2013 Deals of the Year: Brazil’s Oi and Portugal Telecom Connect

可以两种境况不佳的国家的电话吗companies combine to make one flourishing international one? That was the hope of shareholders in Brazil’s Oi and Portugal Telecom when the firms agreed to merge under the Oi flag in October. Oi, a fixed-line carrier spun off from the old monopolist Brasil Telecom, is running a dismal fourth in its country’s cellular business. Through November its shares had lost 60 percent of their value on the year and shed more than 80 percent since peaking at $10.16 in May 2011. PT, afflicted by the troubles in its small home market, is off more than 50 percent over the past three years.

But better days are ahead, claims Marco Gonçalves, head of M&A at BTG Pactual, the São Paulo–based investment bank that was lone adviser to Oi on the $15.7 billion deal. The merger will raise Rio de Janeiro–based Oi’s top line by some 40 percent, to about $17 billion annually, and add an international footprint in Portugal and a few long-range growth markets like Angola and Mozambique. But the real value lies elsewhere, Gonçalves says: cleaning up a forbiddingly complex shareholder structure at Oi and providing for a hefty 14 billion-real ($6 billion) capital increase to reduce debt and fund a catch-up drive in cellular.

2013 Deals of the Year Jim Renwick & Team Barclays Antonio Weiss & Team Lazard Christian Lesueur & Team UBS James ("Jimmy") Lee Jr. & Team JPMorgan Chase & Co. Marco Gonçalves & Team BTG Pactual Marisa Drew & Team Credit Suisse Group Geoffrey Austin & Team Moelis & Co. 安东尼·诺托&团队 Goldman Sachs Group Adam Taetle & Team Barclays Kenneth Hirsch & Team Goldman Sachs Group

The two companies are already intertwined, but in a cumbersome way. Lisbon-based PT owns 12.1 percent of a holding company called TmarPart that in turn owns 50.1 percent of Oi’s common shares. PT also controls 19.4 percent of nonvoting Oi stock, and its ex-CEO, Zeinal Bava, moved across the Atlantic last June to run the Brazilian carrier. The new company will have just one class of stock, with PT taking 38 percent.

最艰难的交易的一部分so far has been persuading the rest of TmarPart’s shareholders to go along, says Gonçalves, 40, who joined BTG Pactual in 2009 after heading M&A for Brazil at Credit Suisse Group. A consortium of Brazilian institutions that have regarded Oi as a dividend play, they looked skeptically at being diluted to a minority in a company whose focus will shift to growth.

The next hurdle is the proposed capital infusion, slated for early in 2014. The big dose of new equity will serve two purposes, Gonçalves explains: reducing Oi’s debt from close to 3.4 times earnings before interest, taxes, depreciation and amortization to less than 3 and providing fuel for mobile phone expansion within Brazil. Oi is getting whipped in its home mobile market by outsiders from Italy (Telecom Italia), Mexico (América Móvil) and Spain (Telefónica).

With the deal expected to close in the first quarter of 2014, BTG Pactual is putting some money where its mouth is on Oi’s capital increase, guaranteeing to raise at least 2 billion reais toward the share issue. BTG’s private equity division also bought a bunch of undersea cable assets from Oi in July for 1.7 billion reais. Gonçalves counts it a success that the telecom’s shares have held steady since the merger announcement despite the pending dilution; its New York stock closed at $1.58 on November 29. “This deal will change Oi from a dividend company into a growth company,” he promises.

Rank	Deal	Estimated Fees ($ Millions) *
1	U.K. bankBarclaysfollows a £5.8 billion ($9.1 billion) rights issue with a $2 billion hybrid bond offering.	$1832
2	Warren Buffett’sBerkshire Hathawayand Brazilian investment firm3G Capitalpay $27.4 billion to take ketchup makerH.J. Heinz Co.private.	$97–107
3	U.S. telecomVerizon Communicationsagrees to give Vodafone $130 billion for the British carrier’s 45 percent stake inVerizon Wireless.	$93–103
4	FounderMichael DellandSilver Lake Partnersprivatize U.S. computer makerDellfor $24.9 billion.1	$82–92
5	Brazilian phone companyOiandPortugal Telecomagree to a $15.7 billion tie-up under the former’s name.	$70–90
6	Cable giantLiberty Globalbuys the U.K.’sVirgin Mediafor $25.5 billion.	$882
7	Advertising firmsOmnicom GroupandPublicis Groupeagree to a $35 billion Franco-American merger of equals.	$50–70
8	Social media companyTwitterlaunches a $2.1 billion initial public offering on the New York Stock Exchange.	$682
9	China’sShuanghui International Holdingscloses a $7 billion buyout of U.S. pork producerSmithfield Foods.	$51–61
10	iPhone makerAppleissues $17 billion worth of bonds.	$532
* Estimates unless otherwise noted. M&A totals only include advisory fees; debt and equity totals only include underwriting fees. 1 Deal value provided by Dell. 2 Publicly disclosed.
Source: Thomson Reuters/Freeman Consulting Services.