Telefonica's sweetened bid may secure Vivo deal

SAO PAULO (Reuters) - Hounded by Spain’s economic woes and the threat of mounting competition in Brazil, Telefonica has unleashed a last-ditch effort to gain complete control of Brazil’s largest wireless carrier.

Late on Tuesday, the Madrid-based company sweetened an unsolicited offer for partner Portugal Telecom’s stake in Brazil’s Vivo to 6.5 billion euros ($7.9 billion). Portugal Telecom had rejected Telefonica’s original 5.7 billion euro bid in May.

Both companies have reasons to strike a deal.

With full ownership of Vivo, Telefonica would increase its presence in one of the fastest-growing emerging market economies and save billions of dollars from the combination of its ailing fixed-line business with a buoyant wireless venture.

Buying Vivo could also provide the Spanish company with a cushion against an extended economic downturn in its home market.

“This could mark a new beginning for Telefonica in Brazil, where it has struggled for years,” said Juarez Quadros, a former Brazil communications minister and partner with Brasilia-based telecom consultant Orion. “Winning Vivo could once and for all help Telefonica shift its focus and win badly needed momentum.”

Combining Vivo VIVO4.SAVIV.N with Telefonica's Brazilian fixed-line unit Telesp TLPP4.SATSP.N could cut costs by as much as 3 billion euros, Credit Suisse said in a recent note to clients. Most of the savings would be in costs to connect phone calls and other operating expenses.

“The haste with which Telefonica is seeking Vivo mirrors the state of its fixed-line and data units,” said a Brazil-based fund manager who requested anonymity because he was not authorized to speak publicly about the situation.

For years, Portugal Telecom has refused to let go of Vivo, but it may give in this time. Telefonica’s bid on Tuesday to pay a nearly 200 percent premium for the company’s stake should convince shareholders, analysts said.

Portugal Telecom’s board will let shareholders decide on the new bid, even after saying it does not reflect Vivo’s value.

“Sitting on the Vivo issue could prove a big mistake,” said Valder Nogueira, a telecom analyst for Sao Paulo-based Banco Santander.

The bid also would give Portugal Telecom or an authorized third party the right to buy Telefonica’s 10 percent stake in the company.

Shares of Portugal Telecom PTC.LS rose 0.6 percent to 8.52 euros on Wednesday, while Telefonica gained 1.2 percent to 15.80 euros. Vivo's preferred shares were up 0.6 percent at 51.15 reais.


While Brazil’s telecom industry is on a roll, it is also facing major challenges.

Mobile phone penetration is still low compared with most developed nations, but the pace of new client additions is showing signs of slowing.

With demand for broadband wireless Internet and pay-TV soaring in Brazil, a larger Vivo could better fend off competition from the Brazilian units of Mexican tycoon Carlos Slim, said Ativa telecom analyst Luciana Leocadio.

In fact, Banco Santander's Nogueira said Telefonica and Portugal Telecom had reason to reconsider their partnership in Vivo because of Slim's recent decision to merge his Latin American media, telecom and data companies under America Movil AMXL.MXAMX.N.

Regulatory changes, the sale of mobile phone licenses and the reorganization of rivals Oi TNLP4.SA and TIM Participacoes TCSL4.SA probably also looked like threats to the competitive advantages that Vivo enjoyed for years, Nogueira said.

Nextel, a unit of NII Holdings NIHD.O, is likely to place bids at the next auction of mobile frequencies. Incumbent operators such as Vivo, Oi, TIM and Slim-controlled Claro cannot bid for licenses unless new suitors fail to turn up.

Vivendi VIV.PA, which beat Telefonica in a battle to buy phone company GVT last year, and America Movil are quickly expanding in Brazil. Vivendi, which has expressed no immediate interest to enter mobile telephony, wants to offer pay-TV, CEO Jean Bernard Levy told Reuters in January.

In addition, Portugal and Spain’s fiscal problems, which threaten the stability of the euro area, could also speed up a resolution of the Vivo dispute, Orion’s Quadros noted.

“The valuation both companies (Telefonica and Portugal Telecom) are applying to the asset,” the Sanford Bernstein analysts wrote last week, “says more about the fragility of their domestic markets, than a rock-solid belief in Brazil.”

($1=0.826 euros)

With additional reporting by Sergio Goncalves and Andrei Khalip in Lisbon; Editing by Lisa Von Ahn