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.
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.