2nd UPDATE: EU Court Rules Portugal's PT Golden Share Illegal

Europe's highest court Thursday ruled that the Portuguese government's golden share in Portugal Telecom SGPS SA (PT) is illegal, but Spain's Telefonica SA (TEF) could still have a lengthy wait for its offer to get control of their Brazilian joint-venture to succeed.

Portugal used its golden share late last month to block Telefonica's EUR7.15 billion sweetened bid to acquire PT's stake in Vivo Participacoes SA (VIV), Brazil's largest mobile operator, even though PT shareholders voted in favor of a deal.

In its ruling Thursday, the European Court of Justice said the Portuguese state's holding of golden shares in PT "constitutes an unjustified restriction" in the free movement of capital and discouraged investment from operators in other European Union countries.

"Portugal of course will comply with this decision," said a Portuguese government official who spoke on condition of anonymity. He signaled, however, that the fight may not be over, noting that the court recognized that there are sufficient grounds "to keep special rights" in companies. He also said the Portuguese government will continue to pursue the national interest, echoing recent comments from Portugal's Prime Minister Jose Socrates.

Over the past few years, the court has taken about a dozen golden-share decisions, of which just one was in favor of the country holding on to special veto rights in a 2002 decision that the national interest of gas supply was important enough for the Belgian government to maintain its golden share in distributor Distrigas SA (DIS-BT).

In its ruling Thursday, the ECJ reiterated that golden shares can be allowed in the interest of national security, but they have to be proportionate to that very specific objective.

The European Union took the Portuguese government to court in January 2009, saying the golden share breached one of the main EU edicts over free movement of capital and couldn't be justified in the public interest.

The commission's president Jose Manuel Barroso said Thursday the court ruling confirmed that the commission had been right to oppose the golden share.

Meanwhile, Telefonica late on Wednesday opened the door to a negotiated settlement in its dispute with Portugal Telecom over control of Vivo.

"Telefonica is willing to continue looking for possible solutions...so that all the interested parties would feel comfortable," the Spanish telecommunications giant said.

PT responded in a statement that it was "available to maintain a dialogue with Telefonica aimed at analyzing options that optimize the advantages for all parties."

In Lisbon, PT Chief Executive Zeinal Bava told local reporters on the sidelines of an event Thursday that the ruling from the EU tribunal doesn't directly involve PT's management. "It's a decision that is above us and that has nothing to do directly with PT's management," he added.

Telefonica officials declined to comment and said a company statement will be released later in the day. Its current offer expires July 16.

PT and Telefonica have been locked in a power struggle over Vivo, which they control through Brasilcel, a joint venture that owns 60% of the company. Both companies are increasingly dependent on emerging economies such as Brazil, where a young population and low mobile-penetration rates makes it easier to pick up new wireless and Internet customers.

Following the ECJ ruling, Telefonica shares were up a modest 0.4% to EUR16.05. PT shares were down 0.4% to EUR8.6, among the worst performers in Lisbon's key PSI-20 index.

ING analyst Georgios Ierodiaconou said in a note to investors on Thursday that he doubts PT and Telefonica "would have publicly engaged in talks with the explicit intention to 'optimize the advantages for all parties' without a signal from the Portuguese Government that there was room for compromise."

-By Mike Gordon and Peppi Kiviniemi, Dow Jones Newswires; +352 691 180 766

(Santiago Pereze and Bernd Radowitz in Madrid contributed to this article.)

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