Oi Investors Question Plan to Take Debt From Holding Company

Oi SA investors are questioning the phone company’s plan to take on debt of 3.2 billion reais ($1.5 billion) from its controlling owners as part of a merger with Portugal Telecom SGPS SA.

Oi, Brazil’s largest landline phone company, fell 5.5 percent to 3.64 reais at the close in Sao Paulo. That brought the stock’s drop for the week to 21 percent, the biggest such decline since March of 2012.

While the deal will help Oi cut costs, HSBC Holdings Plc said yesterday the details of the transaction are less appealing to shareholders. By assuming debt that used to belong to Oi’s owners, the new company will be only slightly less indebted than its predecessors, said Richard Dineen, an analyst at HSBC in New York.

“We believe that the level of disclosure for what is a complex, multistage international transaction has been poor,” Dineen said in a research note, citing the debt deal as an example. “The opacity of certain elements of the transaction and the associated potential for valuation discrepancies is a significant risk for investors.” He has the equivalent of a sell rating on the shares.

Standard & Poor’s said it’s reviewing the transaction and may downgrade Oi to junk. Moody’s Investors Service reiterated that it may do the same.

In one of the steps to complete the merger, Lisbon-based Portugal Telecom plans to acquire 4.5 billion reais in convertible debt from AG Telecom and LF Tel, which own a portion of TmarPart, the controlling shareholder of Oi. The proceeds “essentially” will be used to pay off TmarPart’s 3.2 billion reais in debt, Dineen said. Oi, meanwhile, will be selling new shares to raise 8 billion reais before the new corporation swallows up both companies and all of their assets.

‘Not Cheap’

“The acquisition multiple for PT does not look so cheap once we include R$4.5bn debt that PT is assuming to recap Oi’s parent companies,” said Andrew Campbell, an analyst for Credit Suisse Group AG, in a research note. He has a neutral rating on the shares.

By assuming the parent companies’ debt, Rio de Janeiro-based Oi can eliminate a multitiered ownership structure, moving to a system in the new company where every shareholder has an equal vote. That approach will give the new company more flexibility if it wants to do other deals in the future, Oi Chief Executive Officer Zeinal Bava said yesterday on Bloomberg Television’s “The Pulse.”

AG Telecom is part of the Andrade Gutierrez Group, while LF Tel is owned by Jeressaiti Group.

More Pleased

While Oi bonds retreated yesterday, they put only a dent in the gains from the day before, suggesting debtholders are more pleased with the merger than stock investors. The company’s $1.5 billion of bonds due 2022 fell 0.63 cent yesterday to 91.18 cents on the dollar, pushing yields up 0.11 percentage point to 7.17 percent, according to prices compiled by Bloomberg.

“There’s a positive aspect to this, which is ultimately the move to a much more simplified transparent ownership structure,” Dineen said yesterday in an interview. “Getting to that stage is much more what people are concerned about, and that’s obviously what’s driving the stock right now.”

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