NEW YORK (The Deal) -- The crisis at Espirito Santo Financial Group on Wednesday claimed its first major corporate casualty as Portugal Telecom SGPS (PT) agreed to accept a smaller-than-expected stake in the company it is creating by merging with Brazil's Oi after an Espirito Santo affiliate defaulted on almost $1.2 billion of debt.
Oi and Portugal Telecom said Portugal Telecom shareholders will now get just 25.6% of the enlarged group, rather than the previously agreed 39.6%. The Portuguese company will also take back bad Espirito Santo debt it had transferred to Oi entities.
Espirito Santo owns 10% of Portugal Telecom and its Rioforte Investments SA unit on Tuesday missed an 847 million euro ($1.15 billion) payment due to the telecom. Another 50 million euro payment falls due on Thursday.
"Portugal Telecom and Oi announce that they remain committed to the full completion of their business combination," the companies said.
Rioforte's troubles first came to light earlier this month and the company will soon seek protection from creditors through a bankruptcy filing, according to the Wall Street Journal. Troubles at the complex Espirito Santo Financial Group empire last week triggered a market rout amid fears that Portuguese banking-sector problems could trigger a new euro-zone crisis. (Espirito Santo Financial Group owned 25.1% of major Portuguese lender Banco Espirito Santo SA before shaving its stake to 20.1% on Monday).
The knockon effect on the transatlantic telecom deal, meanwhile, was just the latest setback in a fusion that had been controversial from the outset. Oi complained it hadn't been informed of Portugal Telecom's Rioforte exposure and two Oi representatives on Portugal Telecom's board resigned following the disclosures, with one publicly wondering why Portugal Telecom had remained silent about its relationship with Espirito Santo and Rioforte.