2nd UPDATE: PT To Sell Vivo Stake To Telefonica, Buy Oi Stake

Portugal Telecom SGPS SA (PT) confirmed Wednesday it would sell its stake in Brazil's Vivo Participacoes SA (VIV) to Telefonica SA (TEF) for EUR7.5 billion and use some of the proceeds to buy a 22.4% stake in Brazilian telecommunications company Oi (TMAR5.BR), after months of struggle over Vivo between the two Iberian telecommunication companies.

Brazil has become a battleground for Portugal Telecom and Telefonica with both increasingly drawn to the high-growth region as revenue declines in their mature home markets and they suffer the lingering impacts of a severe recession.

The country's young population and relatively low mobile penetration rates also make it a prime market to pick up new wireless and Internet customers.

Portugal Telecom's agreement to buy a stake in Oi for up to EUR3.7 billion will allow it to keep its exposure in Brazil while Telefonica will take full control of the mobile operator Vivo. Telefonica wants full control of Vivo so it can merge it with its fixed-line telecommunications company Telesp (TSP).

"Brazil has the conditions to be an even more profitable market than it has been up until now," Portugal Telecom Chief Executive Zeinal Bava said in a meeting with journalists Wednesday in Lisbon. "The country has an even better growth outlook than when we first started investing there."

Brazil has about 183 million cellphone accounts, and Vivo is the market leader with a 30% share. But rivals are close behind; Claro--the local unit of Carlos Slim's America Movil SA (AMX)--Oi, and Telecom Italia SpA's (TI) TIM Participacoes (TSU) are all moving to offer combined fixed-line, Internet, television and cellphone services to extend their grip on the market.

Both Telefonica and Portugal Telecom have fought hard for Vivo since Telefonica's first bid in May. The latest EUR7.5 billion bid is the third time Telefonica has raised its offer for the stake in Vivo, and it is now more than half of Portugal Telecom's market capitalization of EUR9.63 billion.

The Spanish company's initial bid of EUR5.7 billion was swiftly rejected by PT's board in May. It then raised the offer twice, first to EUR6.5 billion and then to EUR7.15 billion last month, in an attempt to win over PT shareholders reluctant to exit the coveted Brazilian market.

Although 74% of Portugal Telecom's shareholders then voted to accept Telefonica's offer, the Portuguese government used its golden share--a mechanism European governments have used to thwart hostile takeovers of companies they consider strategically important--to block Telefonica's offer on the grounds that the stake sale was against PT's long-term interests.

Portugal Telecom said it would receive the proceeds for its Vivo stake in three installments, the last in October 2011.

Portugal Telecom's shares reacted well to the deal and closed 2.8% higher at EUR8.53 while Telefonica's shares added 0.7% to EUR17.

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

(Jeffrey Lewis contributed to this article.)

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