Shockwaves from Altice's offer for Portugal Telecom could be felt across Europe

If the deal does go through, it could impact several European countries and beyond the continent too.
Written by Anne Morris, Contributor

Altice has made an offer of just over €7bn to acquire the Portuguese assets owned by Brazilian operator Oi, confirming earlier speculation that a bid was in the offing - and also increasing the likelihood that last year's merger between Oi and Portugal Telecom would effectively be unwound.

The move by Altice continues the company's strategy of picking off cable and mobile network assets in markets it deems strategically interesting, and then pursuing further acquisitions within the same markets with a focus on convergence.

As Altice - founded and owned by the billionaire entrepreneur Patrick Drahi - already runs the Portuguese cable operator Cabovisao, the mobile and fixed assets of Portugal Telecom's MEO brand would add several new and complementary strings to the company's bow.

Altice has demonstrated its two-pronged strategy of consolidation and fixed-mobile convergence in several other markets including France, where its cable unit Numericable is on the verge of completing the acquisition of SFR.

The Portugal bid has further reaching repercussions, as well. These relate to the now year-long plan to merge Oi with Portugal, and the ongoing speculation that the Brazilian mobile market is on the brink of consolidation.

The Oi-Portugal Telecom merger has been dogged by delays and problems from the beginning, culminating in Portugal Telecom being forced to absorb €897m in debt from Rio Forte. Altice has already stressed that its offer for the Portuguese assets of Portugal Telecom does not include its Rio Forte debt securities, Oi treasury shares, and Portugal Telecom financing vehicles.

The Rio Forte debt fiasco was one of a series of missteps that culminated in the resignation of Oi CEO Zeinal Bava, who was regarded as the driving force behind the merger with Portugal Telecom. At the time, Bava's departure was seen as the first step towards a possible breakup of the merger, which was due to complete in the final quarter of 2014.

Although the acting CEO of Oi, Bayard Gontijo, has since rebutted suggestions that the Brazilian company would unwind the merger, he did say the company would consider selling non-core assets acquired through the merger to reduce debt. However, if Altice succeeds in its bid to buy the Portuguese assets, there would not be much of the merger left.

The sale of Portugal Telecom's assets would also raise some rather useful extra funding for Oi at a time when it's looking for ways to better compete with rivals in its domestic market. It is no secret that Oi has hired a bank to examine the possibility of buying TIM Brasil from Telecom Italia, and reports suggest that Oi has teamed up with Mexico's America Movil and Spain's Telefonica to make a joint bid worth BRL 32bn for TIM Brasil. No bid has been confirmed as yet, however.

Although Telecom Italia has continued to reiterate that TIM Brasil is a strategic asset, Brazil is now probably a less attractive market for the Italian incumbent after it lost its chance earlier this year to buy telco GVT from Vivendi; the French media group decided instead to hold exclusive talks with Telefonica.

That leaves Telecom Italia with a mobile unit but no fixed assets in Brazil, while Oi has fixed assets but no mobile unit. This means both companies are in a weaker position compared to Telefonica, which would be able to combine GVT with its mobile player Vivo. Telecom Italia has also reportedly evaluated a potential acquisition of Oi, but nothing has been confirmed.

There could be significant changes ahead for both the Portuguese and Brazilian telecoms markets depending on the outcome of the Altice offer.

As Jefferies analysts put it: "Altice's confirmation… that it has now submitted a binding, fully financed offer to Oi to purchase the Portuguese assets has got the ball rolling on Brazilian mobile consolidation."

However, Jefferies said they still see a gap between Oi's ability to pay and Telecom Italia's valuation expectations for TIM Brasil. In their view, Telecom Italia is in a good position as the companies enter the "end-game": that is, either the Italian incumbent gets its desired price for TIM Brasil of €13bn, equal to BRL 39.5bn and representing a multiple of 11, or Oi fails in its bid for TIM Brasil and Telecom Italia "buys Oi for a knock-down price".

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