Oi SA said it wasn’t aware that merger partner Portugal Telecom SGPS SA had purchased debt issued by Rioforte, a holding company that’s selling assets amid speculation it may be unable to pay its bills.
Oi, the Brazilian telephone company, is asking for more information about Portugal Telecom’s April purchase of 897 million euros ($1.22 billion) in commercial paper from Rioforte, according to a regulatory filing today. Rioforte is owned by Grupo Espirito Santo, or GES, one of Portugal Telecom’s largest shareholders with a 10 percent stake, according to data compiled by Bloomberg.
Investors are speculating Rioforte won’t be able to make payments on the paper due July 15 and July 17, which would saddle Portugal Telecom with losses and increase its debt leverage, according to Rafael Elias, an analyst at Credit Agricole SA. If the merger closes later this year as expected, the combined company would inherit the consequences of the Rioforte debt investment.
Portugal Telecom hasn’t said why Oi wouldn’t have been informed of the Rioforte debt despite the impact it would have on debt leverage after a merger. In a statement today, the Lisbon-based company pledged to work with Oi to resolve the situation.
Otavio Azevedo, an Oi representative on the Portugal Telecom board, resigned this week, telling Valor Economico newspaper that he was “uncomfortable” because he only discovered the Rioforte operation through press reports. Fernando Magalhaes Portella, another Oi representative on the board, also resigned and hasn’t said why.
Rioforte said in April it was seeking to sell a hotel chain and shares in some of its units in Brazil and Paraguay.
Oi Chief Executive Officer Zeinal Bava, who is also CEO of Portugal Telecom’s PT Portugal unit, is aiming to close the merger to streamline the ownership structure of Oi and become more competitive by sharing costs between the companies. Rio de Janeiro-based Oi raised 8.25 billion reais ($3.7 billion) in a capital increase in April to help cement the deal.
Oi said in today’s filing it will analyze the information it receives from Portugal Telecom and take the necessary steps to defend its interests. A telephone call seeking comment from Rioforte wasn’t answered.
Portugal Telecom “strongly believes that the various parties, Portugal Telecom, Oi and GES, will be able to find the adequate solutions to protect the interests of both PT and Oi shareholders,” the company said in a statement today.
Brazilian securities regulator CVM is analyzing the case and will take measures if necessary, it said in an e-mailed response to questions. The nation’s telecommunications regulator, Anatel, is monitoring the situation to see if it puts Oi’s landline license at financial risk, Superintendent Carlos Baigorri said in a telephone interview.
Oi could fall to 1.63 reais a share if investors price in a complete loss of the investment, Lucio Aldworth, a Citigroup analyst, wrote in a note on July 1. Oi dropped 2.8 percent to 1.76 reais in Sao Paulo, a record-low closing price. Portugal Telecom slid 7.3 percent to 2.29 euros in Lisbon, the lowest in more than 18 years.