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Company News

UPDATE 5-Telefonica's Latam profit boost shows Vivo appeal

* H1 net profit 3.78 bln eur vs 3.68 bln forecast

* Vivo buy seen creating synergies of 3.3-3.9 bln euros

* Shares rise as rate of decline in Spanish revenue slows

* Shares close up 3.2 pct

(Adds comments from conference call, updates shares)

By Elisabeth O’Leary

MADRID, July 29 (Reuters) - Telefonica TEF.MC revealed forecast beating profits for the first half as strength in Latin America offset a weak performance at home, confirming the logic of buying Vivo VIVO4.SA in fast-growing Brazil.

Telefonica, the euro-zone’s largest telecom company by market capitalisation, delivered a 9.4 percent rise in first half profit and said its 7.5 billion euro ($9.8 billion) deal secured on Wednesday to buy control of Brazilian mobile joint venture Vivo, is expected to create synergies of 3.3 billion to 3.9 billion euros.

The deal will be accretive from the first year, Chief Financial Officer Santiago Fernandez Valbuena told analysts during a conference call on results.

“We will be the undisputed leader in Brazil, a market which we expect to be re-rated on economic performance,” Valbuena said.

The results underscored the logic of Telefonica's deal to buy control of Vivo from Portugal Telecom PTC.LS as markets in Europe mature. The purchase is a coup for Chairman Cesar Alierta after a politically complicated battle. [ID:nN28196592]

Telefonica said it plans to launch an 800 million euro bid for the remaining 11 percent freefloat of Brasilcel -- its joint venture with PT in Brazil -- in October.

“Latin America was the big driver of improvement ... Performance in Colombia and Brazil is particularly encouraging,” said ING telecoms analyst Georgios Ierodiaconou in a note to clients.

In Latin America, Telefonica’s revenue was up 10.2 percent and core earnings were up 6.1 percent. The unit accounts for the bulk of group revenue.

Telefonica posted first-half net profit of 3.78 billion euros ($4.92 billion) versus expectations for 3.68 billion euros in a Reuters poll of 10 analysts, while revenue was 29.05 billion euros versus 28.55 billion in the poll.

SHARES RISE, GLIMPSE OF SPANISH RECOVERY?

Telefonica's share price rose 3.2 percent on Thursday to 17.55 euros, compared with a 1.48 percent rise in the European telecoms index .SXKP as investors also focused on modest signs of improvement at the company's recession-hit Spanish unit, which represents one-third of group revenue.

Peer France Telecom FTE.PA earlier posted in-line second-quarter earnings and reassured investors by announcing a dividend for 2010-2012, sending its shares up 6.5 percent. [ID:nLDE66J0U5]

Valbuena was cautious, however, about the impact on consumption of the Spanish government’s austerity package, which was announced in May, but largely takes effect from July 1.

“Consumption may be affected by the hike in VAT from July 1,” he said, noting that in general the domestic broadband market was slower in the second quarter than the first.

Revenue at Telefonica’s Spanish unit was down 3.2 percent in the second quarter, having fallen 5.7 percent in the first. The company managed to keep a lid on costs and retain more customers as it fought off cheaper competition.

“These results are strong across the board with a Spanish recovery offsetting recent fears of a consumer slowdown,” Deutsche Bank telecoms analyst David Wright said, adding that Telefonica’s units in Britain and Germany are also recovering.

Earlier Moody’s cut the outlook on Telefonica’s debt to stable from positive. But analysts said investors were unperturbed as Telefonica earlier confirmed a new 8 billion euro senior loan to refinance debt, expected to bring down average borrowing costs. [ID:nLDE66Q1EA]

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