Telefonica Rejected on $7.3 Billion Bid for Vivo Stake
Telefonica SA Chairman Cesar Alierta’s unsolicited 5.7 billion-euro ($7.3 billion) bid for control of Vivo Participacoes SA highlights an urgent effort to fix the Spanish company’s operations in Brazil.
The offer by Europe’s second-largest phone company was rebuffed by Portugal Telecom SGPS SA, which together with Telefonica owns a venture that controls Vivo, Brazil’s biggest wireless carrier. The bid values Portugal Telecom’s Vivo voting shares at 145 percent more than their average price in the month to May 6, Madrid-based Telefonica said in a regulatory filing.
For Alierta, Portugal Telecom’s rejection marks the second failure in the past year in Latin America’s largest economy, after Vivendi SA outbid Telefonica in a takeover battle for Brazilian phone company GVT (Holding) SA. His effort to buy Vivo, first voiced in 2006, is aimed at combining the mobile- phone network with Telecomunicacoes de Sao Paulo SA, or Telesp, Telefonica’s fixed-line unit in Brazil.
“There are certainly some indications of why Telefonica would be desperate to do it based on the recent performance of Telesp,” said Roger Appleyard, head of global credit research at RBC Capital Markets in London. “Portugal Telecom rejected an offer with a huge premium and I think that means that even a higher offer would be turned down.”
Telefonica fell 4.4 percent to 15.94 euros on a dividend- adjusted basis in Madrid trading, the steepest decline since November 2008. Portugal Telecom rose 5.9 percent to 7.535 euros in Lisbon. Vivo voting shares gained 34 percent to 58.30 reais in Sao Paulo trading, while preferred, limited-voting shares rose 5.1 percent to 47.80 reais.
Telefonica faces rivals Vivendi and America Movil, controlled by Mexican billionaire Carlos Slim, in the Brazilian market, where it is seeking growth as demand at home cools. The Spanish company’s Brazilian unit Telesp’s fourth-quarter sales fell 3.8 percent in local-currency terms. Operating income before depreciation and amortization fell 16 percent.
“The main priority for Telefonica is to fix Brazil where they face a bad situation,” said Bruno Lippens, who manages about $6 billion in telecommunications assets at Pictet & Cie. in Geneva, including Telefonica shares. “The core of the problem is that the future of Telesp without a wireless asset is not very rosy.”
The offer to buy out Brasilcel NV, the unlisted joint venture with Portugal Telecom that owns about 60 percent of Vivo, is 84 percent higher than the average analyst valuation of the Portugal Telecom stake, Telefonica said in its offer letter to the board of Portugal Telecom.
The amount is also equivalent to 82 percent of Portugal Telecom’s market value based on yesterday’s closing price.
“The premium being offered is substantial and we estimate that PT could in theory sell Vivo and use the proceeds to buyback about 40 percent of its own equity, clearly accretive,” Jonathan Dann, a Barclays Capital analyst wrote in a note.
Vivo had 30 percent of Brazil’s 179 million wireless subscriptions at the end of March, according to Anatel, the country’s phone regulator.
Telefonica said if Portugal Telecom accepted its offer, it would also buy outstanding common shares of Vivo for 600 million euros. That values the shares at about 86 reais ($49) a share, according to Credit Suisse estimates, or double their closing price of 43.50 reais in Sao Paulo trading yesterday.
Telefonica’s offer follows America Movil’s $24.5 billion plan, announced in January, to take over Telmex Internacional SAB to combine its wireless and land-line operations in Brazil. America Movil and Telmex Internacional are both controlled by Mexico’s Slim.
Portugal Telecom has counted on Brazil to spur revenue as growth in Europe slows and competition increases at home. Its Brazilian sales rose 4.1 percent to 3.23 billion euros last year, while revenue from Portugal declined 1.9 percent.
Portugal Telecom Chief Executive Officer Zeinal Bava said Vivo is a “fundamental growth pillar” for the Portuguese company and that the Telefonica offer doesn’t fit its plans.
Telefonica may have to seek other ways to expand in Brazil, including buying control of Telecom Italia SpA’s TIM Brazil unit, said RBC Capital’s Appleyard.
“Telefonica may have to go down the TIM Brazil road,” he said. “Buying TIM Brazil outright is the less likely scenario, and a more likely option could be a merger with Telecom Italia.”
Telefonica joined a group of Italian investors in 2007 to buy a controlling stake in Telecom Italia for 4.1 billion euros. Telecom Italia Chief Executive Officer Franco Bernabe told analysts May 6 that it had no plans to sell TIM Brazil, adding, however, that “everything is a question of price.”
TIM Brazil is the third-largest wireless carrier behind Vivo and the unit of Slim-controled America Movil.
Telefonica’s Telecomunicacoes de Sao Paulo offers home- phone and Internet service in the state of Sao Paulo. Combining the operations of that company with Vivo could save 3 billion euros a year in costs, Credit Suisse analyst Andrew Campbell said last month in a note to clients.
Brazil’s wireless market will expand 11 percent to 193 million subscribers this year, down from 15 percent growth in 2009, according to a Banco Santander SA research note last month.