Lisbon - Portugal Telecom has been forced to take a cut in its share of the merger with Brazil's Grupo Oi after a holding company of the Espirito Santo family failed to repay more than $1 billion it owed to the telco.
Portugal's largest telecoms services group said it would take legal action to try and recover the debt from the family company, Rioforte, which fell due on Tuesday.
The revision of the terms of the merger with Oi is the most high-profile consequence so far of the escalating troubles of the Espirito Santo clan, once one of Europe's premier business dynasties.
The family's business empire is in disarray since the emergence of accounting irregularities at one of its holding companies, putting Portugal and the family-founded bank Banco Espirito Santo (BES) under pressure as questions continue to swirl about potentially destabilising losses.
The failure of Rioforte, which holds some of the family's major assets, including hotels and property, to repay 847 million euros ($1.15 billion) in short-term debt owed to Portugal Telecom means the latter will now have a 25.6 percent stake in the merger with Oi instead of the 38 percent originally agreed.
While a slap in the face for Portugal Telecom, the reworked deal has reassured investors that the merger, designed to create a telecoms champion with 100 million subscribers and $19 billion in annual revenue, will go ahead.
“In our view, this deal is significantly positive for PT investors and modestly positive for Oi investors, with it very much in the interest of both parties to progress with the merger,” said Mark Chapman from Credit Insights.
Although the new merged company is likely to see its debt downgraded to junk due to the unpaid loan, shares in Portugal Telecom were up nearly 7 percent at 1.95 euros in relief that the merger will go through.
They had slumped by more than a third to a historic low in the past few weeks on concerns it would unravel.
Shares in BES rose 20 percent from all-time lows on Tuesday.
Portugal's largest listed bank has said it has more than enough reserves to deal with its exposure to the Espirito Santo empire but investors are still waiting for it to put a figure on any losses.
Uncertainty over the eventual bill has triggered a plunge in the bank's shares and bonds over the past month.
ALLIES NO MORE
Rioforte is the second Espirito Santo company not to honour its debts in as many weeks, but the failure to repay the Portugal Telecom loan cuts at the heart of the country's tight-knit business community.
The Espirito Santo family and Portugal Telecom have a long allegiance cemented by personal friendships and cross share holdings.
BES has a 10 percent stake in the telecoms group, and Portugal Telecom officials knew the Espirito Santo clan had some problems before they handed over the cash in April, people familiar with the matter have told Reuters.
Portugal Telecom has declined to say why it invested so much of its liquidity in one firm's commercial paper, and Oi has sharply criticised the Lisbon-based group for not disclosing the loan earlier.
Oi's representatives had quit the Portugal Telecom board in protest when told of the Rioforte deal.
Wednesday's agreement is likely to be seen as good news for Zeinal Bava, Oi's chief executive, who had headed Portugal Telecom's Portuguese business before moving to Oi in June 2013, months before the tie-up was announced.
Some investors had expressed concern that the Rioforte situation would put Bava - whose operational know-how is crucial to Oi - in a difficult position, since it remains unclear whether he knew about the loan.
The unpaid debt, which had been transferred to Oi in May, will now be shifted back to Portugal Telecom. 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 Rio Forte money.
The Lisbon group will have to sue Rioforte, but the Espirito Santo family is preparing to seek bankruptcy protection for Rioforte to stop creditors forcing a fire sale.
“This morning's news feels like a sensible resolution to an unprecedented situation: Oi gets to offload a credit risk it shouldn't have been wrong-footed into taking on, while Portugal Telecom has the chance to participate in the merger with the same economics, assuming it can get the cash back from Rioforte in a timely manner,” said Giles Thorne of Jeffries.
“This is certainly a positive for Oi, with matters finely balanced for PT.” - Reuters