Oi Declines to Record Low After Pricing Shares for Merger

Oi SA’s preferred shares fell to a record low after the company was said to raise 8.25 billion reais ($3.71 billion) by selling stock at a price below yesterday’s close. The funding paved the way for a merger with Portugal Telecom SGPS SA.

Brazil’s biggest phone carrier priced preferred shares at 2 reais apiece and common shares, which include voting rights, at

2.17 reais in the offering, according to a regulatory filing yesterday. The funding includes a 750 million-real overallotment, people with knowledge of the matter said yesterday.

Preferred shares slumped 11 percent to 2.11 reais at the close in Sao Paulo, extending a three-day drop to 20 percent. Voting shares declined 11 percent to 2.24 reais.

The shares have been falling because investors had already expected the price on the offering to be low, according to Pedro Galdi, the chief analyst at brokerage firm SLW Corretora. “And now shareholders are selling the stock to adjust its price to that price of the offering,” Galdi said in a phone interview from Sao Paulo. “There’s no reason to keep a share that was bought some time ago for, let’s say, 4 reais, if now it’s worth 2 reais.”

Oi preferred shares have fallen 50 percent since Oct. 1, the day before the merger was announced.

Oi, based in Rio de Janeiro, had aimed for a target of 8 billion reais in total funding to help pay off the debt of its controlling shareholder, Telemar Participacoes SA, and simplify the ownership structure so each shareholder will have an equal vote. The company is seeking to merge with Portugal’s largest phone operator to get savings on costs such as network equipment.

Share Offering

BTG and 13 other banks involved in the transaction raised the funds, which will be combined with 5.7 billion reais of Portugal Telecom’s assets for a total capital increase of 14 billion reais, in line with Oi’s goal. More than 80 percent of the funds were raised from U.S. and European investors, said one of the people with knowledge of the matter, who asked not to be identified because the information is private.

BTG acted as sole lead underwriter on the deal, with four global coordinators: Bank of America Corp.’s Merrill Lynch unit, Barclays Plc, Banco Espirito Santo SA and Credit Suisse Group AG.

An Oi press official declined to comment, citing a silent period during the sale.

Oi succeeded in raising the money even after minority shareholders including Tempo Capital fought against the capital increase, saying it would dilute their stakes. Portugal Telecom plans to acquire 4.5 billion reais in convertible debt from AG Telecom and LF Tel, which own a portion of Telemar. Oi will absorb that debt in the new company.

More Flexibility

Oi Chief Executive Officer Zeinal Bava has said the transaction will give the combined company flexibility if it wants to do other deals in the future.

“The successful execution of this deal will pave the way for the consolidation of Tim Brasil,” a team of Sanford C. Bernstein & Co. analysts led by Robin Bienenstock wrote in a note yesterday. Oi could finance a purchase of 40 percent of Tim Participacoes SA with debt and further asset sales, the analysts wrote.

Press officials at Oi and Tim declined to comment on Bernstein’s note.