UPDATE:Telefonica Hires Law Firm To Break Up Brazil JV-Source

Telefonica SA (TEF) has hired a law firm to explore breaking up its Brazilian joint venture with Portugal Telecom SGPS SA (PT), after months of unsuccessful negotiations to buy out PT's stake, a person familiar with the situation said Monday.

The move to abandon the negotiating table for a potentially drawn out court battle shows just how vital a bigger foothold in the high-growth Brazilian market is for Spain's Telefonica which faces stagnant revenue in many of its markets, including Spain.

Dutch law firm De Brauw Blackstone Westbroek was hired to explore how to dissolve Netherlands-based Brasilcel, the investment vehicle which controls 60% of Brazil's Vivo Participacoes SA (VIV), the person said. The firm advised the two companies when Brasilcel was set up in the early 2000s.

Early Saturday, Telefonica declined to extend its EUR7.15 billion offer for PT's stake in Vivo after the board of the Portuguese company asked for more time to study the bid.

Telefonica's shares rose on the news that talks had fallen through, adding 1.2% Monday to EUR16.36 while Portugal Telecom's shares fell 0.8% to EUR7.98.

The dispute between the two companies would likely be decided in an arbitration court, the person said, adding both companies would either be awarded half of the shares Brasilcel has in Vivo or the shares would be sold to the company which bid the most for them.

The person said the negotiation process with Portugal Telecom was unsuccessful in part because the Portuguese government always had the final say, not PT.

In June, 74% of PT's shareholders voted to accept Telefonica's offer, but the Portuguese government vetoed the sale, using its golden share in the company on grounds that the deal was against PT's long-term interests.

Both PT and Telefonica have fought hard for Vivo since Telefonica's first bid in May. The asset is key for the future growth prospects of both companies, which have declining revenue in their mature home markets and are suffering the lingering impact of a severe recession.

Telefonica wants to merge Vivo with its Brazilian fixed-line company Telesp (TSP) as it looks to compete with America Movil's (AMX) Brazilian unit Claro, owned by Mexican billionaire Carlos Slim.

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

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