Portugal Telecom offers Oi guarantees to save merger, paper says

SAO PAULO, July 15 Tue Jul 15, 2014 8:57pm EDT

SAO PAULO, July 15 (Reuters) - Portugal Telecom SGPS SA is offering partner Grupo Oi SA part of its assets as a guarantee to move ahead with their planned merger, newspaper Diário Económico said late on Tuesday, as the former faces losses in a defaulted debt investment.

According to the online version of the Portuguese newspaper, a portion of Portugal Telecom's 897 million euro ($1.2 billion) investment in Rioforte, a vehicle controlled by Portugal's Espírito Santo family, went unpaid on Tuesday, when it matured. The newspaper did not say how it obtained the information.

Rio de Janeiro-based Oi and Portugal Telecom agreed to keep the terms of their merger unaltered for now, the paper said, adding that Portugal Telecom will continue to have a 37 percent stake in CorpCo, as the company resulting from the merger is known.

Efforts to reach Lisbon-based Portugal Telecom were unsuccessful. A spokeswoman for Oi declined to comment.

While the report failed to detail what type of assets Portugal Telecom would set aside as guarantee for Oi, the move would help protect the Brazilian company from losses related to the investment in Rioforte while increasing Oi's control of CorpCo, Diário Económico added.

The stake could be lowered should Rioforte fail to honor the debt, a situation Diário Económico says looks "highly probable" since the vehicle will request protection from creditors. Rioforte will seek creditor protection at a court in Luxembourg to prevent an uncontrolled fire sale of assets, sources with knowledge of the situation told Reuters on Tuesday.

Rioforte and other investment vehicles controlled by the Espírito Santo family - which owns 10 percent of Portugal Telecom, - plan to seek court protection by Friday, Diário said. Oi shareholders, including construction company Andrade Gutierrez SA, Brazil's Jereissati family and state development lender BNDES, claimed they were not informed of the Rioforte investment by Portugal Telecom.

Portugal Telecom's investments in Rioforte were equal to roughly 40 percent of the telecom firm's market value and formed part of assets used to gauge Portugal Telecom's post-merger stake in CorpCo.

The merger is not at risk, sources told Reuters this week. The merger, which could create a company with more than 100,000 clients and $19 billion in annual revenue, is touted as a chance to strengthen Oi's corporate governance after years of bickering between minority and controlling shareholders. (Reporting by Guillermo Parra-Bernal; Additional reporting by Brad Haynes in São Paulo; Editing by Lisa Shumaker)

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