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 loan.

Portugal Telecom said the holding company, Rioforte, had not honoured the short-term debt of €847 million 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 per cent instead of the 38 per cent set out in the original merger agreement unveiled last year.

The family’s business empire is in disarray

Portugal Telecom and Oi “remain committed to the full completion of their business combination and have signed a new memorandum of understanding”, PT said yesterday.

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.