Brazil's Oi Could Gain Traction From Portuguese Deal

Although investors initially slapped down the deal, the acquisition of a minority stake in Brazilian phone giant Oi (TNE) by Portugal Telecom SGPS SA (PT) could bring major benefits to Brazil's biggest telecommunications company.

Earlier Wednesday, Oi announced the sale of a 22.4% stake to Portugal Telecom for 8.44 billion reals ($4.76 billion).

Portugal Telecom will acquire the stake via a subscription of Oi shares.

That was the part investors didn't like, because it will dilute existing minority stakes. In early trading, Oi's shares were down 7.1% at BRL28.42.

But analysts noted that the operation will include an offer of stock to existing shareholders. Oi expects to raise a total of BRL12 billion from the offer, money that can be put to a variety of purposes.

"The operation is positive for Oi because, with the fresh funds, the company can improve its debt profile," said Joao Pedro Brugger, a manager of the Leme investment fund who oversees BRL170 million in equities and debt.

Oi has been facing problems with debt management since it acquired control of local rival Brasil Telecom in 2008 in a deal that was worth some BRL10 billion.

At the end of the first quarter of this year, the latest data available, Oi debts totaled BRL21.3 billion, up from BRL19 billion in the year-ago period.

"With this deal, Oi gets money and it gains oxygen. Now the company can invest in aggressive plans for expansion in rapid growth areas, such as broadband," said Adriano Pitoli, a telecoms analyst at local consulting group Tendencias.

Portugal Telecom will acquire the stake from Oi shareholders AG Telecom Participacoes S.A. and LF Tel S.A., Oi said in a filing with the Brazilian Securities and Exchange Commission, or CVM.

But control of the company will remain in Brazilian hands, something Brazil's government has made clear as a priority. Oi is controlled by local groups Andrade Gutierrez, La Fonte and Fundo Atlantico.

"This operation will allow Oi to expand its investment capacity, to expand both internationally and locally, but maintaining control in Brazilian hands," said Pedro Jereissati, head of Telemar Partcipacoes, Oi's holding company, in a statement.

Through the deal, Portugal Telecom will acquire Oi's shares via a capital increase to be undertaken by the Brazilian company.

In addition, Oi said it will acquire a stake of up to 10% in Portugal Telecom. That operation must still be approved by the board of directors of the Portuguese company.

Oi described the deal as "a partnership" with the Portuguese company.

Through the partnership, both companies will develop new technologies, gain scale in the growing Brazilian market and expand international operations, Oi said in its filing.

The operation is linked with a deal between Portugal Telecom and Telefonica SA (TEF) announced Wednesday in Europe.

Portugal Telecom will sell its stake in Brazil's mobile operator Vivo Participacoes SA (VIV) to Telefonica for EUR7.5 billion and use some of the proceeds to buy Oi's stake, after months of struggle between the two Iberian telecoms.

Brazil is a key market for both Telefonica and Portugal Telecom as they face declining revenue in their mature home markets and are suffering the lingering impact of a severe recession.

Brazil's telecom market, including fixed and mobile phone components, has four big players. Vivo, which before the current deal was jointly owned by Telefonica and Portugal Telecom; Claro and Embratel, both controlled by Mexican billionaire Carlos Slim; TIM Participacoes, which is the local unit of Telecom Italia SpA (TIA, TIT.MI); and Oi, the only local company controlled by Brazilian groups.

-By Rogerio Jelmayer, Dow Jones Newswires; 55-11-3544-7071; [e-mail]