Portugal Telecom & OI merger – another PIIGS stock transformation ?

It seems like that many PIIGS companies with significant international business operations try to transform their companies in some way or another in order to get rid of the “PIIGS” discount. Basically a first mover was Hellenic Botteling, which delisted in Greece and relisted as Swiss based company in the UK market in 2012. A second, very succesful attempt was made by Autogrill, spinning off the international business.

Now, a few days ago, Portugal Telecom (PTC), the Portuguese TelCo with a large Brazilian subsidiary, came up with a potential new way:

They want to merge with the Brazilian TelCo OI and effectively become a Brazilian Telecom company with a Portuguese subsidiary.

This alone is in my opinion already an interesting special situation. But it gets even more interesting. The structure of the merger is quite complicated, but in general, there will be a merger plus capital increase.

For Portugal Telecom shareholders, it looks like the following:

Each Oi common share will be exchanged for 1 share in CorpCo, and each Oi preferred share will be swapped for 0.9211 CorpCo stock. Each Portugal Telecom share will be the equivalent of 2.2911 euros in CorpCo shares to be issued at the price of the capital hike, plus 0.6330 CorpCo shares.

So on a first look, this looks interesting for Portugal Telecom shareholders. The lower the price of the capital increase, the higher the share in the combined company. Clever Hedge funds might even be able to construct a short OI long PTC trade. Although there is a corridor where either PTC or OI can step back from the transaction if prices would move too strongly in one or the other direction.

Some figures / ratios:

PTC:
Market cap 3.1 bn EUR
P/E 7.4
P/B 1.5
EV/EBITDA 5.5

OI:
Market Cap 6.5 bn BRL (~2.1 bn EUR)
P/E 11
P/B 0.6
EV/EBITDA 4.5

Both companies carry significant debt.

The share prices of both companies reacted at first positively, but in the recent days, OI shares dropped quite significantly and PTC is back to where it was before (after hitting +30% in the first day):

This might be the reaction to the large cash capital increase undertaken by OI in the course of the deal:

As part of the merger, Oi proposes to undertake a cash capital increase of a minimum of R$ 7.0 billion (Euro 2.3 billion), and with a target of R$ 8.0 billion (Euro 2.7 billion) to improve the balance sheet flexibility of CorpCo. Shareholders of Telemar Participações S.A. (“Tpart”) and an investment vehicle managed by Banco BTG Pactual S.A. (“BTG Pactual”), will subscribe approximately R$ 2.0 billion (Euro 0.7 billion) of the cash capital increase

So from an OI shareholder point of view, one could argue that this exercise is somehow quite dilutive.

For some PTC shareholders, the problem might be that the suddenly do not hold a Portuguese/European stock but a Brazilian one. According to the official announcement, the new stock will be listed in Brazil, US and on NYSE Euronext, so technically it should be not a problem for shareholders.

On the “plus side” for this transaction one could argue with the following points

+ A Portuguese company with a potential “PIIGS” discount will be “transformed” into a potential BRIC growth story.
+ The valuation of the overall group might improve as well, as the OI pref shares will cease to exist
+ As PTC shareholder, there is an additional opportunity with regard to the OI share capital increase. The lower the price for the new shares, the higher will be the percentage in the new company
+ it is very likely that the deal will go through. The CEO of both companies is the same guy and regulators will have no reason to object
+ part of the synergies (i.e. lower refinancing costs) might be relatively easy to achieve.

On the other hand, there are also some clear issues:

– Brazil itself is not in the “sweet spot” anymore
– OI itself is struggling. Being only the number 4 mobile operator, especially ROA and ROE is far below the competition
– in the presentation, the CEO committed to pay 500 mn BRL p.a. in dividends. Including the new shares, this will result in a much lower dividend yield going forward from the current 7-8%. As they want to grow, this makes sense, but for some investors this could be an issue
– debt will be relatively high, further capital increase in combination with acquisitions are not unlikely

At the moment, I need to dig a little bit more deeply into this, but in order to keep me motivated and interested, I take a 0.5 % position at current prices (3.40 EUR per share) in Portugal Telecom for my “special situation” bucket.

DISCLAIMER: As always, do your own research. This is not meant to be any kind of investment advise. When publishing this, the author will most likely own the stock already. Do not blindly follow any tips etc. Use your own brain. The author will also most likely sell the stock before posting this on his website.

18 comments

  • Die Diiferenz ist nicht weltbewegend. Bloomberg, comdirect usw. sagen 1,35 und das EPS vom Quartalsbericht bezieht sich auf 1,2x.Milliarden. Ein KBV von 3 zu nennen, war schon großzügig aufgerundet von mir, aber immer noch näher dran als 1,3. Wollte damals nur sagen, dass sie nicht wie diverse ander PIIGS-Unternehmen zum bzw unter dem Buchwert gehandelt werden.

  • Es gibt bei CNH Industrial Aktien mit Stimmrecht, aber ohne wirtschaftlichen Besitz am Unternehmen. Das wurde imho gemacht, damit Exor mehr Stimmrechte hat.

  • Du hast das falsche Unternehmen. Fiat Industrial war 89%-Aktionär bei CNH Global. Nach der Fusion nennen sie sich jetzt CNH Industrial. Dein KBV bezieht sich auf Global und nicht Industrial!

    Diese Seite ist die richtige:

    http://ycharts.com/companies/CNHI/price_to_book_value

    Es schwanken die Angaben zur Aktienanzahl. Als ich vor dem Absturz geschaut habe war bei comdirect die MarketCap rund 13 Milliarden. Das EK ist laut letztem Bericht bei 5,4 Milliarden. KBV 3 war vllt ein bißchen zu großzügig aufgerundet von mir, aber KBV 1,3 stimmt sicher nicht. Bei den 2,7 von deiner Internetseite vermute ich, dass MarketCap in USD und EK in Euro genommen wurde.

    Die Netto-Verschuldung ist ziemlich hoch: 17 Milliarden. Davon sind aber 15 Milliarden von der Finanzsparte. Deswegen kann ich mir kaum geringer EV/x-Verhältnisse vorstellen, habe das aber nicht weiter berechnet oder nachgeschaut.

  • CNH Global war zu 89% im Besitz von Fiat Industrial. Man hat quasi den Namen der “Tochter” angenommen.

    Ansonsten ist das Unternehmen nicht wirklich interessant. KBV von 3.

    Die Marken sind natürlich Klasse: Steyr, New Holland und Case. Man steht damit natürlich in Konkurrenz zu Deere und Caterpillar.

    Dazu noch die LKW von Iveco

  • Fiat Industrial + CNH Global = CNH Industrial ist auch noch ein Beispiel für raus aus PIIGS

  • Currently PTC trades at a ~8% premium to OIBR according to the conversion formula, assuming OIBR will trade down to the offer price given the large raise.

    Therefore the only valid “Merker” positions are combinations of short PTC (if you think OIBR trades down or remains steady) and long OIBR (if you really believe in the combined entity).

  • Hi There, I just discovered your blog. It’s fantastic. If you are looking at telecoms in Iberia, I recommend you take a look at Zon-Optimus merger as well. Given the shareholding structure of Sonaecom, I think it’s very likely that it will be taken private by the largest shareholder. (It makes sense to own the full stream of cashflow from the merger.) If you look deeper into this, Sonae, the retailer/holding company, begins to look interesting as well. Awesome blog my friend, I hope to converse with you on regular basis going forward. Thanks!

    • thanks for the comment.

      I looked at Sonae the retailer some time ago but was not comfortable with the debt.

      ial situationRe Zon: I am actually not generally interested in Iberian Telecoms and do not know the sector very well. PTC came up because it is a “special situation”.

      mmi

      • Thanks for your reply mmi. I was at Bernstein conference earlier this month when both PT and Oi gave a joint presentation. (on the day of the merger announcement!) I came out thinking that the deal was more or less evenly balanced as the two companies both needed the merger for different reasons.

        I spent my lunch break going through your blog and I learnt a lot. Thank you so much for the valuable posts, and I shall be back!

  • On this situation you must take into account that Pt’s non Brazilian assets are being valued at 2B (2.3€/share). This means that at 3.4 you are valuing the remaining 0.6330 shares of Corpco at 1.1€ (1.74€/share). Obviously those 2B are paid with Corpco shares valued at the Oi’s capital raise price but is it enough? I’m not sure the margin of safety is enough. Aditionaly Oi is a turnaround situation and turnarounds rarely do turnaround.

    PT price was 3,4 before the merger because in Portugal there are always leaks of information.. If you look back just 2 or 3 weeks you’ll find that PT price pre merger was between 2.7-2.9€

    PT shareholders are geting a decent deal but the fact is that now they are fully exposed to Oi’s turnaround whereas before if Oi went broke their debt was non recourse and as such there was some protection. It’s not that clear if the benefit is that big

    About the resulting company:
    -planned positive free cash flow only in 2015 (real positive fcf date unknown)
    -African assets 2012 EBITDA might be growing
    -Portuguese EBITDA (if I’m not mistaken) 2010>2011>2012>2013 and my expectation (as a portuguese and knowing the competitive environment over here at the moment) is that 2013>2014
    -Oi: Bava promised a lot of improvement in operations there and he delivered over here but you can’t be sure that he’ll be able to do the same there (the size of the country is much bigger there and so is the needed capex)… And telco is a competitive market so the improvements usually flow to the customer

    Basically:
    -I believe the deal is more or less equally favourable for both sides… Oi’s capital raise was seen as unavoidable.. PT gets a decent way to participate (which impossible to do with cash for them) and Oi get’s their shot at getting a de facto turnaround (as a big brazilian shareholder said before the merger… the capital raise was unavoidable but they wouldn’t put the money until they thought they got a nice chance of getting it back and they now had a CEO who understood the business)… IMO it’s not only the CEO but the team and the fact that they are able to use Pt’s human resources and some synergies)
    -However I’m not sure that at current price the upside is enough to justify going into a turnaround

    One last point: the CEO isn’t the same.. Current Oi CEO is PT’s former CEO (obviously the fusion was probably already being planned back then)

    disclaimer: no position but I might change my opinion, specially if the price drops a lot while the market goes up:)

    ps: thanks for your blog.. it has been a nice help and as such I feel compelled to comment on PT…

    • hi,

      thanks for your insights. I agree completely, turn arounds are always tricky.

      As I mentioned, it is a “watch” position for me.

      Nevertheless an interesting move in my opinion.

      mmi

  • Ich warte mal ab. Vielleicht kann ich auch als Nichaktionär bei der KE zu ähnlichen Kursen einsteigen.

    Bin auch noch long TI und die können dann vielleicht auch TIM überteuert an CorpCo abgeben. Das wird jedenfalls interessant auf dem TK Markt in Brasilien.

    • für mich ist es momentan auch nur ein “Merker” mit 0,5% Portfolio Gewicht. Ich möchte nur vermeiden, dass ich ähnlcih wie bei Autogrill das Ganze verpasse wenn es interesant werden sollte.

  • Wenn der Preis von Oi jetzt 1,24€ wäre, müsste er erst einmal zur KE auf 1,09€ fallen, damit man als Portugal Telecom Aktionär zum gleichen Preis an CorpCo kommt.
    2,2911/1,0916=2,09878
    +0,633
    =2,73 CorpCo Aktien

    3,4/2,73=1,24 je CorpCo

    Vielleicht habe ich da einen Fehler drin, aber ich finde dann sogar Oi interessanter, denn wenn man auch an der KE teilnimmt, müsste der Preis der KE wiederum noch tiefer sein, damit sich der Kauf von Portufal Telekom zu 3,40€ lohnt.

    • Ein paar Anmerkungen:

      Deine Rechnung ist richtig. Man darf aber nicht vergessen, dass die OI sharholder KEIN handelbares Bezugsrecht bekommen, also für den Discount nicht entschädigt werden.

      Dein angenohmener OI Kurs ist etwas zu niedrig, bei aktuell 3,40 EUR PT notieren die OI Stämme bei 1,34 EUR (nicht die Vz. nehmen, die bekommen nur 0.92 CorpCo).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s