LISBON (Reuters) - Portugal Telecom has agreed to revise terms of a merger with Brazil's Oi to reflect a lower valuation of the Portuguese company after a holding company of the troubled Espirito Santo family failed to repay a $1 billion (583 billion pounds) loan.
Portugal Telecom said the holding company, Rioforte, had not honoured the short-term debt of 847 million euros that came due on Tuesday.
To reflect the loss of the investment, Portugal Telecom will end up with a smaller stake in the new company of 25.6 percent instead of the 38 percent set out in the original merger agreement unveiled last year.
Portugal Telecom and Oi "remain committed to the full completion of their business combination and have signed a new memorandum of understanding", PT said on Wednesday after signing a memorandum of understanding that sealed the revised tie-up terms.
The revision of the merger, one of the most important deals for Portugal in recent years, is the biggest consequence so far of the escalating troubles of the Espirito Santo clan, one of Europe's premier business dynasties.
The family's business empire is in disarray since the emergence of accounting irregularities at one of its holding companies. The problems have also weighed heavily on Banco Espirito Santo (BES), Portugal's largest listed bank, which the family founded.
Fears over the impact on BES have rocked markets despite the bank's insistence that it can handle any losses.
The family is preparing to seek bankruptcy protection for Rioforte, sources told Reuters on Monday.
Portugal Telecom will have to fight to claw back some of the money from a court once Rioforte begins selling assets to honour the debt, credit analysts say. It is not clear how long that process will take.
In the statement, PT said it "will pursue its legal and procedural options against Rioforte and relevant related parties to the full extent of the law, to secure repayment of the Rioforte debt."
Shares in Portugal Telecom were up 2.2 percent at 1.87 euros after slumping by more than a third to a historic low in the past few weeks on concerns over the Rioforte debt.
BES was up 4 percent at 0.3950 euro after touching a record low a day earlier. Regulators announced an extension of a ban on naked short-selling of BES shares for Wednesday.
The new merger terms must be approved by PT shareholders in a vote to be held by Sept. 8, by Oi's board and by Brazilian market regulators.
(Reporting By Axel Bugge and Leila Abboud; editing by Tom Pfeiffer)