(Updates with details, comment throughout)
By Axel Bugge
LISBON, Nov 3 (Reuters) - Telecoms group Altice SA has made a bid worth 7.03 billion euros ($8.8 billion) for the Portuguese operations of Brazil's Oi as Oi unwinds its troubled merger with Portugal Telecom.
Altice, controlled by Franco-Israeli billionaire telecoms entrepreneur Patrick Drahi, already owns two small cable companies in Portugal and buying the former state-owned monopoly would vault it into prime position to compete with Vodafone and Optimus.
Drahi said in September that Altice was looking at acquisition targets in countries where it was already present, such as Portugal and Belgium, even though its majority-controlled French cable firm Numericable Group SA is still in the throes of completing its landmark purchase from Vivendi SA of France's second largest mobile operator, SFR.
Oi's new interim chief executive, Bayard Gontijo, said last month that the company could sell Portuguese assets acquired with its takeover of Portugal Telecom (PT) in order to pay down mounting debts of over $18 billion..
Oi's merger with PT soured this summer after the Rioforte holding company of the Espirito Santo banking family, ultimately a shareholder in PT, defaulted on nearly 900 million euros ($1.14 billion) of debt owed to PT, a debt which Oi said it had not been aware of before their merger deal.
As a result PT's shareholding in Oi was sharply reduced in a revision of the merger terms, leaving PT with only 25.6 percent of Oi instead of the 38 percent previously agreed. It also led to the resignation last month of Zeinal Bava, the chief executive of the new company and former chief executive of PT.
Altice said the bid for the PT assets was for "the existing business of Portugal Telecom outside of Africa and excludes Portugal Telecom's Rio Forte debt securities, Oi treasury shares and Portugal Telecom financing vehicles."
The offer, it said, values the assets at an enterprise value of 7.025 billion euros on a cash and debt-free basis and includes a 400 million euros earn-out related to the future revenue generation of Portugal Telecom and a 400 million euros earn-out related to future operating free cash flow.
Altice said it would finance the acquisition with a mix of new debt and existing cash.
Meanwhile Oi needs the sale to strengthen its position in the consolidation of the Brazilian telecoms market.
Local rivals Oi, America Movil and Telefonica Brasil have just agreed to place a joint bid worth around 32 billion reais ($13 billion) for TIM Participações, the second-biggest of Brazil's four mobile network operators and majority-owned by Telecom Italia , sources told Reuters on Friday.
"In the face of intense press speculation over the last few weeks, this bid was expected and fits Oi's goal of selling assets to participate in Brazilian mobile consolidation, which is the company's ultimate goal at this stage," said analysts at BES Investimento in a research report.
Analyst Giles Thorne at Jefferies also said the sale made sense for Oi.
"In our view, the primary driver for the Portuguese investment is to improve financial flexibility in advance of launching an Oi-led bid for TIM Brazil," Thorne said in a research report.
Shares in Portugal Telecom rose 5.36 percent to 1.3770 euros a share on Monday after hitting a record low of 0.8700 in mid-October. They are down 58 percent year-to-date.
Analysts say Altice could face competition for the Portugal Telecom assets and the Financial Times said last month private equity groups including Apax Partners LLP and Bain Capital could be interested. (1 US dollar = 0.8004 euros) (Reporting By Axel Bugge and Ankush Sharma; Editing by Leila Abboud and Greg Mahlich)