(Recasts to add approval by Oi shareholders, share performance)
By Daniel Alvarenga
LISBON, Sept 8 (Reuters) - Shareholders of Portugal Telecom and Brazil's Oi on Monday approved the revised terms of a merger after a failed debt investment forced the Portuguese company to accept less favorable terms in the tie-up.
At a meeting of Portugal Telecom (PT) shareholders, some 98.25 percent voted in favor of approving the new terms of the deal, according to a company spokeswoman.
"The revision (of the deal) is not an ideal situation, but it is the better option given the circumstances that have been discovered," Paulo Varela, CEO of conglomerate Visabeira, which holds about 2 percent of PT, told reporters.
Shares of Portugal Telecom closed 1.26 percent higher on Monday, amid expectations that shareholders would approve the terms. They have bounced over 30 percent since bottoming out last month in the aftermath of the ill-fated debt investment.
Separately, Oi shareholders also approved the new terms in a general assembly. The company's stock touched a six-week high in Sao Paulo trading as any remaining doubts about the deal dissolved.
In July, executives and key shareholders of both companies had agreed that Portugal Telecom should take a smaller share of the company resulting from the merger with Oi, settling for 25.6 percent rather than the 38 percent stake originally agreed.
The renegotiation came 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.
Concerns about the risky investment led the company's CEO Henrique Granadeiro to resign in early August.
Portugal Telecom had failed to inform Oi of the investment and assumed the unpaid debt under the reworked deal in July. PT and Oi combined their operating assets in May.
Some small shareholders have said they were unhappy with the new terms. Octavio Viana, head of investor association ATM representing minority shareholders in Portugal Telecom who are dissatisfied with the deal, said earlier on Monday that his group would advance with legal action if it was approved.
Two dozen shareholders represented by the association last month filed a class-action suit against all Portugal Telecom management teams since 2001 over investments in Espirito Santo group made since then, claiming it was illegal and demanding reimbursement for the lost value of their shares in Portugal Telecom.
But many analysts said that voting in support of the deal was the best option.
"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, a senior analyst at Morningstar Equity Research.
"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 2013 in a deal aimed at creating a stronger competitor in the Brazilian telecoms market as well as a cost savings that should help both companies reduce their debt.
Shareholder advisory firms Institutional Shareholder Services and Glass Lewis both recommended Portugal Telecom shareholders approve the reworked deal.
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 Portugal of the country's largest listed lender, Banco Espirito Santo, which was split into a bad bank holding toxic assets and a solvent 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. (U.S. $1 = 0.7724 euro) (Additional reporting by Andrei Khalip, writing by Axel Bugge; editing by G Crosse, Mark Potter)