Oi Revenue Drops as Portugal Telecom Merger Nears Completion

Oi SA, Brazil’s biggest phone company, reported a second consecutive quarter of declining revenue, underscoring its plan to cut costs through a merger with Portugal Telecom SGPS SA.

Sales fell 2.3 percent to 6.88 billion reais ($3.1 billion), topping analysts’ average estimate of 6.8 billion reais, according to data compiled by Bloomberg. Earnings before interest, taxes, depreciation and amortization rose 37 percent to 2.96 billion reais, boosted by proceeds from the sale of transmission towers announced in December.

Chief Executive Officer Zeinal Bava is putting the finishing touches on the combination with Portugal Telecom, which he has said will streamline the ownership structure of Oi and make the company more competitive against Telefonica Brasil SA, Tim Participacoes SA and America Movil SAB. Rio de Janeiro-based Oi raised 8.25 billion reais in a capital increase last month to help cement the deal.

“We’re delivering results with a trajectory that shows the turnaround of Oi and continued stabilization in Portugal, which provides additional comfort to the new company,” Bava said today on a conference call with analysts. “With respect to synergies and transformation of the business model, there’s clearly work to do, which is going to take time.”

Oi’s non-voting shares fell 8 percent to 1.83 reais at the close in Sao Paulo, the lowest closing price on record. They have dropped 49 percent this year, compared with a 4.6 percent increase in the Ibovespa benchmark index. Portugal Telecom slid 3 percent to 2.81 euros in Lisbon, down 11 percent for the year.

Tower Sales

Oi’s net income fell to 228 million reais from 262 million reais a year earlier. Leaving out items including the tower sale, Ebitda rose 5.9 percent to 1.71 billion reais as Bava focused on recruiting less expensive prepaid wireless users and on encouraging both landline and mobile customers to spend more on their monthly bills.

More asset sales, including 1,500 to 2,000 additional wireless towers, may be on the way, Bava said today.

Portugal Telecom’s Ebitda fell 3.7 percent to 279 million euros ($381 million), and revenue declined 3.9 percent to 690 million euros in the quarter.

Share Sale

Oi’s share offering, which officially concludes May 29, is a prerequisite to closing the Portugal deal. It will help pay off the debt of its controlling shareholder, Telemar Participacoes SA, and get rid of share classes so that 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.

The company succeeded in raising the money even after minority shareholders including Tempo Capital fought against the capital increase, saying it would dilute their stakes. Bava has said the transaction will give the combined company flexibility if it wants to do other deals in the future.

The transaction seals a relationship that began three years ago, when Lisbon-based Portugal Telecom said it would acquire a 22.4 percent stake in Oi for $4.8 billion. Both companies now hold minority stakes in each other. The combined carrier, which will include Portugal Telecom’s assets in Europe and Africa, will be based in Rio de Janeiro, with Bava as CEO and with more than 100 million mobile-phone subscribers across three continents.

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