Both Portugal Telecom (OTC:PTGCY) and Oi S.A. (UNKNOWN:OIBR.DL) have fallen to multiyear lows in recent days, as an already agreed upon merger between the two has stalled over a disputed acquisition of commercial debt from Luxembourg banking giant Espirito Santo Financial Group (OTC:ESFOF).

RioForte: Much ado about something?
At issue is Portugal Telecom's purchase of $1.22 billion in debt from Espirito Santo's RioForte holding company. RioForte is used as a holding company for all of the group's nonfinancial holdings, and has myriad investments, mostly centered on Portugal, Spain, and Brazil.

This became a problem for two reasons. One is that Portugal Telecom did not disclose this purchase before the merger agreement with Oi was reached, and the other is that some Espirito Santo holding companies are under investigation in Luxembourg.

The fighting has slowed an already costly merger process, which has hurt both companies' bottom lines in recent quarters. Yet Luxembourg's finance ministry is downplaying the investigation, saying there is no evidence of financial instability among the holding companies, and has dubbed the scandal "a lot of noise."

The worst case
Despite a lot of panic selling, there is no sign that the debt is neither a real threat to the merger, nor is it even liable to change the terms of the merger. It is just slowing things down and adding to the merger costs, while fueling a near term sell-off that is entirely too big.

Portugal Telecom alone has over $3 billion in cash and equivalents, and even if we assumed the RioForte paper was worthless, a dramatic overstatement given what Luxembourg is saying about the probe, it is not a threat to continuing operations.

Portugal Telecom alone has lost as much in market cap as the paper is worth, so the bad news is already priced in. Oi has lost hundreds of millions of dollars in market cap itself in the panic selling.

What we're actually looking at
The merger of Portugal Telecom and Oi made a lot of sense when it was announced, and it still does. The RioForte dispute is indeed "a lot of noise," but ultimately the merger seems almost certain to go through, and the company will be all the stronger for it.

Both companies are seeing some harm to their earnings right now, and even once the merger is complete it may take awhile to get the combined company running smoothly. But waiting the downturn out at these levels seems like the most reasonable course of action. This is a buying opportunity more than anything else.

Numbers don't lie
Both Portugal Telecom and Oi are extremely cheap at current levels, and the combined company is an absolute steal when compared to Spain's Telefonica SA (NYSE:TEF), a competitor these two merged to compete against more efficiently.

Portugal Telecom is trading at only 7.75 times trailing earnings and has a healthy 10.04% profit margin. It is trading at only 1.19 times book value. Compare that to Telefonica's P/E of 13.14 and 2.63 times book value, and you can see there is quite a disconnect here. 

The discount of Oi is even more stark, though the exact figures are a lot more difficult to determine because of the large new placements of shares aimed at reducing its debt and completing the Portugal Telecom merger.

Oi's offering could be as many as 5.75 billion shares, and at those levels would put trailing P/E at about 11, with a price book of 0.52 -- clearly still a substantial discount despite the recent dilution of shares.

Waiting out the merger process is going to be arduous, but for those willing to look to the long term there is a lot to like about either Portugal Telecom and Oi, and even more reason to be optimistic about the merits of the combined company at these levels.