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Telefonica Agrees to Buy Portugal Telecom Vivo Stake

Cesar Alierta, chairman and CEO of Telefonica SA
Alierta has had to raise the bid three times to gain control of Vivo, Brazil’s largest wireless company. Photographer: Jonathan Fickies/Bloomberg

Telefonica SA agreed to buy Portugal Telecom SGPS SA’s stake in Vivo Participacoes SA, Brazil’s largest wireless company, after raising its bid for a third time to 7.5 billion euros ($9.8 billion).

Telefonica will initially pay 4.5 billion euros in the all- cash deal, followed by 1 billion euros at the end of the year and the rest in 2011, the company said in a statement. Separately, Portugal Telecom agreed to pay 8.44 billion reais ($4.8 billion) for a 22.4 percent stake in Brazil’s biggest phone operator Telemar Norte Leste, known as Oi.

The Vivo accord ends almost three months of wrangling during which the Portuguese company’s board sought more money and the country’s government blocked the deal, calling the stake “strategic.” Telefonica Chairman Cesar Alierta raised his initial offer by 32 percent to gain control of Vivo, which he wants to merge with the Spanish company’s Brazilian fixed-line unit Telecomunicacoes de Sao Paulo SA, or Telesp, to ride the growth in the Latin American country as business slows at home.

“Strategically, this was clearly necessary for Telefonica and the price reflects that,” said Alberto Espelosin, who helps manage about $12 billion at Ibercaja Gestion in Zaragoza, Spain, and owns Telefonica shares.

Both companies have sought growth in Brazil as markets at home have cooled. Vivo said today it ended the second quarter with 56 million clients. The carrier controls 30 percent of the Brazilian mobile-phone market, according to Anatel, the country’s phone regulator. Brazil’s economy is growing at the fastest pace in more than two decades.

Adding to Profit

Portugal Telecom gained 2.8 percent to 8.533 euros in Lisbon trading. Telefonica rose 0.7 percent to 17.005 euros in Madrid, giving the company a market value of 77.6 billion euros.

Telefonica’s latest offer for Portugal Telecom’s stake in Brasilcel NV, their 50-50 venture that owns 60 percent of Vivo, is greater than the market value Portugal Telecom had yesterday of 7.44 billion euros.

“Portugal Telecom did a very good job for their shareholders,” said Andrew Hogley, an analyst at Execution Noble Ltd. in London.

For Telefonica, the offer will add to profit from the first year and will make the Spanish company the largest phone operator in Brazil, it said in an e-mailed statement. Telefonica will also offer about 800 million euros for Vivo voting shares not held by Brasilcel, it said.

Legal Options

Telefonica on May 6 offered 5.7 billion euros for Portugal Telecom’s Vivo stake. It raised the bid to 6.5 billion euros in June and in the same month increased it to 7.15 billion euros, after the two earlier offers were rejected by the company.

The third offer, which won approval from the Lisbon-based company’s investors, was blocked by the Portuguese government last month using special veto powers. When the offer expired in mid-July, Telefonica refused to extend it, deciding instead to look into its legal options.

“An agreement was a better option than an uncertain legal process,” said Francisco Salvador, a strategist at Iberian Equities in Madrid.

Telefonica’s bid values Vivo at more than 10 times this year’s expected earnings before interest, tax, depreciation and amortization. Telefonica trades at 3.5 times estimated Ebitda. The company said the deal will close within 60 days following the signing of the accord.

Brazil Push

Telefonica, whose Brazilian unit Telesp’s first-quarter sales fell 1.4 percent in local-currency terms, needs a greater mobile-phone presence in the country.

“Brazilian mobile was the biggest gap in Telefonica’s footprint,” said Georgios Ierodiaconou, an analyst with ING Groep NV in London.

Portugal Telecom has relied on Brazil for growth, with sales from the Latin American country rising 27 percent in the first quarter, while revenue at home fell 3.6 percent. Since 2006, Vivo has overtaken the fixed-line unit as the company’s biggest revenue contributor, accounting for half of sales in the first quarter.

For Portugal Telecom, the deal with Brazil’s Oi would let it keep a presence in the country even as it sells its Vivo stake to Telefonica. Oi, based in Rio de Janeiro, provides Internet access, mobile, fixed-line and pay-television services.


This deal “is a win-win in our perspective,” Portugal Telecom Chief Executive Officer Zeinal Bava said. “Brazil continues to be an important strategic bet for Portugal Telecom.”

As part of the accord, Oi will buy a stake in Portugal Telecom of as much as 10 percent, the Brazilian company said in a regulatory filing.

Bank of America Merrill Lynch and Morgan Stanley are advising Portugal Telecom on the Vivo deal, while Credit Suisse Group AG and UBS AG are advising Telefonica. On Oi, the Portuguese company is being advised by Banco Espirito Santo, Bank of America and Morgan Stanley. Skadden, Arps, Slate Meagher & Flom LLP is the law firm representing Portugal Telecom.

Telefonica will partly fund the Vivo transaction with a 5 billion-euro loan arranged by Citigroup Inc., people with knowledge of the deal said July 8. The company offered to pay initial interest of 65 basis points, or 0.65 percentage point, on the three-year borrowing, the people said.

The cost of insuring against losses on Telefonica bonds rose 13 basis points to 172.5, according to data provider CMA. Credit default swaps pay the buyers the face value in exchange for the underlying security if a borrower fails to meet its obligations, less the value of the defaulted debt.

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