UPDATE 2-Brazil sees no risk for Oi-Portugal Telecom merger, sources say

Fri Jul 11, 2014 5:54pm EDT

(Adds BNDES president's comments in paragraph 6-8, share performance in last paragraph)

By Leonardo Goy

BRASILIA, July 11 (Reuters) - Brazil's government does not believe a planned merger of Grupo Oi SA and Portugal Telecom SPGS SA is at risk, three sources with direct knowledge of the situation said on Friday, as tensions grew over Portugal Telecom's debt deals with troubled Banco Espírito Santo SA.

Oi, which controls Brazil's fourth-biggest wireless carrier, and state development bank BNDES, a major sponsor of the merger, had lashed out at Portugal Telecom for not disclosing a debt investment in holding company Rioforte, which is under investigation in Luxembourg over liquidity issues.

The representatives of two key Oi shareholders quit Portugal Telecom's board at the start of the month, when Portugal Telecom's 897 million euro ($1.22 billion) investment in Rioforte, controlled by key shareholder Banco Espírito Santo, came to light.

Recent disclosures of financial irregularities at a web of family-held holding companies behind Banco Espirito Santo, Portugal's largest listed bank, have raised questions about potentially destabilizing losses at the bank and other companies in the family's orbit.

The Brazilian government is monitoring the situation "from afar," with some officials making initial consultations with regulatory agencies about the situation, said a first source, who declined to be identified because of the sensitivity of the issue. President Dilma Rousseff's administration has been a major sponsor of the merger since it was announced last year.

"Our belief is that the situation won't get to the point of sinking the deal. That would be a lose-all situation," the source said, adding that "both sides need the merger" to grow.

On Friday, Luciano Coutinho, president of BNDES, told reporters in São Paulo that the merger is unlikely to collapse as a result of the Portugal Telecom investments in Rioforte, which might lead both companies to rework the terms of the deal.

"We will analyze the conditions," Coutinho said, without elaborating. He added that BNDES will seek to preserve the interests of Oi shareholders because "that is our fiduciary duty."

The debt investment in Rioforte, equal to roughly 40 percent of Portugal Telecom's market value, matures in coming days, and was hanging over the Oi merger. The merger has been touted as a chance to strengthen Oi's corporate governance after years of bickering between minority and controlling shareholders, but distrust of the Portuguese partner is clouding those hopes.

Securities watchdog CVM as well as Anatel, the telecommunications industry regulator, are monitoring how the situation evolves, a second source said. Anatel requested information from both companies, the second source said, without elaborating.

A third source said that so far, the dispute has not reached the point of becoming a "political issue." The common belief is that any eventual problems between partners are "a company problem that can be resolved with market means," the third source said.

Portugal Telecom shed 1.6 percent to 1.834 euros in Lisbon. Preferred shares of Oi rose 11 percent to 1.71 reais. (Writing and additional reporting by Guillermo Parra-Bernal; Editing by Bernadette Baum and Lisa Shumaker)