Telefonica May Amend Vivo Bid to Appease Portugal After Ruling
Prime minister of Portugal Jose Socrates. Photographer: Mario Proenca/Bloomberg
July 8 (Bloomberg) -- Christopher Nicholson, a senior analyst at equity research firm Oraca Ltd., talks about the European Court of Justice ruling on Portugal's right to veto decisions by the country’s biggest phone company, Portugal Telecom SGPS SA. The European Union's highest court ruled today in Luxembourg that the so-called golden share gives the country an unjustified influence over the company. The governnmet is seeking to block the sale of Portugal Telecom's stake in Brazil's largest wireless operator. Nicholson speaks with Andrea Catherwood on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Telefonica SA may grant Portugal Telecom SGPS SA a minority holding in its Brazilian assets to win approval for its 7.15 billion-euro ($9.1 billion) offer for the Portuguese company’s stake in Brazil’s largest wireless operator, analysts said.
Telefonica wants to merge Vivo with Telecomunicacoes de Sao Paulo SA, or Telesp, the Spanish company’s fixed-line unit in Brazil. Adjusting the offer to ensure Portugal Telecom has a stake in the combined group would appease the Portuguese government, said Banco BPI analyst Pedro Pinto Oliveira.
The European Court of Justice yesterday said the government doesn’t have veto rights at Portugal Telecom, voiding a decision by Portuguese Prime Minister Jose Socrates to block the transaction at a shareholders meeting last month. Portugal said it will alter its special rights in the company to comply with the ruling, which isn’t retroactive to when the bid was made.
The companies could make “some small adjustments” to complete the deal, saidFrancisco Salvador, co-strategist at Iberian Equities in Madrid. “It’s a way to show that the solution has been agreed on by all parties.”
Portugal Telecom fell 3.5 percent to 8.30 euros in Lisbon. Telefonica rose 0.3 percent to 16.21 euros in Madrid.
Robin Bienenstock, an analyst at Sanford C Bernstein, cut her rating on Portugal Telecom to “underperform” from “market perform” today, citing the bid and lower mobile termination rates in Brazil. Mobile termination rates are operators’ wholesale charges to connect calls to each others’ networks.
Possible Outcomes
Bienenstock assigned a 5 percent probability of the current bid succeeding and a 60 percent chance for a deal that “leaves Portugal Telecom with a diminished economic interest in a larger vehicle but does not force Portugal Telecom to cede control to Telefonica,” she said today in a report.
Both companies said after the court ruling they are open to negotiations. The Portuguese government said while it respects the European court ruling, it requires changes to the bid.
“If that proposal isn’t altered, naturally the Portuguese government’s position can’t be different,” minister Pedro Silva Pereira said after the court ruling.
Telefonica last month won approval from 74 percent of the shareholders present at a meeting in Lisbon for its offer to buy Portugal Telecom’s stake in their 50-50 venture Brasilcel NV, which owns 60 percent of Vivo Participacoes SA.
Vivo Options
Under the current offer from Telefonica, Portugal Telecom can sell its entire Vivo stake in one go or dispose of a third of it with an option to sell the rest over three years. The bid is valid until July 16.
Allowing Portugal Telecom to own a minority in Telefonica’s combined Brazilian business “would save the face of the Portuguese government,” said Pinto Oliveira. “This would also give time for Portugal Telecom management to find another solution in Brazil if this one ends up not being suitable.
Portugal Telecom must find the “best solution that’s good for all,” Chief Executive Officer Zeinal Bava said yesterday. Telefonica spokesman Miguel Angel Garzon said that the Madrid- based company is still willing to find possible solutions for the transaction.
“Portuguese companies will always kowtow to the government and so the realistic option remains a negotiated solution” between the companies and the prime minister, said Renaud Berenguier, head of U.K. sales at CM CIC Securities.
Dividend Payments
Giving Portugal Telecom a minority stake in the Brazilian venture might not be welcomed by all investors, Execution Noble analyst Andrew Hogley said.
Such an offer “may appease the government but Portugal Telecom might end up with some angry shareholders,” he said. It may be more attractive to shareholders to keep the current 50 percent stake as it gives them higher dividend payments and more control, Hogley said.
To please the government, Portugal Telecom could also try to come up with a new investment to remain in Brazil, said Joao Caiado Guerreiro, a corporate lawyer at Lisbon-based Franco Caiado Guerreiro e Associados. Socrates said before the vote that Portugal’s strategic interest requires a Portugal Telecom with scale.
Tele Norte Leste Participacoes SA, Brazil’s biggest phone company known as Oi, could be a target for Portugal Telecom to maintain a foothold in the country, analysts including Link Corretora’s Maria Tereza Azevedo have said.
Social Democrats
Portugal Telecom said in a July 4 regulatory filing that it hadn’t studied any merger in the Brazilian market and hadn’t tried to negotiate an Oi deal.
Socrates heads a minority Socialist government that could fall if opposition parties block its budget or band together to force it from power. The Social Democrats, the biggest opposition party, are leading the Socialists in voter surveys, and party leader Pedro Passos Coelho has said he would scrap the golden share.
The Portuguese government maintained power over the former state monopoly by controlling 500 class “A” shares with the right to name a third of the board and to veto capital increases, bond issuances and dividend payments. Portugal had sold its common shares in the Lisbon-based company by 2000.
“Governments, any government, have enormous power,” said Joao Caiado Guerreiro. “At this moment, everyone wants a solution to save face.”
To contact the reporters on this story: Paul Tobin in Madrid at ptobin@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.
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