UPDATE 5-EU court ruling could unblock PT-Telefonica deal

* EU rules Portugal Telecom golden share illegal

* Portuguese govt says will comply with court ruling

* Looks for ways to comply that safeguard national interest

* PT, Telefonica to continue talks

* Vivo shares up 1 pct

(Adds government statement, updates shares)

By Conor Sweeney and Filipa Lima

LUXEMBOURG/LISBON, July 8 (Reuters) - The European Court of Justice ruled on Thursday that Portugal’s golden share in Portugal Telecom broke EU rules, opening the way to a possible conclusion of PT’s sale of its Brazilian unit to Telefonica.

Portugal stunned investors last week by using its golden share to block a shareholder vote overwhelmingly in favour of selling PT's PTC.LS stake in Vivo VIVO4.SA, Brazil's top cellphone company, to joint venture partner, Spanish peer Telefonica TEF.MC, for 7.15 billion euros ($9.0 billion).

The Portuguese government said on Thursday it respects the court’s decision but will look at ways to comply with EU law that also safeguard national interests. Some analysts interpreted the statement as indicating the government was likely to attempt to wring concessions from Telefonica.

European Commission President Jose Manuel Barroso, who is Portuguese, said the court ruling confirmed the Commission’s view that golden shares distort the single market.

The European Commission has been on a drive to abolish golden shares in the last five years because it says they act as a barrier to cross-border investment.

“The government will try to find a solution that simultaneously respects EU law as it was interpreted by the court but that also safeguards the national interests that are at stake,” Portuguese Cabinet Minister Silva Pereira said.

The minister said the court’s decision was not retroactive, suggesting the government considers that its blocking of the Vivo sale is valid.

Tim Daniels, an analyst at Olivetree Securities in London, said that Telefonica would have to change its offer in a way that was favourable to the government.

“National interest would be served if Telefonica agreed it would never make a bid for all of PT, for example, or that it would always vote its stake in the company in support of the PT board,” he said.

Portugal’s government has repeatedly stated that it considers PT’s stake in Vivo as representing the national interest because it gives the company an international dimension, in a former Portuguese colony.

RBS analyst Kevin Yates said: “It will be up to Telefonica and PT to find a way to appease the government, so it looks like negotiations will have to start again.”

A top 10 shareholder in Telefonica told Reuters that the ruling showed that the company will eventually succeed in taking over Vivo.

“The Portuguese government has golden shares, not a holding in PT, and now the golden share has been deemed illegal, it is only a matter of time,” the shareholder said.

Vivo shares were up 1.2 percent at 1559 GMT, having jumped 3 percent in early morning trading. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^


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PT shares closed 0.6 percent lower while Telefonica was 1.2 percent higher.

Telefonica said the court decision justified its offer for Vivo.

Telefonica wants to control Vivo to galvanise its Latin American growth strategy as competition in Brazil accelerates and its business in Europe slows.

PT Chief Executive Zeinal Bava said his company would continue talking to consider various options.

“We have to be pragmatic and find the best way out for all the parties involved,” Bava told reporters in Lisbon, adding that the court’s decision was out of management’s hands.


An unlocking of the stalemate could save the face of the Portuguese government which has dug its heels in over the sale of Vivo, PT’s main foreign asset in former Portuguese colony Brazil, relegating it to a largely domestic carrier.

“Whatever negotiated solution is reached... would have to be accepted by the Portuguese government, which would seem to favour any deal that makes it look like a winner in the situation,” said a senior Madrid-based telecoms analyst.

The court’s decision to ban the golden share was expected. It follows an opinion last December by advocate-general Paolo Mengozzi, who said Portugal had failed to justify its right to overrule decisions affecting Portugal Telecom. (Additional reporting by Victoria Howley and Cecilia Valente in London, Srikesh Laxmidas in Lisbon) (Writing by Axel Bugge; Editing by Mike Nesbit and Erica Billingham) ($1=0.7453 euros)