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Announcement:

Moody's: Portugal Telecom's investment in Oi (Brazil) neutral to ratings

26 Jan 2011

Madrid, January 26, 2011 -- Moody's Investors Service has today said that the ratings of Portugal Telecom ("PT", Baa2 stable) are unaffected by the company's announcement today of a final agreement to acquire a direct and indirect 22.4% equity stake in Brazilian mobile operating subsidiary Oi, for BRL8.32 billion (EUR3.7 billion).

PT originally announced the deal on 28 July 2010 (when Moody's affirmed the company's ratings), immediately after reaching an agreement with Telefónica (Baa1 stable) for the sale of PT's stake in Vivo for EUR7.5 billion. As previously stated, PT will fund this transaction with part of the cash proceeds already collected from Telefónica. In addition, PT had previously announced that it will use the remaining cash proceeds to fund its EUR1 billion pension deficit, make an extraordinary payment of EUR 1.4 billion to shareholders and the rest for debt de-leveraging.

The Oi deal (which involves the fulfillment of certain guarantees, a call for capital increases, a subscription period of 30 days and a cash settlement) is expected to be closed by the end of March 2011.

Representing a substitution for its previous investment in Vivo, PT's investment in Oi strongly positions PT to take advantage of the growth opportunities in the mobile segment in Brazil, by contributing to developing innovative and technologically advanced services to customers. Oi, has a 23% market share in a fast-growing market with about 95% mobile penetration .

The ratings factor in PT's confirmation of its use of the cash proceeds received from Telefónica. Specifically, PT will use these in such a way that the balance between its financial and business risk is not altered, in line with the company's current rating level. This implies that the company will use a substantial portion of the cash to reduce debt, in addition to the strategic investment in Brazil confirmed today.

PT's Baa2 rating reflects: (i) its integrated telecoms business model, which allows it to adapt to the developments in the telecoms industry; (ii) its management strategy and tolerance for financial risk, which directly influence debt levels and credit quality; and (iii) its operating margins and liquidity. Moody's expects a gradual improvement in PT's domestic operations, to support a recovery in debt ratios.

The rating outlook remains stable, reflecting Moody's belief that PT is likely to maintain a prudent financial strategy. The rating agency expects that PT's adjusted financial ratios will stabilize, such that the company exhibits a net debt/EBITDA ratio of around 2.5x and a retained cash flow (RCF)/net debt ratio of 20%, in line with the current Baa2 rating level. However, negative rating pressure could arise if PT's financial ratios were to deteriorate in the short term (beyond that which is described above) or the company's debt ratios were to fail to recover, as a result of a deviation in performance or a further enhancement of the company's shareholder remuneration policy. A downgrade could result if, for example, PT's RCF/net debt ratio were to decrease towards 15% or the company's net debt/EBITDA ratio were to approach 3.5x.

Moody's previous rating action on Portugal Telecom was implemented on 5 March 2007, when the rating agency confirmed the company's Baa2 issuer rating and the senior unsecured long-term debt ratings of its fully owned subsidiary Portugal Telecom International Finance B.V.

The principal methodology used in rating Portugal Telecom was the "Global Telecommunications Industry Rating Methodology", published in December 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Ratings Methodologies sub-directory on Moody's web site.

Portugal Telecom SGPS, SA, domiciled in Lisbon, Portugal, is the leading telecommunications operator in Portugal, servicing 4.3 million fixed lines, which includes 1 million ADSL retail connections. PT also has approximately 7.3 million mobile phone customers as of September 2010. PT is present nationwide, delivering a full range of services and products across Portugal, including mobile, fixed and Internet Protocol (IP)-based voice and data communications. In addition, PT is active in IT infrastructure outsourcing and also manages communications infrastructures. PT also has operations in other countries, including Guinea Bissau, Cape Verde, Mozambique, Timor, Angola, Kenya, China, Sao Tome and Principe, and Namibia. On 26 January 2011, it announced the final agreement to acquire a 22.4% stake in Oi (Brazil mobile telecom operator).

Madrid
Carlos Winzer
Senior Vice President
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
Madrid 28004
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Portugal Telecom's investment in Oi (Brazil) neutral to ratings
No Related Data.
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