UPDATE 2-Brazil's Oi prices offering at bottom of range ahead of merger

Mon Apr 28, 2014 5:51pm EDT

(Recasts to update with pricing results, background in paragraphs 1-6)

By Joan Magee and Guillermo Parra-Bernal

NEW YORK/SAO PAULO, April 28 (IFR/Reuters) - Grupo Oi SA took the biggest step yet toward combining with partner Portugal Telecom SGPS SA late on Monday by pricing Brazil's only share offering this year at the lowest price expected.

Oi, Brazil's largest fixed-line telephone carrier, priced a sale of preferred shares at 2 reais each, at the bottom of the suggested range set by bankers, two sources with direct knowledge of the deal said. The company had indicated a range of 2 reais to 2.30 reais for the preferred shares.

Common shares were priced at 2.17 reais, a premium of more than 8 percent to the preferred stock, said the sources, who declined to be identified because the transaction is underway. The sources said a pricing near the bottom of the range would allow the company to ensure strong demand for as many as 5.75 billion shares in the deal and allow banks to buy another 2 billion shares in supplementary and additional allotments.

Details on the size of the placement were not immediately available on the website of securities industry watchdog CVM. One of the sources said foreign investors bought about 85 percent of the offering, with the rest going to local institutional investors.

The sources expect the transaction to fetch at least 8 billion reais ($3.6 billion) from investors, helping Oi to reduce a stifling debt load.

The recapitalized Oi, which also controls Brazil's fourth-largest mobile phone carrier, plans to use its stronger balance sheet to form CorpCo, the proposed name of the company after the tie-up with Portugal Telecom.

Each Oi common share would be exchanged for 1 share in CorpCo and each Oi preferred share would be swapped for 0.9211 CorpCo share.

Executives at Oi and Portugal Telecom say CorpCo will have more clout to compete in Brazil with bigger rivals such as the local unit of Spain's Telefonica SA , Telecom Italia SpA's TIM Participações SA and Mexico's America Movil SAB.

Oi's preferred shares closed at a record low on Monday, shedding 5.6 percent to 2.37 reais, while common shares were down 0.4 percent to 2.52 reais.

DEAL DROUGHT

Stock offerings in Brazil are off to their worst start this year in more than a decade, the latest sign of eroding investor confidence in Latin America's largest economy.

Before Oi's share sale, no initial public offering or follow-on sale had been filed with the CVM since mid-December, which is unheard of since at least 2004, according to Thomson Reuters data. A truncated capital markets calendar, rising political risks and the emergence of attractive investments elsewhere have left investment bankers struggling after they thrived for years with easy-to-sell IPOs.

The Oi offering took off, according to investors heard by Reuters and the IFR, because banks involved in the transaction structured it with a series of guarantees to lure buyers.

By early Monday afternoon, investors had pledged to buy a little more than 10 billion reais worth of stock in the offering, said the sources.

Grupo BTG Pactual SA, the largest listed Latin American investment bank, is handling the transaction, along with the investment-banking units of Bank of America Corp , Barclays Plc, Citigroup Inc, Credit Suisse Group AG, Banco Espírito Santo SA and HSBC Holdings Plc.

São Paulo-based BTG Pactual, controlled by billionaire financier André Esteves, pledged 2 billion reais in fresh capital for Oi and structured the participation of as many as 13 other banks in a scheme to bolster the offering if investor demand faltered.

Banco do Brasil SA. Banco Bradesco SA, Banco Caixa Geral de Depósitos SA, Goldman Sachs Group Inc, Itaú Unibanco Holding SA, Morgan Stanley & Co and Banco Santander SA are also joint bookrunners.

Under terms of the deal, Portugal Telecom will contribute its assets, excluding its stake in Oi, and own 38 percent of the new company. Oi's major shareholders excluding Portugal Telecom would have as much as 30 percent of CorpCo and other investors such as BTG Pactual and a number of Brazilian pension funds would own the rest.

($1 = 2.23 Brazilian reais) (Additional reporting by Brad Haynes in São Paulo; Editing by Dan Grebler)