UPDATE: Telefonica Could Block PT's Dividends From Vivo

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

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

"Telefonica's strategy is blackmail," a PT spokesman said, adding the company should relinquish its board seats at PT due to a "lack of loyalty" and a conflict of interest.

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.

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.

"The success of Telefonica's bid is dependent on the feedback investors give to both companies and if they will let PT reject Telefonica's offer or a potential higher offer," ING analyst John Davies said.

At 1007 GMT, Portugal Telecom shares rose 5.8% to EUR7.73, making it the top gainer on Lisbon's PSI-20 index, while Telefonica's shares rose 1.4% to EUR15.32.

For both companies, Vivo is a key asset. Vivo represented roughly half of Portugal Telecom's revenue in the first quarter, and was the only segment that showed significant revenue growth.

The Portuguese company has said Vivo is a core part of its business and that leaving Brazil would threaten its long-term growth prospects.

PT has its government's backing; Prime Minister Jose Socrates recently 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.

The Portuguese market regulator Wednesday asked Telefonica to clarify the circumstances that would justify the launch of a bid.

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.

ING's Davies said that Telefonica might be able take over all of PT, but said a good relationship with the Portuguese government was crucial for smooth operations in the country.

Taking over PT "doesn't seem to be consistent with Telefonica's strategy: the synergies of two European fixed-line companies are limited and Telefonica wouldn't get the goodwill amortization like it would in the deal for Vivo," Davies said.

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

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