Portugal Telecom merger with Oi

This essay was part of the International Business course at Fundação Getulio Vargas.


On the 2nd of October, 2013, the merger of Portugal Telecom and Oi was announced. However, to better comprehend the particularities of this deal, we have to go back to 2010, when an agreement was established between the Portuguese and Brazilian governments (both on the left-side of the political spectrum), then leaded by José Sócrates and Lula da Silva, respectively.

Portugal Telecom (“PT”) was at that time, one of the greatest Portuguese companies by market capitalisation, employing more than 10,000 people directly and another 16,000 indirectly, which helps comprehend its importance to the economy, and consequently the Portuguese state’s interest in having a say on the firm’s development. Oi was Brazil’s biggest fixed phone provider, but it lagged behind on the mobile phone segment, seen as a crucial component in the emerging market economy.

A Portuguese-speaking MNC

The desire for international expansion by the Portuguese telecom company was always part of its ambitions: the creation of a multinational champion with a significant foothold on the Portuguese speaking market, namely Brazil, but also in Africa. The company first acquired part of Vivo in 2003, in a 50–50 joint-venture with the Spanish telecom giant, Telefonica. The Portuguese telecom goal of increasing their scale in the Brazilian market was conquered, and by 2009 the Brazilian operation accounted for more than 50% of the company’s revenues and was seen as critical to the future success of the firm.

From a JV, to M&A, with Golden Shares in the mix

Nevertheless, fears of a loss of control due to the greater capacities of the Spanish company were never entirely defeated by the Portuguese directors and shareholders, including the government. This would confirm itself in the summer of 2010, when Telefonica acquires the stake belonging to PT. Vivo was, at the time, growing fast, coupled with a period of high economic performance by the Brazilian economy, which grew by 7.5%, emulating growth rates as seen in China or India.

The Portuguese government could not accept this exit from the Brazilian market, one that had been an important piece of the puzzle for establishing PT as a major player of the telecom industry worldwide. Actually, before entering into Vivo, the Portuguese firm had already tried to acquire Telemar, the predecessor of Oi, in 2007, but the deal did not go through. This deal was brokered with the help of both Portuguese and Brazilian governmental figures, including José Dirceu, an important minister during Lula’s leadership, as well as a late, former Portuguese president, Mário Soares. Dirceu is currently in jail, serving a 26-year sentence, for corruption and money-laundering under the “Lava-Jato” investigations, as well as an 11-year sentence for the “Mensalão” case.

Going back to the purchase of PT’s stake in Vivo by Telefonica, one may argue that this was also a turbulent process, given that the Portuguese firm did not want to sell one of its most lucrative operations, and it took four different offers by the Spanish company to eventually convince the PT’s shareholders and directors that this was a deal too good to refuse. The ultimate offer of €7.15B was rejected, after the Portuguese government used its 500 golden shares to veto the deal. This political move was orchestrated by the prime minister at the time, José Sócrates, albeit against the majority of shareholders of PT.


However, some “high profile” shareholders were already looking into other alternatives in Brazil. One of these shareholders was the former Portuguese bank, Banco Espírito Santo (“BES”), which through its CEO, Ricardo Salgado, commanded a very high degree of influence in the board and management and thus could steer the telecom’s decision-making, to better suit the bank’s own interests. Salgado knew by then how fragile the bank’s finances were, given a severe European sovereign debt crisis that mainly affected the southern nations of that region and left their banking sectors scrapping for every “nickel” they could find.

Nonetheless, not every shareholder was keen on finding an alternative for Vivo in Brazil. This is a classic case of an agency issue between shareholders and management, where the former are looking for their own interests, rather than pursuing a long-term view for the company. Some were more interested in receiving their dividends from such a lucrative transaction with Telefonica, and not so much interested in the expansion ambitions of the managers of the firm.

The deal

The deal was eventually finalised, with Telefonica raising its offer to €7.5B, and PT acquiring a 22.38% stake in Oi by €3.7B (2/3 were part of a capital raise for Oi), plus getting the C-suite positions of the merged company. Oi acquired a 10% stake in PT, valued at €875M. This deal never gathered the full support of shareholders, and there were even some internal disagreements regarding the price PT paid to acquire a stake in Oi, with some senior directors arguing it was overpriced. The Brazilian telecom company was severely over-burdened with debt and for that reason also raised capital from investors at a total of €4.2B.

Moreover, it lacked the technological capabilities in the mobile segment, which were seen as being vital in order to reap the benefits from the potential offered by the Brazilian market. Vivo, on the other hand, was very well positioned in the mobile segment, and thus the Spanish insistence in getting the whole pie for themselves.

The downfall of PT

The merger was officially completed in October 2013, and by then BES began appearing more and more in the public and regulatory eye, as rumours of an unstable financial situation started to gain more credibility. BES was an important shareholder of PT and Salgado, an important member of the Portuguese elite. Once known as “Dono disto tudo” (“Owner of it all”), the now former banker, saw PT as a useful vehicle for propping up the bank’s balance sheet. PT acquired €900m of debt issued by RioForte, a holding company of BES and by summer 2014, the latter failed the repayment of this debt.

The lack of prospects regarding this repayment to PT as well as the uncertainty surrounding the exposure of the telecom firm to the Espírito Santo group, led to a sell-off by investors, causing a severe devaluation of the firm’s market capitalisation. Furthermore, the merger deal suffered some ultimate changes, since the Brazilian shareholders were not happy after finding out about such a ruinous investment that had been so far omitted from them and the market. The Portuguese shareholders had to relinquish part of their stake to the

Brazilian side, ending up with 25.6% of CorpCo (the new company that was to be born from the merger), down from an initially agreed 38%.

In addition, control of the newly merged firm was also a confrontational issue between both sides; for the Brazilians it was fundamental that the company remained Brazilian, and that control was theirs; however, the Portuguese were reluctant to give it up. Even though management was controlled by the former PT CEO, Zeinal Bava, the administration was controlled by Brazilian shareholders, given that the voting power of PT was limited to 7.5%. The Brazilian shareholders included Previ, Funcef, Petros and Fundação Atlântico, all pension funds of Brazilian firm (the last one being of Oi), BNDES Participações, a Brazilian, development bank and Andrade Gutierrez, a construction company with ties to the political elite.

The break-up

Truth be told, this was a deal born out of ambitions that were to grand and disproportionate to the reality. Oi was a highly leveraged firm (its debt increased from €5B in 2010, to €14B in 2013, with BNDES being its largest creditor), which limited its ability of improving its technological capabilities and keeping a growth trajectory in Brazil. PT despite being a company with great technological know-how, was too close to the political and economic interests of an elite that overlooked the long-term success of the telecom firm. The PT group was separated into two different entities; PT Portugal which included the company’s assets in Portugal and PT SGPS, which changed its name to Pharol. The former was acquired from Oi by a Netherlands-based multinational, Altice, which paid a total of €7.4B. Pharol kept its position as the biggest shareholder of Oi, as well as the RioForte investment, which the firm expects to recover roughly a mere 10% of the original investment.

Furthermore, Pharol is prosecuting three former administrators including Bava, as well as demanding a reparation (of the difference regarding the RioForte investment and whatever value it will end up recovering) to its former audit company Deloitte.

Oi on the other hand, kept the African operations, as well as some participations in some subsidiaries of PT. It has filed for bankruptcy, and is now under judicial recovery, however complaints have been made by some creditors that bankruptcy laws in Brazil still give equity holders too much power.

The legacy left behind

What is left behind, what was once lauded as a new transatlantic telecom champion, isn’t a pretty picture. The political pressure to ensure that this deal would go through, from both parts, led to the downfall of one of the most emblematic firms in Portugal, whilst in Brazil, the need for keeping the firm Brazilian, overlooked the ever-growing debt, which led to the country’s greatest default. “Empire-building” behaviours in today’s highly globalised world need to be carefully thought out and planned. In the case of PT, it is clear that the joint-venture with Telefonica in Vivo was a very important asset, and perhaps to succumb to the shareholders’ pressure and selling it was a mistake.

In the case of Oi, its shareholders and management should have taken a step back and analysed what was the most important action to be taken in terms of making the firm competitive again in the telecom market, especially with regards to the mobile segment. Cost-cutting in the fixed phone segment, reduction of debt and technological improvement would have been a better path.

In both countries there are ongoing investigations regarding corruption and money laundering schemes, and this deal is increasingly getting more into the authorities’ radar. The latter are questioning if Andrade Gutierrez, played a role on the breakthrough of this deal, and if this involved payments to political figures close to former Brazilian president Lula da Silva. The firm’s former president, Otávio Azevedo was arrested in 2016 due to corruption charges from the “Lava-Jato” investigations.

In Portugal, “Operação Marquês”, led to the arrest of former prime-minister José Sócrates, under allegations that there was a danger of him getting out of the country, however, he has since been free, as the prosecutors long to reach a final accusation. In addition, just this past month, two former administrators of PT, including Bava, were considered suspects in the same investigation, and the appropriate authorities of both countries have been cooperating in the exchange of information to better comprehend the circulation of money in a web of complicit interests, where illegalities may have been committed across the Atlantic.


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2. Luís Rosa, “A Operação Marquês e os negócios (ruinosos) da PT no Brasil”, Observador, 19 January, 2017

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4. Paulo Zacarias Gomes, “Pharol já só espera recuperar 9,56% do investimento na RioForte”, Jornal de Negócios, 28 November, 2016

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12. “Assembleia Geral Extraordinária”, Portugal Telecom, SGPS, S.A., 8 September, 2014, http://web3.cmvm.pt/sdi/emitentes/docs/fr51775.pdf

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15. Lusa, “Granadeiro e Bava arguidos na ‘Operação Marquês’”, RTP, 24 February, 2017