Telefonica, PT Coax Investors As Battle For Vivo Hots Up

Telefonica SA (TEF) will this week press major investors to accept its offer for Portugal Telecom's stake in Vivo Participacoes SA (VIV), intensifying the battle for control of the Brazilian mobile operator.

Wednesday, Telefonica will begin a roadshow to pursuade major PT shareholders--including stepping up pressure on U.S. investors Brandes Funds and Blackrock Inc. (BLK)--to back its EUR5.7 billion bid for control of Vivo, people familiar with the situation say. The move is seen as key to the Spanish telecom giant's efforts to increase scale and unlock synergies in the fast-growth Brazilian communications segment.

Portugal Telecom has so far rejected the offer and Portuguese Prime Minister Jose Socrates described the company as a strategic asset, and Brazil as a key market.

To argue its case and pressure Portugal Telecom's shareholders, Telefonica has hired Swiss investment bank UBS AG (UBS) and is also being helped by long-term adviser Credit Suisse Group (CS), people familiar with the matter say.

Advisors will focus particularly on U.S. shareholders, such as Brandes and BlackRock, people familiar with the matter say. San Diego, Calif.-based Brandes, which owns just over 9% of the equity in Portugal Telecom, could potentially play a pivotal deciding role. Brandes couldn't immediately be reached to comment on the issue. Blackrock, with a 2.3% stake, couldn't immediately be reached.

"Telefonica is trying to get across to PT's shareholders that if they aren't convinced by the PT growth story for Vivo now, there is an opportunity to crystalize value," one person close to the situation says.

Telefonica, which also has a 10% stake in Portugal Telcom, could call an extraordinary shareholder meeting, but these people say its preferred strategy is to push for another shareholder to do so.

Telefonica's bid earlier this month has wreaked irrevocable damage to an already fragile relationship between the two companies, one person says, meaning there is now no way back for either of them.

"Telefonica's bid for Vivo has soured their relationship, something will have to change because they won't be able to go back to the status quo now."

Another person said the battle was now likely to become "a long drawn-out and ugly thing."

For both companies, Vivo is a key asset. Vivo represented roughly half of Portugal Telecom's revenue in the first quarter in the only area that had growth in the period. The Portuguese firm has said Vivo is a core part of its business and that leaving Brazil would threaten its long-term growth prospects.

Telefonica, meanwhile, wants to merge Vivo with its Brazilian fixed line operator Telecomunicacoes de Sao Paulo (TLPP4.BR), or Telesp, to increase its scale in Brazil and unlock EUR2.8 billion in synergies.

Last week, Portugal Telecom began a roadshow of its own in California and the east cost of the U.S., as it scrambled to reassure investors about its own strategy in Brazil.

To help defend itself from the unsolicited bid, Portugal Telecom has hired Bank of America-Merrill Lynch (BAC), other people involved say. PT declined to comment.

Telefonica and Portugal Telecom face declining revenue in their mature home markets and the lingering impact of severe recession, making them increasingly dependent for growth on countries like Brazil, where mobile penetration rates are still low enough to pick up new wireless and Internet customers. Brazil had 180.8 million cellphone subscribers in April, an equivalent of 94% of the population, and added 1.66 million subscribers in the month.

May 11, Telefonica bid EUR5.7 billion for Portugal Telecom's stake in Brasilcel, a holding company both companies share that controls Vivo. The joint venture has existed since 2001, but each company has previously sought to buy the other's stake.

Friday, ING said in a note that Telefonica should be willing to pay up to EUR7.5 billion for the Vivo stake due to the synergies, potential tax credits and gains the company could make after selling its stake in PT--a stake it is unlikely to keep should it acquire the company's prized asset.

Telefonica in November lost out to France's Vivendi SA (VIV.FR) in a bidding war for Brazilian alternative telecoms provider GVT, spurring its latest bid for Vivo. Brazil has also been pushed to the forefront of Telefonica's strategy in the region after Venezuela devalued the bolivar and currency controls in the country hurt its revenue there.

Vivo has the biggest mobile market share in Brazil, but rivals are close behind; Claro--the local unit of Carlos Slim's America Movil SA (AMX)--Oi, owned by holding company Telemar Norte Leste (TMAR5.BR) and the country's largest telco, and Telecom Italia SpA's (TI) TIM Participacoes (TSU) are all moving to offer combined fixed-line, Internet, television and cellphone services to expand their grip on the market.

-By Jason Sinclair and Jessica Hodgson, Dow Jones Newswires, +34 91 395 81 27, jason.sinclair@dowjones.com (Christopher Bjork contributed to this story.)

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