UPDATE 2-Brazil's Oi says Portugal Telecom did not disclose Rioforte debt

Thu Jul 3, 2014 2:40pm EDT

(Adds Portugal Telecom statement, latest share performance)

By Brad Haynes and Axel Bugge

SAO PAULO/LISBON, July 3 (Reuters) - Brazil's Oi SA said on Thursday that before they combined assets, Portugal Telecom SGPS SA did not disclose an investment in the holding company of a key shareholder under investigation in Luxembourg.

Oi said it would defend its interests as it pressed for more information, reflecting a growing gulf between the telecommunications companies in the midst of a drawn-out merger.

Portugal Telecom said it was intent on resolving questions over the acquisition of 897 million euros ($1.22 billion) in debt from Rioforte, which is held by one of the Portuguese company's biggest shareholders, the Espirito Santo banking family.

The investment in the debt of one of the family's holding companies became an issue after the group came under investigation in Luxembourg for irregularities.

Analysts have warned of credit risk from the Rioforte debt - equal to roughly 40 percent of Portugal Telecom's market value - that matures this month and set off investor concerns about the merger formalized in an April 28 share offering.

Shares of Portugal Telecom fell 7.3 percent in Lisbon to their lowest in nearly two decades. Oi lost 2.6 percent on the Sao Paulo stock exchange, falling in tandem with its merger partner for the fifth straight session.

"Although the merger between Oi and Portugal Telecom is in its final stages, the investment in Rioforte's commercial paper is triggering an open conflict and driving the two companies apart, just when they should be approaching total integration," said Steven Santos, a manager at the XTB Portugal brokerage.

The merger was touted as a chance to strengthen Oi's corporate governance after years of bickering between minority and controlling shareholders. Any distrust of the Portuguese partner could hurt that upside.

Portugal Telecom said on Thursday it was "completely focused" on resolving Oi's concerns about the Rioforte debt.

"PT strongly believes that the various parties, PT, Oi and GES (Espirito Santo Group), will be able to find the adequate solutions to protect the interests of both PT and Oi shareholders," it said in an emailed statement.

Earlier this week two Brazilian board members of Portugal Telecom with ties to Oi quit. In October, both board members are expected to join a combined board of the new company, making the resignations largely symbolic.

Some analysts played down the risks to the companies' merger, well underway since the April share swap.

"I guess Oi would have a hard time renegotiating the terms. After all, Zeinal Bava was the CEO of Portugal Telecom before Oi. He's been aware," said Allan Nichols, senior analyst at Morningstar Equity Research.

Bava, who made his name turning around Portugal Telecom amid an economic crisis, took over Oi in June 2013, shortly before the companies announced a merger aimed at bolstering their balance sheets and boosting competitiveness in a tough market. ($1 = 0.7345 euros) (Additional reporting by Andrei Khalip and Daniel Alvarenga Editing by W Simon and J Benkoe)

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