Vivo Participacoes SA (VIV, VIVO4.BR), Brazil's leading wireless-phone provider, of which Telefonica SA (TEF, TEF.MC) acquired full control Wednesday, said it plans to double the number of cities in its coverage area next year.

The deal with Spain's Telefonica could mean a major boost for Vivo.

The expansion, financed by investments of 2.49 billion Brazilian reals ($1.4 billion) planned for this year by Vivo, will likely be aided by reduced costs at the company as Telefonica integrates mobile services with its Telesp, or Telecomunicacoes de Sao Paulo SA (TLPP4.BR, TSP) fixed-line operations, analysts said.

Portugal Telecom SGPS SA (PT, PTC.LB), which previously shared control of Vivo with Telefonica, said Wednesday it would sell its stake in Vivo for EUR7.5 billion. Portugal Telecom said it would use some of the proceeds to buy a 22.4% stake in Brazilian telecommunications company Oi (TMAR5.BR), after months of struggle between the two Iberian telecoms.

Brazil is a key market for both Telefonica and Portugal Telecom as they face declining revenue in their mature home markets and are suffering the lingering impact of a severe recession.

"Gains from synergy and scale due to the incorporation of Vivo's mobile operations to Telesp's fixed-line network justifies every cent" spent by Telefonica, Link Corretora analyst Maria Tereza Azevedo said. Cost reductions from the joining of the companies' operations will likely top 2.8 billion euros, she said.

Asked about the sale during a conference call to discuss second-quarter earnings, Vivo Chief Executive Roberto Lima said these types of deals "create positive opportunities for everyone," but declined to comment further until the deal is completed.

Sao Paulo-based Vivo said Wednesday that second-quarter profit rose to BRL236 million from BRL181.7 million in the same period last year, due to a rise in revenue after strong growth in its customer base.

Vivo's second-quarter net revenue rose 10% to BRL4.4 billion from BRL4 billion.

In addition to increasing the number of customers at a faster rate than rivals, Vivo was able to increase the share of post-paid customers in its client base, Brascan Corretora analyst Beatriz Battelli wrote in a note. Phone companies have higher profit margins from post-paid customers than from pre-paid users.

Vivo reiterated, during the conference call, its plan to invest BRL2.49 billion this year to expand services.

CEO Lima said this investment, a third of which had already been paid out in the first half of this year, will focus on increasing third-generation, or 3G, coverage. Third-generation technology allows users to access the Internet and download data via their phones.

The company plans to cover 2,832 cities by the end of 2011, up from an expected 1,410 cities by the end of this year.

Vivo said Wednesday that earnings before interest, taxes, depreciation and amortization, or Ebitda, were BRL1.34 billion, up from BRL1.21 billion.

The Ebitda margin, a measure of profitability over net revenue, was 30.5% in the quarter, up slightly from 30.3% in the year-earlier period.

-By Paulo Winterstein, Dow Jones Newswires; 55-11-3544-7073; paulo.winterstein@dowjones.com
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