PORTUGAL TELECOM : Proposal refering to the sole item of the agenda of the Gene...

Proposal refering to the sole item of the agenda of the General Meeting of Shareholders to be held on 27 March 2014

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EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS
PORTUGAL TELECOM, SGPS S.A.
27 March 2014

PROPOSAL OF THE BOARD OF DIRECTORS

SOLE ITEM ON THE AGENDA:
(To deliberate on the participation in the Capital Increase of Oi, S.A. through the contribution of assets representing all of the operating assets held by the Portugal Telecom Group and the related liabilities, with the exception of the shares of Oi, the shares of Contax Participações, S.A. and the shares of Bratel BV held directly or indirectly by PT)

Whereas:
a. Pursuant to the memorandum of understanding appropriately disclosed to the market on 2 October 2013 ("MoU"), PT, Oi, S.A. ("Oi") and certain other companies related to them announced the intention of combining the two businesses of PT and Oi (the "Business Combination"), integrating them into a single Brazilian listed entity, it having been established that such company will be Telemar Participações, S.A. ("CorpCo");
b. With the Business Combination, the activities and business of PT and Oi will come to be under the control and management of one single entity, allowing synergies to be crystalized, either through PT's achieving economies of scale which would otherwise be difficult to obtain or through Oi's having more direct access to the resources and innovation capabilities of PT;
c. CorpCo will have its headquarters in Brazil, will integrate, among others, the direct and indirect shareholders of PT and Oi and is expected to be listed on the Bovespa, S.A. - Bolsa de Valores, Mercadorias e Futuros ("BM&FBovespa"), on the NYSE Euronext Lisbon regulated market and on the New York Stock Exchange (in the form of American Depositary Receipts), with admission to the Novo Mercado segment of BM&FBovespa and the adoption of the related corporate governance practices, dispersion of the shareholder base of PT and Oi, creation of greater liquidity and obtaining of a greater growth potential for the shares traded;
d. The implementation of the Business Combination is subject to several conditions, including a series of corporate transactions and their approval by the corporate bodies of each of the companies involved, obtaining the necessary legal and regulatory authorizations and applicable consents from creditors and third parties. The definitive agreements governing the necessary steps for the implementation of the Business Combination have already been agreed and signed (the "Definitive Agreements"), as announced on 20 February 2014;
e. Within the scope of the process leading to said Business Combination, it is intended in particular that a share capital increase of Oi (the "Oi Capital Increase") will be undertaken, in which a portion of the new shares to be issued will be subscribed through a contribution in kind corresponding to the shares held by PT in a company holding or to hold all of the operating assets relating to its business (except for the shares directly or indirectly held in Oi, Contax Participações, S.A. ("Contax") and Bratel B.V.) and the liabilities of PT on the date of the contribution, as considered in the Valuation Report, a copy of which is attached hereto (Schedule 1) ("PT Assets");
f. So as to guarantee the conditions suitable for PT to make the aforementioned contribution in kind, prior to the Oi Capital Increase PT will implement a reorganization of its assets. As a result, all the shares of the companies holding the assets and liabilities corresponding to PT's business have been or will be transferred so that they are owned directly or indirectly by PT Portugal, SGPS, S.A. ("PT Portugal"). The shares of capital stock of PT Portugal will transferred in the contribution in kind mentioned above;
g. Under applicable Brazilian law, the PT Assets corresponding to the contribution in kind were valued by an independent valuation firm, as per the Valuation Report attached hereto;
h. For purposes of the subscription in the Oi Capital Increase, the Board of Directors of Oi has determined a value for the PT Assets of €1,750 million. On the execution date of the Definitive Agreements, such amount was consistent with the range set forth in the MoU signed on 1 October 2013, corresponding to €1,900 million, when the dividends to be paid by PT before the completion of the Business Combination under its previously announced dividend policy and other costs associated with the transaction, as foreseen in the MoU, are taken into account, both of which have been considered in the Valuation Report;
i. As established in the MoU and in the Definitive Agreements, the value in Euros of the PT Assets was converted into 5,709.9 million Reais on 20 February 2014 (the day preceding the date of first publication of the notice for the Extraordinary General Meeting of the shareholders of Oi). The value in Reais which will apply for purposes of the subscription and contribution in kind by PT in the Oi Capital Increase was fixed as from that date;
j. The Report and the value of the PT Assets in Reais to be contributed by PT for purposes of the subscription in the Oi Capital Increase will be submitted, in accordance with Brazilian law, to the Oi General Meeting of Shareholders to be called for such purpose;
k. As consideration for the contribution of PT Portugal within the Oi Capital Increase, PT will subscribe for ordinary and preferential shares. For such purpose, PT will benefit from the assignment of the priority rights to be assigned to it by Telemar Participações, S.A., AG Tel and LF Tel, with the shares being subscribed at a price per share equal to that established for the portion of the Oi Capital Increase to be made in cash and to be determined through the bookbuilding process;
l. After completion of the Oi Capital Increase, it is specifically envisaged that, subject to approval in a general meeting of the respective shareholders, (i) the control structure of CorpCo will be simplified through a corporate reorganization of the various holding companies which are direct and indirect shareholders of CorpCo, whereby, among other effects, PT will directly hold Oi shares corresponding to its indirect stake in CorpCo (the "Corporate Reorganization"); (ii) all the shares representing the share capital of Oi will be incorporated into CorpCo, with the Oi ordinary and preferential shares to be exchanged for ordinary shares of CorpCo and with Oi becoming a wholly owned subsidiary of CorpCo (the "Incorporation of Oi"); and (iii) PT will be incorporated into CorpCo through a merger transaction through which PT will cease to exist, with the shares of PT being exchanged for shares representing the share capital of CorpCo (the "PT Merger");
m. With the completion of the Oi Capital Increase, certain agreements will come into force binding the votes of PT and other parties involved, the shareholders of CorpCo and Oi, with a view to carrying out the Corporate Reorganization and the Incorporation of Oi. Should these events not occur, for whatever reason, the stake of PT in CorpCo and, indirectly, in Oi, will remain bound to the current shareholders' agreements and to the voting and transfer restrictions established therein, duly adapted, notably to maintain the rights of the parties now in effect and to provide for continuing efforts toward the completion of the Business Combination, in accordance with the principles originally established. Still in this case, PT will not be able to trade its shares in Oi (neither those already currently held nor those acquired under the Oi Capital Increase) until 31 December 2014, without prejudice to the lock-up agreement described below;
n. Pursuant to the documentation of the Oi Capital Increase, it is expected that PT will enter into an agreement with the placement banks not to dispose of the Oi shares subscribed by PT in the Oi Capital Increase, and subsequently the CorpCo shares for which the former will be exchanged under the Incorporation of Oi (lock-up), for a period to be established, estimated from 90 to 180 days as from the completion of the Oi Capital Increase. Such lock-up will not be applicable to the shareholders of PT after the completion of the PT Merger, where the shares they hold in PT's share capital will be exchanged for CorpCo shares;
o. The PT Merger Agreement to be prepared jointly by the management bodies of PT and CorpCo will be submitted at the appropriate time for the approval of the Shareholders at a General Meeting to be called to such purpose after the completion of the Oi Capital Increase. Pursuant to such General Meeting, and should the transaction be approved by the Shareholders, the final terms of the transaction to be undertaken will be determined, including the final exchange ratio for the merger (which depends on the number and price of the shares to be subscribed for by PT in the Oi Capital Increase);
p. Therefore, and notwithstanding PT's contribution of the PT Assets within the Oi Capital Increase, it is possible that the PT Merger will not be completed, namely if it is not approved by the Shareholders. In such case, PT will exclusively hold a stake in CorpCo (after the completion of the Incorporation of Oi) with the Shareholders maintaining a direct stake in PT, which will remain listed on the NYSE Euronext. In such an event, under the agreements executed in connection with the Business Combination, it was established as a condition that PT will be limited to exercising 7.5% of the voting rights of CorpCo, after the Incorporation of Oi, regardless of the stake effectively held;
q. The stake of PT in the Oi Capital Increase is subject to the satisfaction of various conditions (without prejudice to the ability of PT or Oi, as applicable, to waive any such condition, to the extent legally permitted), including the approval by the shareholders' General Meeting of PT and Oi, the obtaining of any legal and regulatory authorizations, notably the authorization/non-opposition for all steps of the Business Combination by the Brazilian telecom regulator  (Agência Nacional de Telecomunicações) ("Anatel") and by the Portuguese Antitrust Authorities (Autoridade da Concorrência Portuguesa) ("AdC"), the obtaining of consents from lenders and third parties and the final and valid consummation of the Oi Capital Increase, including the subscription of the cash portion in a minimum amount of 7 billion Reais;
r. PT may opt not to carry out the subscription of the Oi Capital Increase in the event its corporate stake in CorpCo, as a result of the subscription orders of the Oi Capital Increase, on a fully diluted basis after the Incorporation of Oi, is equal to or lower than 36.6% of the shares representing the share capital of CorpCo. Similarly, Oi may opt not to allow PT to participate in the Oi Capital Increase should it be verified up to the end of the bookbuilding process that, as a result of the transaction, PT would hold a stake, on a fully diluted basis, greater than 39.6% of the shares representing the share capital of CorpCo;
s. Given the material nature of the transaction at hand, the Board of Directors decided to request, under article 373, number 3, of the Portuguese Companies Code, the convening of a General Meeting of Shareholders to deliberate on PT's contribution of the PT Assets within the Oi Capital Increase;
t. All the documents relating to the Oi Capital Increase, aside from all the other documents already disclosed by Oi related to the Transaction, will be available to the respective shareholders of Oi and the market in general, and may be consulted on Oi's Investor Relations website (http://ri.oi.com.br), on the IPE system on the website of the CVM (Comissão de Valores Mobiliários, the Brazilian Securities Commission) (www.cvm.gov.br), and on the BM&FBOVESPA website (www.bmfbovespa.com.br).
We propose that the following be approved:
The participation of PT in the Oi Capital Increase, through the contribution of the PT Assets comprising all of the operating assets held by PT (except for the stakes directly or indirectly held in Oi, Contax and Bratel B.V.), and the liabilities of PT on the date of the contribution, as considered in the Valuation Report, a copy of which is attached hereto.
That such contribution be undertaken for the amount of 5,709.9 million Reais, corresponding to the equivalent of 1,75o million Euros, applying the Euro/Real conversion rate on 20 February 2014 (i.e., 3.2628 Reais per Euro), as established in the MoU and the Definitive Agreements and which, considering the dividends to be paid by PT before the completion of the Business Combination under its previously announced dividend policy, subject to the approval of the annual General Meeting, and other costs associated with the transaction, as foreseen in the MoU - both already considered in the Valuation Report - corresponded on that date to €1,9oo million.

Lisbon, 24 February 2014

The Board of Directors,

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