Portugal Telecom and Oi compromise over debt to keep merger alive

In a bid to rescue their proposed merger Brazilian operator Oi will get a bigger piece of the combined operation – CorpCo – in return for helping Portugal Telecom (PT) out with €847 million of defaulted debt from Rioforte, which had threatened to scupper the move.

PT announced the signing of a Memorandum of Understanding with Oi following the “non-repayment” of the matured debt that PT for some reason decided to take on from Rioforte., with a further €50 million still outstanding. “The Rioforte debt is currently held in subsidiaries that were contributed to Oi on 5 May 2014 in the context of the business combination announced on 2 October 2013,” said the announcement.

The business combination in question was the announcement of a merger between PT and Oi to form the wonderfully-named CorpCo nine months ago. Things had clearly stalled in that time and this deal is designed to get things moving again.

The mechanics of the deal are complex, but essentially amount to Oi shareholders taking on this debt in return for a bigger piece of CorpCo. Under the terms of the new deal PT shareholders will own 25.6% of CorpCo, down from a reported 39.6% previously.

Bloomberg reports that, despite the two companies being in the middle of a proposed merger, Oi had no idea PT had decided to buy this debt as recently as April of this year. Furthermore Espirito Santo Group, which owns Rioforte, also holds a 10% stake in PT. Meanwhile PT will be taking legal action against Rioforte, with the support of Oi, to try to recover the debt, and has the option to buy back some of the lost share in CorpCo if and when it has the cash.

It’s hard to imagine a more Byzantine set of inter-dependencies and financial juggling than this, and somehow shareholders have got to get their heads around it by 8 September, which is the deadline for PT’s general shareholders meeting, where the deal will be approved or otherwise.