Portugal Telecom in Talks on Possible Bid for Vivo

Portugal Telecom SA, escalating a battle for Brazilian wireless operator Vivo Participacoes SA, is in talks with investors from the Middle East and Asia as it weighs a possible offer for Telefonica SA’s stake.

“I can tell you for sure that there are people interested from the Middle East and from Asia,” said Jose Maria Espirito Santo Ricciardi, an executive of Banco Espirito Santo SA, Portugal Telecom’s second-biggest shareholder. He declined to name any of the investors.

Either Portugal Telecom buys Telefonica out of Vivo or the Portuguese operator needs to find another company in Brazil, Ricciardi, chief executive officer of Banco Espirito Santo’s investment banking unit, said in an interview at Bloomberg’s headquarters in New York yesterday. Brazil, whose economy analysts forecast will grow by the most in more than two decades this year, has South America’s largest mobile-phone market.

Telefonica, Spain’s biggest phone company, prompted a fight for control of Vivo with an unsolicited 5.7 billion-euro ($7 billion) offer this month to buy Portugal Telecom’s stake. The Portuguese company rejected the offer. Telefonica declined to comment today on remarks from Ricciardi. The Portuguese company said today on its Web site its board hasn’t taken any decision related to Telefonica’s Vivo stake.

What appear to be “irreconcilable differences” probably will lead Portugal Telecom and Telefonica to end their partnership, said Peter Lyons, a telecom analyst at New York- based brokerage Oscar Gruss & Son Inc.

‘Bad Marriage’

“It is like a bad marriage,” he said. “These situations can continue to plod along for years, and they have done already for many years, and could go on for more years but the pressure is building within the shareholder structure of each company to come to some kind of resolution.”

The preferred shares of Sao Paulo-based Vivo fell 2.9 percent to 49.70 reais at 3:22 p.m. New York time after climbing 2 percent yesterday to its highest closing price since February. The voting Vivo shares fell 2.9 percent to 71.97 reais after surging 7.4 percent yesterday. Portugal Telecom slipped 0.1 percent to 8.401 euros in Lisbon while Telefonica rose 1.1 percent to 15.755 euros in Madrid.

Portugal Telecom, based in Lisbon, also is exploring ways to end its partnership with Telefonica in Portugal, Ricciardi, said in the interview. Telefonica of Madrid is Portugal Telecom’s largest shareholder with a 10 percent stake.

“Status quo is not an option anymore, everything is possible,” Ricciardi said. “The only solution that I see on this is to find a way for Portugal Telecom and Telefonica to have important investments in Brazil that are not in the same company.”

Brazil’s economy may grow 6.5 percent this year after shrinking in 2009, according to central bank survey of about 100 economists published this week.

‘Strategic’ Holding

“For us it’s key to stay in Brazil and price is not the issue,” Ricciardi said. His comments echoed those of Portugal Prime Minister Jose Socrates, who said in Sao Paulo yesterday that Portugal Telecom’s stake in Vivo is “strategic.” The government holds Portugal Telecom veto powers, which are being challenged by the European Commission.

Telefonica and Portugal Telecom each own 50 percent of Brasilcel NV, an unlisted company that controls about 60 percent of Vivo. America Movil SAB, the Latin American wireless carrier controlled by Carlos Slim, owns Claro, Brazil’s second-biggest mobile-phone company after Vivo. Brazil’s third-largest wireless carrier is Tim Participacoes SA, which is two-thirds owned by Telecom Italia SpA, Italy’s biggest phone company. Tele Norte Leste Participacoes SA, known as Oi, is Brazil’s fourth-biggest wireless carrier and its biggest land-line company. It’s controlled by a group of Brazilian investors.

Oi Option

Portugal Telecom is more likely to find another way to stay in Brazil without buying Telefonica’s stake in Vivo, said Lyons, at Oscar Gruss.

“Vivo will likely remain at the end of the day with Telefonica and Portugal Telecom would probably find a better fit in another vehicle in Brazil with such as, at some level of ownership, in Oi,” Lyons said. “That alternative makes more sense than Portugal Telecom buying Telefonica out of Vivo.”

Telefonica Chairman Cesar Alierta first publicly expressed an interest in taking control of Vivo in 2006. Telefonica, whose $4 billion bid last year for Brazil’s GVT (Holding) SA was topped by France’s Vivendi SA’s $4.18 billion offer, needs to revive its Brazilian operations and wants to merge Vivo with Telecomunicacoes de Sao Paulo SA, or Telesp, the Spanish company’s fixed-line unit in Brazil.

Portugal Telecom Chief Executive Officer Zeinal Bava said in an interview in New York this week that the Telefonica offer was “opportunistic” while analysts with ING Grope NV and Sanford C Bernstein suggested Telefonica should raise its offer to 7.5 billion euros

“The current valuation Telefonica is putting on the Vivo asset, we think it’s low, we think it’s opportunistic, clearly taking advantage of the fact that southern Europe is having one of its worst crises for the last three decades,” Bava said in the interview.

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net. Fabiola Moura in New York at fdemoura@bloomberg.net;

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