Court ruling may aid Telefónica's bid for Vivo of Brazil

Telefónica of Spain's attempt to buy full control of a Brazilian wireless joint venture it holds with Portugal Telecom received a significant boost Thursday when Europe's highest court ruled that the Portuguese government had used an illegal method to block the deal.

The ruling by the European Court of Justice came a week after the government surprised investors by using its so-called golden share in Portugal Telecom to stymie a 7.15 billion euro, or $9 billion, offer for its half of Vivo, the leading operator in Brazil's fast-growing wireless market.

The golden share vote was justified by the country's prime minister on grounds of national interest, arguing that remaining in booming Brazil was essential to Portugal Telecom's future growth. Still, the European court's ruling had been widely expected, following a preliminary decision by its advocate general that went against the Portuguese government.

At a meeting of Portugal Telecom shareholders last week, investors voted almost three-quarters of their shares in favor of the Vivo takeover offer.

While Telefónica had warned that it was likely to appeal against the golden share veto following the European ruling, most analysts expect the company to try to settle the dispute rather than engage in further legal wrangling.

It was also not immediately clear whether the European ruling could be retroactive, since the court was asked to consider whether the government could keep its golden share rights in Portugal Telecom rather than rule on the specific case of Vivo.

In its decision, the court said that "by maintaining in Portugal Telecom special rights, allocated in connection with golden shares, Portugal has failed to fulfill its obligations pursuant to the free movement of capital."

Ahead of that ruling, both operators issued statements that were seen as an attempt to defuse the dispute and ensure that their wrangling would not undermine Vivo.

Portugal Telecom said that it wanted to "analyze options that optimize the advantages for all parties." The Spanish operator, meanwhile, said that it was "willing to continue looking for possible solutions to take this operation to a good ending, as long as there is equal availability from Portugal Telecom to this effect, in a way in which both parties feel comfortable."

Lisbon's intervention in the tussle between the two companies was widely condemned last week by European Union officials as a return to unwanted protectionism. Officials in Brussels have been on a longstanding crusade to stop Portugal and other governments from using golden shares to block foreign takeovers on the grounds that capital should be able to flow freely across the 27-nation bloc.

Telefónica, meanwhile, had twice improved its offer for Vivo, from an initial 5.75 billion euros, to convince Portugal Telecom’s management and shareholders, who were reluctant to give up a piece of the Brazilian market, particularly when the company faced a stagnating business at home. There was no immediate comment from the company following the European ruling.

(Published by The New York Times – July 7, 2010)

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