Portugal Telecom falls as BES debt trips merger alarm

John Glover and Joao Lima

Bonds and stocks of Portugal Telecom SGPS SA tumbled on concern that its merger with Brazil’s Oi SA will be undermined by its purchase of short-term debt from the troubled Espírito Santo (BES) group.
The telecommunication company’s 750 million euros (USD1 billion) of 5 percent notes fell 3 cents on the euro to 103.9, the lowest since November, to yield 4.16 percent. The Lisbon- based company’s stock dropped for a fourth day after closing at a record low.
Portugal Telecom said it holds 897 million euros of commercial paper from Rioforte Investments, a fully owned subsidiary of Espírito Santo International, which failed to make payments on some of its short-dated debt. Brazil’s state development bank, known as BNDES, on July 8 said that the debt purchase by Portugal Telecom lacked good corporate governance.
“The merger is the biggest worry,” said Mark Chapman, an analyst at CreditSights Inc. in London, who recommends reducing holdings of Portugal Telecom debt. “The broader issue is that existing differences of opinion about whether the merger was the right thing to do at the right price come to the fore when events create this sort of uncertainty.”
Espírito Santo International missed payments on some of its short-term securities, according to a July 8 statement. Portuguese government debt led declines among securities from Europe’s most indebted nations this week, while banks dragged stocks in the region down more than 1 percent.
The Espírito Santo group of companies owns about 10 percent of Portugal Telecom, which in turn holds 2.1 percent of Banco Espirito Santo SA, the nation’s second-largest bank by market value. Bloomberg