Portugal Telecom's Shares Gain On Sweetened Telefonica Bid

Portugal Telecoms SA's (PT, PTC.LB) shares rose Wednesday after its Spanish peer Telefonica SA (TEF, TEF.MC) raised its bid for PT's indirect stake in Brazilian mobile operator Vivo Participacoes SA (VIV) to EUR6.5 billion, paving the way for the deal, analysts say.

Portugal Telecom's shares rose as much as 8% in early trade and at 0903GMT were up 1.9% at EUR8.62 in an overall lower Portuguese market. Telefonica's shares were down 1.4% at EUR15.39.

"Telefonica has made an offer Portugal Telecom cannot refuse," said Robin Bienenstock of Bernstein adding the deal would be "transformational" for PT shareholders. increasing the value of the shares by between 20% and 40% from Tuesday's closing price of EUR8.47.

"Telefonica's offer is a smart move," ING's Georgios Ierodiaconou said. "The improved offer is high enough to entice Portugal Telecom's institutional shareholders to accept the offer and low enough to allow Telefonica to acquire the asset at a level that leaves significant upside."

Telefonica had previously offered EUR5.7 billion for PT's half of Brasilcel, a holding company that owns about 60% of Brazilian cell phone operator Vivo, an offer which PT rejected.

The sweetened bid offers Portugal Telecom two alternatives. It can either sell its entire stake immediately or sell one third now and the remainder at any time over the next three years at PT's sole discretion.

Late Tuesday, Portugal Telecom said it had received the sweetened offer and would call an extraordinary general meeting to allow its shareholders to vote on the offer, but added the bid didn't fully reflect the strategic value of the asset.

Telefonica's offer is the fruit of weeks of meetings with Portugal Telecom's key shareholders who asked the company to raise its offer, a person close to the situation said.

Telefonica has also been in talks with Portugal Telecom since it launched its initial bid last month, the person added.

Telefonica's offer represents a 130% premium to the fair value of PT's Vivo stake, Bernstein's Robin Bienenstock said, adding the revised offer shows "how badly Telefonica needs to reset the clock rather than how great the deal is."

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

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 of synergies.

Telefonica and Portugal Telecom face declining revenue in their mature home markets and the lingering impact of the 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.

The person close to the situation said PT could use some of the cash from the sale of its Vivo stake to buy a stake in rival Brazilian company Brasil Telecom (BRT03.BR, BRT04.BR).

Company Web Site: http://www.telefonica.com

-By Jason Sinclair, Dow Jones Newswires; 34 91 395 81 27; jason.sinclair@dowjones.com

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