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Spain, Portugal telcos battle over Brazil mobile

MADRID/LISBON (Reuters) - Telefonica's TEF.MC bid for more of Brazil's mobile market set a new price benchmark in the battle for telecoms growth markets on Tuesday and sparked a tug-of-war with its partner Portugal Telecom PTC.LS.

Late on Monday, the Spanish group made an offer to buy Portugal Telecom out of a joint venture that controls Vivo VIVO4.SA, Brazil's number one wireless phones operator.

The bid was rejected by the Portuguese carrier despite an eye-watering 140 percent premium -- evidence that the price of access to the remaining growth areas of a maturing industry has reached a new level.

Telefonica owns 31.8 percent of Vivo through its Brasilcel joint venture. It lodged the 6.3 billion euro ($8.5 billion) bid for the 31.8 percent owned by Portugal Telecom plus a free-float of about 3 percent.

Telefonica, outmaneuvered last year by Vivendi VIV.PA in its plans to buy Brazil's telecom group GVT GVTT3.SA, is attracted to Brazil because customer churn is high and brand loyalty is low. Taking full control of Vivo has been a key ambitions for over a decade.

Portugal Telecom sees that value too.

“Disinvesting in Brazil by selling Vivo would mean amputating PT’s future since scale and growth are critical factors of success in the telecommunications sector,” said Portugal Telecom CEO Zeinal Bava in an e-mail.

Shares in Portugal Telecom closed up 5.9 percent on Telefonica's move, and in Brazil, the stock of Vivo and rival TIM Participacoes TCSL4.SA soared in anticipation of more consolidation moves.

TOUGH TIMES FOR M&A

Gaining a strategic foothold in the region has become more critical now, as Mexican billionaire Carlos Slim begins to integrate his America Movil AMXL.MX with other Latin American groups he controls into a provider with 250 million customers.

Telefonica has around 170 million subscribers in Latin America, so to keep pace with Slim it needs to take full control of a Brazilian operator.

Europe’s second-largest telecoms group is also trying to compensate for problems at home where its “business is in the grip of an extraordinary macro-economic crisis combined with the unwinding of very high prices,” Bernstein analyst Robin Bienenstock said.

Should the move to control Vivo be unsuccessful, Telefonica may turn to another European competitor -- Telecom Italia -- to boost its presence in Brazil.

“If Telefonica would not succeed with the bid and later exit Vivo, it could without conflicts of interest pursue Telecom Italia’s assets in Brazil,” Unicredit said in a note, adding Telefonica could use the funds to increase its stake in Telco.

Telco is the investor pact that controls Telecom Italia, and Telefonica is its biggest shareholder.

In February, sources said Telefonica had begun talks to create Europe’s biggest telecoms operator by buying smaller partner Telecom Italia.

“I think telecom M&A is extremely difficult right now, to execute something seems very difficult,” one telecom banker said, adding that it was pretty difficult right now for hard-pressed telecom groups to come up with the premiums that seem to be expected.

India's Bharti Airtel BRTI.BO for example made two unsuccessful attempts to gain a foothold in Africa by pursuing South Africa's MTN MTNJ.J and finally acquired Zain's ZAIN.KW African assets for $9 billion, which many regarded as a high price.

Analysts at Iberian Equities said in a research note that ongoing economic instability in Southern Europe may be a further catalyst. They expect that PT’s core shareholders are more likely now to accept an offer for Vivo.

Some analysts were skeptical that Telefonica and PT can come to an agreement before next month’s bid deadline on June 6.

“Vivo is a strategic asset for both PT and Telefonica and so it will be difficult for them to reach a deal. We don’t rule out Telefonica could up its offer, however,” Renta 4 analysts said in a note.

(Additional reporting by Georgina Prodhan in London, Nicola Leske in Frankfurt, Robert Hetz in Madrid and Andrei Kalip in Lisbon; Editing by Andrew Callus)

$1=.7453 Euro

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