UPDATE 2-Portugal Telecom and Brazil's Oi form new telecom group
* Oi to make capital increase of at least 2.3 bln euros
* PT's ex-CEO Zeinal Bava to be CEO of new company
LISBON, Oct 2 (Reuters) - Portugal Telecom is to combine with Brazil's largest fixed-line telecoms group Oi to form a new company worth about 5.6 billion euros and with 100 million subscribers.
Under the deal, Oi will carry out a capital increase of at least 2.3 billion euros ($3.11 billion) and the merger is expected to create cost savings of about 1.8 billion euros. Once the transaction is completed, shareholders in PT, already the key shareholder in Oi, will own 38.1 percent of the combined group.
The new company will have its headquarters in Brazil and be led by Zeinal Bava, the former CEO of Portugal Telecom, who took the helm at Oi in June.
"The merger is a natural fulfilment of the industrial alliance established in 2010 creating a leading telecoms operator led by Zeinal Bava as CEO," Portugal Telecom said in a statement.
The group will be listed in Brazil and on NYSE Euronext.
Oi is the former state-owned telecom operator in Brazil and the biggest provider of fixed-line telephones with a 41 percent market share and a 29 percent share in broadband.
It is in fourth place in mobile with an 18.6 percent share behind Telefonica, Telecom Italia's TIM Brasil and America Movil's Claro, according to August data from the Brazilian telecom regulator.
PT said the merger would consolidate the position of both companies as the leading telecoms operator for Portuguese-speaking countries, with a total population of about 260 million, including Brazil, Portugal, Angola and Mozambique.
Portugal Telecom shares jumped around 20 percent initially before easing back to trade 11 percent up at 3.78 euros by 1041 GMT.
"The rise in shares reflects the projection of synergies provided by the companies, which means an upside of at least 14 percent for PT," said Guido dos Santos, a telecom analyst at Caixa Investment Bank. "It's a huge market in Brazil with big growth potential, so it makes sense having a Brazilian joint company," he said.
Under the deal, Oi plans a cash capital increase of a minimum of 7 billion reais (2.3 billion euros), and with a target of 8 billion reais to give the new entity greater balance sheet flexibility, PT said.
Each ordinary share in Oi will be exchanged for 1 share in the new entity, CorpCo, and each preferred share will be swapped for 0.9211 CorpCo shares. One PT share will be exchanged for the equivalent of 2.2911 euros in CorpCo shares to be issued at the price of the capital increase, plus 0.6330 CorpCo shares.
The total Oi capital increase will amount to 14.1 billion reais, with 6.1 billion reais in shares expected to be subscribed by PT in its own assets.
The companies expect the proposed merger to be completed in the first half of next year.