Portugal Telecom says Telefonica offer 'clearly insufficient'

Portugal Telecom SGPS SA Chief Executive Officer Zeinal Bava said Telefonica SA's 5.7 billion- euro ($7 billion) offer for its stake in their Brazilian joint venture is "clearly insufficient," marking a shift in stance.

The Portuguese company had previously called its holding in Vivo Participacoes SA, Brazil's largest wireless operator, strategic and a "fundamental growth pillar." Its board rejected the Spanish company's offer for the stake on May 10. Bava's comments suggested the Lisbon-based company may be holding out for a better price.

Bava's remarks represent a "significant change," said Juan Carlos Acitores, who helps oversee about $20 billion in assets at Ahorro Corporacion in Madrid, including Telefonica and Portugal Telecom shares. "It opens the door to a negotiation."

Telefonica Chairman Cesar Alierta has been trying to gain control of Vivo since at least 2006. He is seeking to merge it with Telecomunicacoes de Sao Paulo SA, or Telesp, the Spanish company's fixed-line unit in Brazil. Telefonica threatened to make a bid for Portugal Telecom and curb its ability to pay dividends, seeking to force it to the negotiating table.

The "offer is clearly insufficient and not very attractive because it will amputate PT’s future," Bava told reporters today in New York.

Telefonica should raise its offer to 7.5 billion euros, ING Groep NV analyst Georgios Ierodiaconou said in a note this month. That's similar to the one published by Sanford C Bernstein analysts including Robin Bienenstock.

Portugal Telecom gained 6 percent to 7.78 euros in Lisbon. Telefonica fell 0.2 percent to 15.09 euros in Madrid.

'Fair' Offer

Telefonica Chief Financial Officer Santiago Fernandez Valbuena said May 13 that the offer is "full, fair and final." The company's stance hasn't changed, spokesman Miguel Angel Garzon said today.

The offer to buy out Brasilcel NV, an unlisted joint venture that owns about 60 percent of Vivo, values Portugal Telecom's Vivo shares at 145 percent more than their average price in the month to May 6, the Spanish company said in its offer letter to the board of Portugal Telecom.

It's also equivalent to 3.5 percent of Portugal's overall economy. The partners each own 50 percent of Brasilcel.

The rejection by Portugal Telecom has increased tensions between the two companies. Telefonica, which owns 10 percent of Portugal Telecom, said it could make an offer for all of the Portuguese company.

"Telefonica does not discard, in the present circumstances, any possible alternative, including" an offer for Portugal Telecom, Madrid-based Telefonica said today in a regulatory filing.

Vivo Growth

The Spanish company said the bid rejection could put Portugal Telecom's "dividend cover" at risk. Portugal Telecom in regulatory filings notes that Vivo dividends are contingent on the partnership's approval.

"Portugal Telecom relies on dividend from uncontrolled subsidiaries and asset sales to pay its own dividend," Telefonica said.

Vivo has driven revenue growth for Portugal Telecom as growth in Europe slows and competition increases at home. Its Brazilian sales rose 4.1 percent to 3.2 billion euros last year, while revenue from Portugal declined 1.9 percent.

Vivo had 30 percent of Brazil's 179 million wireless subscriptions at the end of March, according to Anatel, the country’s phone regulator.

The existing relationship between Portugal Telecom and Telefonica cannot continue, Ricardo Salgado, an executive at Grupo Espirito Santo, told Jornal de Negocios. Grupo Espirito Santo is one of Portugal Telecom's biggest shareholders.

Eventually, one of the partners may have to buy out the other’s stake in Brasilcel, Salgado said, according to the Portuguese newspaper.

Credit Suisse Group AG and UBS AG were hired by Telefonica on its plans to take control of Vivo, while Bank of America Merrill Lynch is working for Portugal Telecom, bankers familiar with the matter said.

(Published by Bloomberg – May 26, 2010)

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