among others -- “should assume a commitment to subscribe for an amount of 6 billion reais” in the capital increase, Oi said in a February regulatory filing.
“There’s little, if any, risk of the capital raising not completing,” Evan Miller, a portfolio manager at Gamco in London who helps manage $43.5 billion in assets, including Oi shares. “But obviously you don’t want to have to draw on a banking syndicate if you can avoid it.”