Telefonica Could Block Dividends If PT Doesn't Sell Vivo

Telefonica SA (TEF) said Wednesday it could block dividends Portugal Telecom (PT) collects from the Brazilian cellular joint venture both companies control, ramping up pressure on PT to sell its stake in Vivo.

In a presentation to investors, Telefonica said PT doesn't have direct access to Vivo Participacoes SA's (VIV) cashflow and an estimated EUR111 million PT is likely to get from Vivo this year is subject to an agreement with Telefonica.

Portugal Telecom and Telefonica currently share control of Brasilcel, a holding company that owns about 60% of Vivo. Brasilcel bylaws require both companies to sign off on key aspects like dividend repatriation and strategic moves in Brazil.

A Portugal Telecom spokesman said Telefonica was using "blackmail" to try to take over Vivo and Telefonica should relinquish its board seats at PT due to a "lack of loyalty" and a conflict of interests.

Telefonica began a roadshow Wednesday to persuade Portugal Telecom's shareholders to accept a EUR5.7 billion offer Telefonica made earlier this month for PT's portion of Vivo.

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.

A Telefonica spokesman also said Telefonica doesn't rule out a hostile bid for all of Portugal Telecom, in which it already has a 10% stake, if the company doesn't agree to sell Vivo.

Earlier this month, Telefonica's Chief Financial Officer Santiago Fernandez Valbuena said that from a strictly financial point of view a full takeover of PT might make more sense than the bid for Vivo, but Telefonica hadn't bid for the company out of "respect" for Portugal and its key companies.

-By Jason Sinclair, Dow Jones Newswires, 34 913958127, jason.sinclair@dowjones.com

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