Portugal Telecom to merge with Brazil’s Oi

Portugal Telecom has announced plans to merge with Brazilian affiliate Oi in a move set to create a global operator serving more than 100 million customers across Europe and Latin America.

The Portuguese incumbent says the deal is a natural development of the alliance the two companies struck in 2010, and will see Zeinal Bava – who led Portugal Telecom (Lisbon, Portugal) until earlier this year before taking up the leadership role at Oi (Rio de Janeiro, Brazil) – appointed chief executive of the combined entity.

Portugal Telecom has announced plans to merge with Brazilian affiliate Oi in a move set to create a global operator serving more than 100 million customers across Europe and Latin America.

The Portuguese incumbent says the deal is a natural development of the alliance the two companies struck in 2010, and will see Zeinal Bava – who led Portugal Telecom (Lisbon, Portugal) until earlier this year before taking up the leadership role at Oi (Rio de Janeiro, Brazil) – appointed chief executive of the combined entity.

The tie-up is aimed at generating significant economies of scale for the two players, with synergies estimated at a net present value of €1.8 billion ($2.44 billion).

As part of the merger, Oi is to carry out a cash capital increase of at least €2.3 billion aimed at improving the balance-sheet flexibility of the new company.

That company will have revenues of €12.4 billion and earnings before interest, tax, depreciation and amortization (EBITDA) of €4.2 billion, based on 2012 figures, with a net debt of about €13.7 billion.

According to Bloomberg, Portugal Telecom currently owns 12.1% of the investor group that controls Oi, as well as 19.4% of the Brazilian operator’s non-voting shares.

After the transaction has closed, Portugal Telecom shareholders are set to hold a 38.1% stake in the new entity.

Portugal Telecom says the merger will build on previous collaboration between the two operators in areas including product development, customer care, engineering, operations and IT.

Both Oi and Portugal Telecom have struggled in recent quarters and will hope the combination of assets and expertise provides a much-needed spur to performance.

For the three months ending June 2013, Portugal Telecom reported a 5.5% drop in revenues, to €1.54 billion, and a 13.8% fall in EBITDA, to €491 million, owing largely to weak demand in its domestic market.

Although Oi reported a 2.4% increase in net revenues over the same period, to BRL7.1 billion ($3.2 billion), its EBITDA slumped by 16.4%, to BRL1.8 billion, due to a rise in personnel and marketing expenses.

Oi has recently entered into agreements to sell what it describes as non-strategic assets – including some of its mobile phone towers and cable company GlobeNet – in an effort to reduce costs and improve its financial flexibility.