(Updates share performance)
SAO PAULO, July 16 (Reuters) - Shares of Brazil’s Grupo Oi SA jumped the most in six months in Wednesday trading after the company renegotiated a merger with Portugal Telecom to avoid the credit risk from a debt investment that had dragged the stock to a record low.
Oi’s preferred and common shares surged around 18 percent in early trading, their biggest intraday jump since early January. The stock later settled to a 12 percent gain, bringing preferred shares to 1.75 reais and common shares to 1.82 reais.
Under the deal announced overnight, Portugal Telecom agreed to a smaller initial stake in the merged company and took responsibility for an 897 million euros ($1.22 billion) debt investment it had not disclosed before the deal.
The debt was issued by the Rioforte holding company controlled by the Espirito Santo family, a major investor in Portugal Telecom facing scrutiny from European regulators. Commercial paper maturing on Tuesday went unpaid as Rioforte prepared to file for creditor protection, a source close to the process told Reuters.
“Portugal Telecom will bear all the risk related to RioForte debt and Oi shareholders will be protected,” wrote the trading desk of Brazilian investment bank Itau BBA in a note explaining Wednesday’s development. “So on a relative basis, we believe this agreement is more beneficial to Oi shareholders than to Portugal Telecom ones.”
Shares of Portugal Telecom rose 3.3 percent in Wednesday trading as the new accord relieved fears that the merger could fall apart. Both companies have been counting on the deal to bring relief for their balance sheets.
Brazil’s telecommunications regulator Anatel is likely to approve the new terms of Oi’s merger with Portugal Telecom, a source at the agency told Reuters.
The arrival of new management from Portugal was seen as a chance to bolster corporate governance at Oi, which had suffered from long-running disputes between controlling and minority shareholders. Concerns about the prudence of the Rioforte investment, however, have clouded those hopes.
Oi said in a Wednesday securities filing that it is pressing ahead with plans to conclude the merger with a final share swap, originally scheduled for October.
The company also reiterated plans to join the Novo Mercado segment of the Sao Paulo stock exchange, which requires greater transparency and higher standards for corporate governance.
$1 = 0.7376 euros Reporting by Brad Haynes and Asher Levine; Additional reporting by Leonnardo Goy in Brasilia; Editing by James Dalgleish