Update: Portugal Telecom & Oi Merger & Oi capital increase

DISCLAIMER: The stock discussed is again very risky and not a typical “value stock”. Please do your own homework and never commit large amounts of your capital to such investments. The author might buy or sell the shares without giving advance notice. Do your wn homework !!

Last year I had a mini series (part 1, part 2, part 3) about the merger between Portugal Telecom and the Brazilian Oi. My initial idea was a long PTC / short OI deal as the mechanics of the merger seemed to imply a signifcant dilution for OI shareholders.

Interestingly, since I wrote the first post in October 2013, both shares lost siginficantly, however Oi with around -37% more than double than PTC with -15%.

Oi is now in the process of preparing the planned capital increase and it looks that they did push through the share offering though there have been some hickups along the way.

Just as a quick reminder:

Oi was supposed to do a big capital increase first before then the company gets merged with PTC.

Oi seems to have priced the new shares aggresively at the bottom of the expected range:

Grupo Oi SA, Brazil’s largest fixed-line telephone carrier, priced an offering of preferred shares at 2 reais each, at the bottom of the indicative range set by bankers, sources said on Monday.

So at current prices with PTC at ~3 EUR and OI common shares at 2,50 Reais (or ~0,81 EUR) PTC sharesholders will receive “new shares” of OI at the value of 2,2911 Euros plus 0,6330 “CorpCo” shares which should equal common shares. So at 3 EUR there seems to be a small discount but I think this is hardly exploitable as an arbitrage situation.

For me, the current situation is an interesting combination of a special situation (capital increase regardless of price) and Emerging Markets exposure.

However, much more interesting for me is that aspect:

It is pretty clear that Oi wanted to raise a defined amount without really caring about the share price. This looks similar to EMAK and Unicredit in Italy 2 years ago. This is one of the rare cases where we clearly have a seller who does not care about the price but just wants to raise a fixed amount of money.

The “special-special” aspect of this one are the following feature:

1. We do not have subscription rights despite the massive amount of new shares
2. We have the additional complexity of the subsequent PTC merger

In such a situation, it is extremely hard to come up with a solid valuation of the business. Both, OI and PTC look very cheap on a trailing EV/EBITDA basis but honestly, i did not try to figure out how the combined entity will look like. Oi minorities clealry got screwed by this transaction whereas PTC shareholders had been protected to a certain extent.

The good part of the this capital raising is that the entity will have some fresh cash which will allow them to operate for some time. Although there is clearly the risk of further dilutions if they want to bid for instance for additional businesses in Brazil.

Summary:

For me, the Oi capital increase looks very similar to situations like EMAK and Unicredit, where the companies issued new shares regardless of price. This increases the possibility that the price has been pushed significantly below fair value. Buying PTC now looks like an interesting way to get exposure to the merged entity at a depressed price. I will therefore invest a 1% position into PTC at current prices (3 EUR) for my “special situation” bucket.

14 comments

  • Unter was hätte man die 900 mio eigentlich buchen müssen? Short Term Investments können es ja eigentlich nicht sein.

    Falls die die 900 mio flöten gehen, dann wäre das >50% des EK …

    Während sich die Banca Espirito wieder erholt hat, fällt PT einfach weiter ….

    Interessant finde ich, dass OI gestern zu 0,86 USD in NY gehandelt wurden. 0,86 * 3,64 / 1,367 = 2,29 Euro … Das ist ein deutlicher Discount zum PT-Schlusskurs von gestern ( ca. 2,50 Euro) oder dem derzeitigen Kurs (ca.2,40). Zocken hier schon welche auf ein Scheitern der Fusion? Und wer ist der Verlierer beim Scheitern?

    • Das ist sehr unschön und auch ein guter Grund für den Verkauf. Ich vermute mal, dass PTC mehr oder weniger vom Staat gewzungen würde, aber das macht die Sache auch nicht besser.

      • Aber irgendwo muss die Position ja in der Bilanz stehen. ShortTerm Investments haben sie ja klar genannt. Für mich ist das inzwischen recht dubios. Und alles andere als eine kleine Nummer, wie ich es am Anfang dachte.

        Der Schlusskurs von OI Stammaktien in NY war bei umgerechnet 2,18 Euro. Während PT in Lissabon zu 2,29 Euro am Schluss gehandelt wurden. Damit kostet PT 5% mehr, obwohl die Mist gebaut haben. Vllt ist ja ein Zock auf Verringerung des Spreads drin? 😀

        • Ich habe mal bei der IR nachgefragt, da ich es auch nicht verstehe. Das ist wirklich ein sehr sehr schlechtes Zeichen und in der Tat keine Kleinigkeit. Ausserdem ist das Disclosure echt besch…..eiden.

  • Gab es schon wieder Dividende? 😛

    Spaß beiseite … unschön, dass da wieder linke Deals gemacht werden… Ist ja fast wie in Italien 😀

    http://www.handelsblatt.com/finanzen/aktien/aktien-im-fokus/telekom-anbieter-portugal-telecom-faellt-auf-18-1-2-jahres-tief/10132884.html

  • Hab es jetzt nachgelesen. Vermutlich war der Stichtag etwas zu früh für die PT-Aktionäre. Aber immerhin hat es 3,64 Aktien gegeben. Im Oktober wären es nur 2,18 gewesen

    Frage ist halt, ob man den Oi-Kurs absichtlich gedrückt hat um den PT-Anteil am neuen Unternehmen zu erhöhen..

  • Ich dachte es gibt 2,2911 Euro in jedem Fall + 0,633 Aktien. Und die Anzahl neuer Aktien, die man für die 2,2911 Euro bekommt hängt vom Oi-Kurs an einem Stichtag ab.

  • Habe ich nicht vergessen. Finde aber inzwischen die Sache recht spannend, da sie immer weniger am Oi-Kurs hängen. Fallende Kurse erhöhen ja den Anteil der PT-Aktionäre am neuen Unternehmen.

  • Im Augenblick sind beide im freien Fall.

    Oi bei umgerechnet 0,65 Euro somit müsste der Umtausch bei 2,70 Euro liegen. Bei einem Kurs von 2,64 Euro scheints derzeit keinen wirklichen Discount zu geben. Allerdings kommt die 2,11 Euro-Festkomponente immer näher 😀

  • net debt in camparison to FCF is way too high for me. The company is owned by creditors in my opinion. It would take more than 10 years to pay down debt if they didn’t have to pay interest. Am I missing something like synergies?

  • Hi! Why do you think the arbitrage is a bad idea and why did you prefer PT over Oi? If I got my numbers right (please check my blog post where I explain my numbers) PT is currently trading 18.7% above OiCommon ADR. That would mean that even if those 18.7% do not meet your arbitrage criteria you would be giving up the first 18,7% gain when going long. Please tell me if there is anything wrong with my numbers since I am considering acting on it
    Thanks for the site and ideas, I have made some money on them!

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