Brazil's Oi Q1 net falls 98 pct after takeover

* Profit drops 98 pct after Brasil Telecom purchase

* Debt surges to 19.2 billion reais

* EBITDA falls as company expands into Sao Paulo state

SAO PAULO, May 14 (Reuters) - Brazilian telecommunications group Oi Participacoes (TNLP4.SA)(TNE.N) said on Thursday its first-quarter profit fell 98 percent after it took over smaller rival Brasil Telecom.

Net income dropped to 11 million reais ($5.3 million) from a pro-forma 564 million reais in the year-earlier period, the company said in a securities filing. The company presented the year-earlier results on a pro-forma basis because Oi, formerly known as Tele Norte Leste Participacoes (TNLP4.SA) and Brasil Telecom BRTP4.SA didn't operate as a joint phone group at the time.

Net revenue rose 3.5 percent to 7.49 billion reais from a year earlier. Debt rose more than five-fold to 19.2 billion reais in the quarter ended on March 31, compared with 3.05 billion reais in the same quarter of 2008.

Oi said consolidated earnings before interest, taxes, depreciation and amortization -- a measure of cash flow known as EBITDA -- dropped 8 percent to 2.38 billion reais from a proforma 2.58 billion reais in the same period a year ago.

The decline in EBITDA was due to "the start of operations in Sao Paulo and some start-up costs related to integration which should deliver some savings starting in the second half of the year," the company said in a separate press statement.

The new company, controlled by a group formed by Brazil's state development bank, pension funds and local business groups, will vie for a bigger share of Brazil's mobile phone market of 160 million users with Spain's Telefonica (TEF.MC) and Claro, the Brazilian unit of Mexico's America Movil (AMXL.MX).

Shares in Oi, gained 2.38 percent to 34 reais, while shares of Brasil Telecom gained 1.18 percent to 17.15 reais. (Reporting by Guillermo Parra-Bernal and Tais Fuoco; editing by Carol Bishopric