Why Portugal Telecom Shares Popped

Why Portugal Telecom Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Portuguese telecom giant Portugal Telecom climbed 12% this morning after agreeing to merge with its Brazilian affiliate Oi .

So what: PT will receive a 38% holding in the new entity with Oi investors controlling the rest, giving PT a nice chunk of the new company without any headaches, while providing Oi with more operational and financial flexibility. In fact, the goal's main purpose is to capitalize on Latin American growth amid continued weakness in the European market, and judging by the pops in PT and Oi shares today, both sets of shareholders seem happy with the move.

Now what: The new entity will have about $17 billion in annual revenue with over 100 million customers. "The new company will have a unique position in the strategic markets in which it operates, with a high growth potential in Brazil underpinned by convergence and mobility, as well as in Portugal by leveraging on technological and innovation leadership," Oi CEO Zeinel Bava said. Given that the deal still has some regulatory hurdles to clear, however, I wouldn't make too big of a bet just yet.

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