(Updates with suspension of share offer)
By Luciana Bruno and Leonardo Goy
RIO DE JANEIRO/BRASILIA, March 27 Brazil's securities watchdog on Thursday suspended the offer of shares in telecommunications company Grupo Oi SA for up to 30 days, dealing a setback to its planned merger with Portugal Telecom.
The Securities and Exchanges Commission decision came after Oi's chief executive officer, Zeinal Bava, breached a mandatory quiet period ahead of the offer by making comment to the press.
The public offer of Oi shares is a key operation for the success of the merger of the two telcom companies.
Oi said in a statement that it would clarify the situation as soon as possible before the commission to try to resolve any irregularity so that the share offer could go ahead.
The planned combination of Oi and Portugal Telecom had taken an important step forward earlier on Thursday when shareholders of the Brazilian carrier approved a capital increase that will facilitate the merger.
Oi shareholders approved an increase of up to 14 billion reais ($6.1 billion) at a meeting in Rio de Janeiro. While analysts expected minority shareholders to challenge the plan, the vote to pass both the proposal and an asset appraisal of Portugal Telecom took only eight minutes.
Hours later, councilors at telecommunications industry watchdog Anatel gave the go-ahead for the merger, tying it up to the nonexistence of tax debts by both companies and their controlling groups. Antitrust watchdog Cade had approved the deal in January.
Both decisions help inject hope among Oi's controlling shareholders and Brazil's government that the combination will give the combined company more clout to compete inside Brazil with bigger rivals such as Spain's Telefonica SA, Telecom Italia SpA's TIM Participações SA and Mexico's America Movil SAB.
Despite the favorable outlook for the transaction, investors still remain skeptical. Preferred shares of Oi shed 0.3 percent, while common shares tumbled 3.9 percent. Shares of Portugal Telecom were down 1.8 percent on Thursday.
Oi and Portugal Telecom have discussed how to tie up since the latter bought a 25 percent stake in the Brazilian company three years ago, sources with knowledge of the situation told Reuters on Wednesday. The market value of both companies has fallen more than 50 percent over the past three years, a sign that investors bet that a merger would take place sooner or later.
The company resulting from the merger, known as CorpCo, will have more than 100 million subscribers and $20 billion in annual revenue. Bava, the 48-year-old engineer who in June became Oi's CEO after a five-year stint as head of Portugal Telecom, will lead it.
The merger is in some ways akin to throwing a lifeline to Portugal Telecom, which has suffered in recent years along with a flagging Portuguese economy. Shareholders of the Lisbon-based company on Thursday approved the use of the company's assets for Oi's capital increase at a separate shareholder meeting
The next step for the deal is the April 16 pricing of Oi's share offering, which has firm commitments from large shareholders including Portugal Telecom, pension funds, Brazil's Jereissati family, construction firm Andrade Gutierrez SA, as well as investment banking giant Grupo BTG Pactual SA.
Yet, the offering poses some headwinds, analysts such as Andre Baggio at JPMorgan Securities said. While controlling shareholders have already committed 2 billion reais to the plan and a group of 14 banks led by BTG Pactual guaranteed the subscription of up to 6 billion reais in new stock, the conditions for their participation remained unknown.
Sources at both Brazilian watchdogs told Reuters when the merger was announced in October that passage would be smooth, because the deal was structured as a corporate restructuring rather than a change of control.
Oi was born after Tele Norte Leste Participações SA's purchase in 2008 of Brasil Telecom Participações SA - a move sponsored by then-President Luiz Inacio Lula da Silva to face growing competition from Telefonica and Mexican billionaire Carlos Slim's America Movil. Portugal Telecom entered Oi's controlling bloc after exiting Vivo, a mobile carrier now fully owned by Telefonica, in 2010.
Bava, the architect of Portugal Telecom's investment in Oi, is tasked with fixing Oi's complex shareholder structure, cut debt and figure out how the new company can cope with the demands of a Brazilian market that may be ripe for consolidation.
Under terms of the deal, Oi would sell up new stock and use proceeds to cut debt. Portugal Telecom would contribute its assets, excluding its stake in Oi, and own 38 percent of the new company. Oi 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.
Each Oi common share would be exchanged for 1 share in CorpCo and each Oi preferred share would be swapped for 0.9211 CorpCo stock. Each Portugal Telecom share would be the equivalent of 2.2911 euros in CorpCo shares to be issued at the price of the capital hike, plus 0.6330 CorpCo shares. (Reporting by Luciana Bruno, Leonardo Goy and Alberto Alerigi Jr; Writing by Guillermo Parra-Bernal; Editing by Jeffrey Benkoe, Andrew Hay and Richard Chang)