NOTICE TO THE MARKET: Oi Case – Portugal Telecom

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The ASSOCIATION OF CAPITAL MARKET INVESTORS – AMEC – hereby informs the Capital Market’s participants that its Executive Board has approved the publishing of this notice, in which the association explains its position about the operations involving Oi S.A. and Grupo Portugal Telecom, under the following terms:

Amec’s members had a specific meeting to discuss the recent events related to the corporate operations involving Oi S.A. and came to the following conclusions:

Once again, Oi’s minority shareholders are likely to suffer losses resulting from the Company’s corporate restructuring. Despite the fact that the solution offered seems to solve the principal of the non-payment imposed by a related party, it provides Portuguese shareholders with advantages to the detriment of remaining shareholders.

These advantages include, but are not limited to:

  • Granting of ‘synthetic put option’ to Portugal Telecom that, according to our members’ estimates, is worth hundreds of millions of reais. This amount results from the possibility that Portugal Telecom may opt not to increase its share interest in Oi in the event the Company’s situation gets even worse in the future. This option becomes even more ‘valuable’ considering it is granted to an insider (signatory of the shareholders’ agreement, with power to nominate members to Oi’s Board of Directors).
  • Succession risks in view of the actions that have already started to be filed in Portugal. By possibly transferring all its assets to Oi/CorpCo, Portugal Telecom potentially transforms them into the “successors” of its rights and obligations.
  • Downgrade of Oi’s securities to the category of speculative investment (junk), what affects the Company’s capital cost.
  • Consequent loss of financial availability/flexibility for the consolidation of the telecommunications sector in Brazil, one of the main highlights in this operation of sale.

According to Amec’s members, the Board of Directors and remaining members who are part of  Oi S.A’s controlling group are clearly and asymmetrically encouraged to accept the operation despite the advantages granted to Portugal Telecom’s shareholders once, by doing so, they would not put the integrity of the merger into risk. The merger allowed the absorption of debts totaling some $4,5 billion reais by all CorpCo’s shareholders and that, prior to the merger, were exclusively owed by Oi’s controlling shareholders.

These events reaffirm the opinions previously disclosed by Amec in letters sent to the capital market’s regulatory entities and the Public Prosecutor’s Office. The mentioned scenario shows, once again, the urgent need of creating mechanisms that effectively prevent situations of conflict of interests or noncompliance with fiduciary duties and diligence from taking place.

Additionally, Amec highlights that there are other signs of lack of diligence in the operation, as can be noticed not only in the mentioned investments of Portugal Telecom’s cash, but also in other contingencies already disclosed in the media (including the investments made by the Portuguese company in Angola), which probably have been pushed aside considering the urgency of finding a solution for the debts of Oi S.A’s controlling shareholders.

These operation-related events represent a real opportunity for the regulatory structure of the Brazilian capital market to prove robust and ready to defend abuses against both minority shareholders and the diffuse interest of the Brazilian society.