Brazil’s largest telco Oi has agreed to merge with its major stakeholder Portugal Telecom (PT) to create a combined entity called CorpCo.
As PT also operates in Portugal and Africa, while Oi is present only in Brazil, this merger will create a transatlantic carrier with over 100 million customers.
The deal is expected to enable CorpCo to generate operational and financial synergies of approximately BRL5.5 billion (US$2.5 billion) and benefit from increased scale. As part of the merger, Oi proposes to undertake a cash capital increase of a minimum of BRL7 billion, with a target of BRL8 billion to improve the balance sheet flexibility of CorpCo.
Marceli Passoni, senior analyst at Informa Telecoms & Media, said: “The merger will benefit both companies. The European telecoms market is shrinking. It is Africa and Brazil that offer good opportunities for PT to continue growing its business. Meanwhile, Oi will gain scale, allowing it to be more competitive with its main rivals in Brazil – Telefonica, America Movil and TIM.”
She adds that Brazil is the world’s fifth-largest mobile market and joining forces with PT will allow Oi to put more pressure on handset manufacturers and network equipment suppliers to offer discounts, reducing costs.
Another major benefit for Oi is to have an investor with know-how in the telecoms market. “PT previously owned 50% of Telefonica’s Brazilian mobile subsidiary Vivo and has operations in other markets. The other stakeholders at Oi are basically investment groups, without telecoms market knowledge, which are more interested in rapid capital gains”, says Passoni. According to the analyst, the operator was struggling to post good financial results but was still paying high dividends. Only this year, Oi changed its dividends payment policy to increase investment in networks.
The merger should not be subject to any objections from the anti-trust agency, given that it will not have any impact in terms of market share and the fact that PT is already a stakeholder at Oi and holds stakes in other players in the local market.
IHS analyst Julian Watson noted that should the deal go ahead, the group may be open to offers for its African operations provided the group is able to repatriate funds. Across Africa and Asia, Portugal Telecom largely owns non-controlling stakes. Its assets in Angola and Namibia are the most attractive and could be of interest to groups like MTN, Orange and Vodacom.