PT merges with Oi in Brazil

Portugal Telecom (PT) has announced that it has entered into a memorandum of understanding (MoU) with Brazil's Group Oi SA to form a new company. The new company is known as CorpCo, and it will be based in Brazil.

The new company shares will be listed on the Novo Mercado segment of BM&FBOVESPA, on the NYSE Euronext and on the NYSE (New York Stock Exchange).

The merger is the natural fulfilment of the industrial alliance established in 2010 between PT and Oi. The combination of PT and Oi will create a leading telecoms operator with operations covering a population of c. 260 million people and c. 100 million subscribers.

The merger will consolidate the position of both companies as the leading operator for Portuguese-speaking countries with leadership positions in all markets where it operates. The combined company will aim to achieve significant economies of scale, maximise operational synergies and add value for its shareholders, customers and employees.

CorpCo will operate in strategic markets and benefit from compelling growth prospects in Brazil and mature operations in Portugal geared for economic recovery.

The business combination will enhance the implementation of strategic initiatives already underway, where PT and Oi have been sharing expertise and know-how in areas such as product development, customer care, engineering, operations and IT.

As part of the merger, CorpCo intends to be listed on the Novo Mercado segment of BM&FBovespa, on the NYSE Euronext and on the NYSE, and implement best-in-class corporate governance with one class of shares with equal voting and dividend rights for all shareholders.

The Board of Directors for the first three-year term of office will be composed by the following members: Alexandre Jereissati Legey, Amilcar Morais Pires, Fernando Magalhães Portella, Fernando Marques dos Santos, Henrique Manuel Fusco Granadeiro, José Maria Ricciardi, José Mauro Mettrau Carneiro da Cunha, Nuno Rocha dos Santos de Almeida e Vasconcellos, Rafael Luís Mora Funes, Renato Torres de Faria e Sergio Franklin Quintella. José Mauro Mettrau Carneiro da Cunha and Henrique Manuel Fusco Granadeiro will be Chairman and Vice-Chairman of the Board of Directors, respectively.

Zeinal Bava, CEO of Portugal Telecom from 2008 to 2013 and the current CEO of Oi and PT Portugal, will be the CEO of CorpCo and its subsidiaries.

The proposed merger will allow CorpCo to leverage Oi's unique footprint in Brazil and PT's experience in the Portuguese market, thus allowing it to crystalise the growth opportunities in convergence and mobility in Brazil.

The combined entity will focus on achieving operational excellence. A clear action plan has been prepared aiming at integrating areas yielding incremental efficiencies, including the appointment of teams to monetise synergies and address existing operational challenges.

The business combination is expected to generate synergies estimated to have a NPV of R$ 5.5 billion (Euro 1.8 billion).

CorpCo is committed to strengthen further its financial discipline to improve the cash-flow profile to underpin investment in future growth areas and balance sheet flexibility.

Under terms of the deal, Oi targets to raise R$ 8.0 billion (Euro 2.7 billion), with a minimum of R$ 7.0 billion (Euro 2.3 billion), in cash (the "Cash Capital Increase"), to improve the balance sheet flexibility of CorpCo.

Shareholders of Tpart and an investment vehicle managed by BTG Pactual will subscribe approximately R$ 2.0 billion (Euro 0.7 billion) of the Cash Capital Increase.

In addition and subject to the cash capital increase, PT will subscribe to a capital increase in kind of approximately R$ 6.1 billion (Euro 2.0 billion) ("Capital Increase in Kind") fully subscribed through with the contribution of the PT Assets (as defined below).

The Oi capital increase of R$ 14.1 billion (Euro 4.7 billion) will be executed through the public issuance of common shares and preferred shares of Oi, in proportion to the current ratio between the common and preferred shares of Oi issued and outstanding.