(Adds Portugal Telecom statement, latest share performance)
By Brad Haynes and Axel Bugge
SAO PAULO/LISBON, July 3 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
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
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)