UPDATE 3-Portugal Telecom, Brazil's Oi team up to fight rivals
* Two groups merge to strengthen Oi amid Brazil shake-up
* Oi to carry out capital increase of at least 2.3 bln euros
* Portugal Tel contributes assets to own 38 pct of new group
* PT's ex-CEO Zeinal Bava to head new company
LISBON, Oct 2 (Reuters) - Portugal Telecom is to merge 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.
The combined group, based in Brazil, will have more clout to compete with bigger mobile rivals, including Spain's Telefonica and Telecom Italia's TIM Brasil as well as America Movil with which it is neck-and-neck in broadband.
Under the deal, Oi will carry out a share issue of 2.3-2.6 billion euros ($3.11 billion) partly to reduce debt. Portugal Telecom will contribute its assets, excluding its current 25 percent stake in Oi, and will end up owning 38 percent of the new group. Oi and certain financial investors will own the rest.
The merged group aims for cost savings of about 1.8 billion euros after the deal closes in the first half of next year.
The proposed transaction coincides with a broader shake-up of Brazil's local mobile market of 268 million customers that is potentially in the works.
Spain's Telefonica, now Telecom Italia's biggest shareholder, is pushing for the indebted Italian group to sell off its Brazilian subsidiary TIM Brazil. Analysts said TIM Brasil could be split up and sold to the other local carriers since none would likely be allowed to buy the whole group for antitrust reasons.
No competition issues are envisaged for Portugal Telecom and Oi's deal, Brazil communications minister Paulo Bernardo said.
Former Portugal Telecom CEO Zeinal Bava will head up the combined group. He took the helm at Oi in June to restructure it after two years of declining profits.
"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.
The group will be listed in Brazil and on NYSE Euronext and the NYSE.
FIXED LINE LEADER
The former state-owned Oi holds a leading 41 percent market share in fixed telephones and a 29 percent share in broadband.
It is in fourth place in mobile with an 18.6 percent share behind Telefonica's Vivo with 28.7 percent, TIM Brasil with 27.2 percent and America Movil's Claro with 25 percent, according to July 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.
The two groups had 2012 combined revenue of about 12.5 billion euros and core operating profit of 4.26 billion euros.
Portugal Telecom shares jumped 20 percent initially before easing back to trade 7 percent up at 3.64 euros by 1341 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, 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."
Telecom operators in Brazil are betting they can grow as more consumers adopt smartphones to surf the web on the go and have broadband at home. Smartphone adoption in Brazil stands at 16 percent of the population, roughly half that in Portugal or the United States, while only 10 percent have broadband at home.
Under the terms of the deal, 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.
Bank of America Merrill Lynch was the lead adviser to Portugal Telecom, along with Morgan Stanley and Banco Espirito Santo. Brazilian investment bank BTG Pactual advised Oi.