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LISBON, Sept 8 (Reuters) - Shares in Portugal Telecom rose in early Monday trading on expectation its shareholders will accept less favourable terms for a merger with Brazilian peer Oi, finalising a long-awaited deal following a debt debacle at the Portuguese firm.
Investors are due to vote on the new terms later on Monday.
In July, Portugal Telecom was forced to take a cut in its share of the company resulting from the merger with Oi to 25.6 percent from 38 percent after a holding company of the Espirito Santo banking family defaulted on nearly 900 million euros ($1.2 billion) it owed to the Portuguese firm.
Portugal Telecom had failed to inform Oi of the investment and assumed the unpaid debt under the reworked deal in July. Portugal Telecom (PT) and Oi combined their operating assets in May.
"At this point, the way the deal is structured, Portugal Telecom shareholders are better off voting for it, as that will allow them to directly own a stake in the new company," said Allan Nichols, senior analyst at Morningstar Equity Research.
"I think they'll support it. It's a lesser of two evils, but PT really shot itself in the foot with that loan."
Portugal Telecom and Oi announced plans to combine in October in a deal aimed at creating a stronger competitor in the Brazilian telecoms market, as well as cost savings that should help both companies reduce their debts.
Shareholder advisory firms Institutional Shareholder Services and Glass Lewis have both recommended Portugal Telecom shareholders to approve the reworked deal.
Shares in Portugal Telecom rose 4 percent in early trading while the broader market in Lisbon was flat. They have gained over 30 percent since bottoming out last month in the aftermath of the deal renegotiation.
At 1015 GMT, the shares were up 2.9 percent at 1.8 euros.
"The expectation is that the merger will be approved and will go ahead. PT has been consolidating gains because of that," said Paulo Rosa, a trader at GoBulling brokers in Porto.
Under the deal, Portugal Telecom has a call option to buy back more shares in Oi over a six-year period, potentially increasing its stake in the merged group if it can recover some of the money from Rioforte, the holding company that defaulted on its debt.
Rioforte, which is registered in Luxembourg, is under creditor protection, with judges expected to rule next month on how and when it can start selling assets that range from the largest piece of private property in Portugal to tourism, energy, healthcare and farming from Brazil to Mozambique.
The collapse of the Espirito Santo family's business empire culminated in the Aug. 3 rescue by the Portuguese state of the country's largest listed lender, Banco Espirito Santo, which was split into a bad bank holding toxic assets and a good bank - Novo Banco.
Novo Banco inherited the lender's 10 percent stake in Portugal Telecom and is to vote at the shareholder meeting, where two thirds of those present have to approve the deal.
1 US dollar = 0.7724 euro Reporting by Andrei Khalip and Daniel Alvarenga; Editing by Mark Potter