VIV Telefonica Brasil SA

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

¨          REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

OR

¨          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨          SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number: 001-14493

Vivo Participações S.A.

(Exact name of Registrant as Specified in its Charter)

Vivo Holding Company

(Translation of Registrant’s Name into English)

The Federative Republic of Brazil

(Jurisdiction of Incorporation or Organization)

Av. Roque Petroni Junior, 1464, 04707-000
São Paulo, SP, Brazil

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

*      Not for trading purposes, but only in connection with the registration on the New York Stock Exchange of American Depositary Shares representing those preferred shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report.

The number of outstanding shares of each class as of December 31, 2010:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes     ¨                        No     x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes     ¨                        No     x

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      x                      No     ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

If "Other" has been checked in response to the previous question, i ndicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17     ¨                         Item 18     ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     ¨                        No     x

Table of Contents

INTRODUCTION

All references in this annual report to:

·          “1xRTT” are to 1x Radio Transmission Technology, the CDMA 2000 1x technology, which pursuant to the ITU (International Telecommunication Union) and in accordance with the IMT-2000 rules, is the 3G (third generation) technology;

·          “ADRs” are to the American Depositary Receipts evidencing our ADSs;

·          “ADSs” are to our American Depositary Shares, each representing 1 share of our non-voting preferred stock;

·          “AMPS” are to Advanced Mobile Phone System, a radio interface technology for cellular networks based on spectral spreading of the radio signal and channel division in the frequency domain;

·          “ANATEL” are to Agência Nacional de Telecomunicações —ANATEL, the Brazilian telecommunication regulatory agency;

·          “BM&FBOVESPA” are to the BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros, the São Paulo stock exchange;

·          “Brazilian Central Bank,” “BACEN,” “Central Bank of Brazil” or “Central Bank” are to the Banco Central do Brasil , the Brazilian central bank;

·          “Brazilian Corporate Law” are to Law No. 6,404 of December, 1976, as amended by Law No. 9,457 of May 1997, by Law No. 10,303 of October 2001, by Law 11,638 of December 28, 2007; and to Law No. 11,941 of May 27, 2009;

·          “Brazilian government” are to the federal government of the Federative Republic of Brazil;

·          “CDMA” are to Code Division Multiple Access, an aerial interface technology for cellular networks based on spectral spreading of the radio signal and channel division in the code domain;

·          “CDMA 2000 1xEV-DO” are to a 3G (third generation) access technology with data transmission speed of up to 2.4 megabytes per second;

·          “Celular CRT” are to Celular CRT Participações S.A. and its consolidated subsidiary, formerly Vivo subsidiaries prior to our corporate restructuring;

·          “Commission” are to the U.S. Securities and Exchange Commission;

·          “Corporate Restructuring” are to the restructuring of our operating subsidiaries described in “Item 4.A.—Information on the Company—Our History and Development—Corporate Restructuring of Our Operating Subsidiaries”;

·          “CVM” are to the Comissão de Valores Mobiliários , the Brazilian securities commission;

·          “D.O.U.” are to the Diário Oficial da União , the Official Newspaper of the Government of Brazil;

·          “Federal District” are to the federal district of Brasilia, the capital of Brazil;

·          “General Telecommunications Law” are to Lei Geral de Telecomunicações , as amended, which regulates the telecommunications industry in Brazil;

·          “Global Telecom” and “GT” are to Global Telecom S.A., formerly a Vivo subsidiary prior to our corporate restructuring;

·          “GSM” are to the Global System for Mobile Communications, a service rendered by concession from ANATEL for a specific frequency range;

·          “IASB” are to International Accounting Standards Board;

·          “IFRS” are to International Financial Reporting Standards, as issued by IASB;

·           “Net additions” are to the total number of new customers acquired in the period minus the reduction in the number of customers;

·          “NYSE” are to the New York Stock Exchange;

·          “OI” are to TNL-PCS S.A., the mobile operator branch of Telemar;

·          “ real ,” “ reais ” or “R$” are to Brazilian reais , the official currency of Brazil;

·          “SMC” are to Serviço Móvel Celular (Mobile Cellular Service), a service rendered pursuant to a concession granted by ANATEL to provide mobile service in a specific frequency range;

·          “SMP” are to Serviço Móvel Pessoal (Personal Cellular Service), a service rendered pursuant to an authorization granted by ANATEL to provide mobile service in a specific frequency range;

·          “SMS” are to text messaging services for wireless devices, which allow customers to send and receive alphanumerical messages;

·          “TCO” are to Tele Centro Oeste Celular Participações , which includes TCO’s “B” band subsidiary and NBT, formerly Vivo subsidiaries prior to our corporate restructuring;

·          “TCP” are to Telesp Celular Participações S.A. , our predecessor company;

·          “TDMA” are to Time Division Multiple Access, a radio interface technology for cellular networks based on spectral spreading of the radio signal and channel division in the time domain;

·          “TLE” are to Tele Leste Celular Participações S.A. and its consolidated subsidiaries, formerly Vivo subsidiaries prior to our corporate restructuring;

·          “TSD” are to Tele Sudeste Celular Participações S.A. and its consolidated subsidiaries, formerly Vivo subsidiaries prior to our corporate restructuring;

·          “Telebrás” are to Telecomunicações Brasileiras S.A. —Telebrás;

·          “Telemar” are to Telemar Norte Leste S.A. (controlled by Tele Norte Leste Participações S.A.); 

·          “Telemig” or “Telemig Participações” are to Telemig Celular Participações S.A. ;

·          “Telemig Celular” are to Telemig Celular S.A. ;

·          “Telenorte” or “Tele Norte” are to Tele Norte Celular Participações S.A.;

·          “Telesp Celular” and “TC” are to Telesp Celular S.A., formerly a Vivo subsidiary prior to our corporate restructuring;

·          “Telpart” are to Telpart Participações S.A.;

·          “The Merger” are to the merger of the Vivo Companies as discussed in “Item 4.A.—Information on the Company—Our History and Development— Corporate Restructuring and Deregistration of Telemig Participações and Telemig Celular ”;

·          “US$,” “dollars” or “U.S. dollars” are to United States dollars;

·          “Vivo,” “the Company,” “we,” “our” and “us” are to Vivo Participações S.A. (formerly Telesp Celular Participações S.A.) and its consolidated subsidiaries (unless the context otherwise requires);

·          “Vivo brand” are to the brand used in Brazil in the operations of the Vivo Companies, which together constitute the assets of the Brasilcel joint venture between Portugal Telecom and Telefónica ;

·          “Vivo Companies” are to Vivo, TCO, TLE, TSD, Celular CRT and Telemig Celular S.A., collectively;

·          “Vivo S.A.” are to Vivo S.A., a wholly owned subsidiary of Vivo, that since the Restructuring has conducted all of our operations including SMP operations in the following areas:

·          “Areas 1 and 2,” the state of São Paulo (operations previously provided by Telesp Celular S.A.);

·          “Area 3,” the states of Rio de Janeiro and Espírito Santo (operations previously provided by Telerj Celular S.A., or Telerj, and Telest Celular S.A., or Telest);

·          “Area 5,” the states of Paraná and Santa Catarina (operations previously provided by Global Telecom);

·          “Area 6,” the state of Rio Grande do Sul (operations previously provided by Celular CRT);

·          “Areas 7 and 8,” the central western and northern regions, including the states of Goiás, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondônia, Acre, Amapá, Amazonas, Maranhão, Para and Roraima and in the Distrito Federal (operations previously provided by Telegoias Celular S.A., or Telegoias, Telemat Celular S.A., or Telemat, Telems Celular S.A., or Telems, Teleron Celular S.A., or Teleron, Teleacre Celular S.A., or Teleacre, Norte Brasil Telecom S.A., or NBT and TCO); and

·          “Area 9,” the states Bahia and Sergipe (operations previously provided by Telebahia Celular S.A., or Telebahia, and Telergipe Celular S.A., or Telergipe);

·          Vivo also operates in “Area 4”— state of Minas Gerais and “Area 10”— states of  Pernambuco, Alagoas, Paraíba, Rio Grande do Norte, Ceará and Piauí.

·          “WAP” are to Wireless Application Protocol, an open and standardized protocol started in 1997, which allows access to Internet servers through specific equipment, a WAP Gateway at the carrier, and WAP browsers in customers’ wireless devices;

·          “WCDMA” are to Wide-Band Code-Division Multiple Access, a technology for wideband digital radio communications of Internet, multimedia, video and other bandwidth-demanding applications; and

·          “wireless devices” are to the wireless appliances that we sell, including cellular handsets, wireless handheld devices and wireless broadband cards.

Unless otherwise specified, data relating to the Brazilian telecommunications industry included in this annual report were obtained from ANATEL.

PRESENTATION OF FINANCIAL INFORMATION

We maintain our books and records in reais . We prepared our consolidated financial statements included in this annual report in accordance with the IFRS. These consolidated annual financial statements are our first financial statements prepared in accordance with the IFRS. IFRS 1 – “First-time Adoption of International Financial Reporting Standards” has been applied in preparing these financial statements. Until December 31, 2009, our consolidated financial statements were prepared in accordance with accounting practices adopted in Brazil (“Brazilian GAAP”). Brazilian GAAP is based on the Brazilian Corporate Law No. 6,404 of December 15, 1976, as amended, and included the provisions of Law No. 11,638/2007 and Law No. 11,941, dated May 27, 2009 the accounting standards issued by the Brazilian Federal Accounting Council ( Conselho Federal de Contabilidade – “ CFC”); the accounting standards issued by the Accounting Standards Committee ( Comitê de Pronunciamentos Contábeis – “ CPC”), and the rules and regulations issued by the Brazilian Securities Commission ( Comissão de  Valores Mobiliários – “ CVM”). After the adoption of CPCs No.15 to 43, Brazilian GAAP does not differ from IFRS, for preparation of consolidated financial statements. The comparative figures with respect of 2009 have been restated to reflect adjustments made as a result of the adoption of IFRS. Reconciliations and descriptions of the effect of the transition from Brazilian GAAP to IFRS are given in Note 3 to our consolidated financial statements included elsewhere in this annual report. These consolidated financial statements have been audited by Ernst & Young Terco Auditores Independentes S.S. (“EY T ” or “Ernst & Young Terco”). In this annual report we will refer to the set of accounting practices adopted in Brazil, through December 31, 2009, as the “Former Brazilian GAAP”.

FORWARD-LOOKING STATEMENTS

Certain sections in this annual report, principally in “Item 3.D. ¾ Key Information ¾ Risk Factors,” “Item 4. ¾ Information on the Company” and “Item 5. ¾ Operating and Financial Review and Prospects,” contain information that is forward-looking, including but not limited to:

·          statements concerning our operations and prospects;

·          the size of the Brazilian telecommunications market;

·          estimated demand forecasts;

·          our ability to secure and maintain telecommunications infrastructure licenses, rights of way and other regulatory approvals;

·          our strategic initiatives and plans for business growth;

·          industry conditions;

·          our funding needs and financing sources;

·          network completion and product development schedules;

·          expected characteristics of competing networks, products and services;

·          quantitative and qualitative disclosures about market risks;

·          other statements of management’s expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts; and

·          other factors identified or discussed under “Item 3.D.—Key Information—Risk Factors.”

Forward looking statements may also be identified by words such as “believe,” “expect,” “anticipate,” “project,” “intend,” “should,” “seek,” “estimate,” “future” or similar expressions. Forward-looking information involves risks and uncertainties that could significantly affect expected results. The risks and uncertainties include, but are not limited to:

·          the short history of our operations as an independent, private-sector entity and the introduction of competition to the Brazilian telecommunications sector;

·          the cost and availability of financing;

·          uncertainties relating to political and economic conditions in Brazil;

·          inflation, interest rate and exchange rate risks;

·          the Brazilian government’s telecommunications policy; and

·          the adverse determination of disputes under litigation.

We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.

PART I

Item 1.        Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.        Offer Statistics and Expected Timetable

Not applicable.

Item 3.        Key Information

A.    Selected Financial Data

Our consolidated financial statements are prepared in accordance with the IFRS.

Until December 31, 2009, our consolidated financial statements were prepared in accordance with accounting practices adopted in Brazil (“Brazilian GAAP”). Brazilian GAAP is based on the Brazilian Corporate Law No. 6,404 of December 15, 1976, as amended, and included the provisions of Law No. 11,638/2007 and Law No. 11,941, dated May 27, 2009; the accounting standards issued by the Brazilian Federal Accounting Council ( Conselho Federal de Contabilidade – “ CFC”); the accounting standards issued by the Accounting Standards Committee ( Comitê de Pronunciamentos Contábeis – “ CPC”); and the rules and regulations issued by the Brazilian Securities Commission ( Comissão de Valores Mobiliários – “ CVM”). After the adoption of CPCs No.15 to 43, Brazilian GAAP does not differ from IFRS as regards the preparation of consolidated financial statements. The comparative figures with respect to 2009 have been restated to reflect adjustments made as a result of the adoption of IFRS. Reconciliations and descriptions of the effect of the transition from Brazilian GAAP to IFRS are given in Note 3 to our consolidated financial statements included elsewhere in this annual report.

The following tables present a summary of our selected financial data at the dates and for each of the periods indicated. You should read the following information together with our financial statements and the notes thereto included elsewhere in this annual report and with “Item 5.—Operating and Financial Review and Prospects.”

(1)   Reflecting our retroactive application of changes to the accounting criteria to enable the Former Brazilian GAAP to converge with IFRS. 

Exchange Rates

The Brazilian Central Bank allows the real /U.S. dollar exchange rate to float freely and has intervened occasionally to control the exchange rate volatility. However, the exchange market may continue to be volatile, and the real may depreciate or appreciate substantially in relation to the U.S. dollar. The Brazilian Central Bank or the Brazilian government may intervene in the exchange rate market.

Since March 17, 2008, Brazilian exporters have been allowed to keep 100% of income from exports outside of Brazil. In addition, the foreign exchange mechanism was simplified to provide for the simultaneous purchase and sale of foreign currency through the same financial institution and using the same exchange rate.

On October 5, 2010, the Brazilian government announced measures to respond to the real appreciation by increasing the IOF tax rate to four percent on foreign exchange transactions related to foreign investments in the

financial and capital markets, except for variable income investments traded on the stock exchange, which remained at two percent.  However, the increase failed to achieve its intended goal of curbing the appreciation of the Brazilian currency in comparison to the US dollar.
 

On October 18, 2010, new increases in the IOF tax rate were announced by the Brazilian government which adopted a six percent rate for foreign exchange transactions and for the investments of foreign investors in accordance with the margin requirements for future transactions on the BM&FBOVESPA. The IOF tax rate remains at zero on exchange transactions for outflow for these funds as well as for proceeds received as a result of initial public offerings. The conversion of Brazilian currency into foreign currency for purposes of paying dividends for ADS programs is not subject to tax.

 On January 6, 2011, the Central Bank of Brazil published Circular 3,520 (Circular 3,520/2011), which imposes a 60% minimum reserve deposit for any financial operations exceeding U.S.$3 billion.

The following tables set forth the exchange rate (rounded to the nearest tenth of a cent), expressed in reais per U.S. dollar (R$/US$), for the periods indicated, as reported by the Brazilian Central Bank.

Source:    Central Bank of Brazil, PTAX.

(1)   Represents the average of the exchange rates (PTAX) on the last day of each month during the relevant period.

B.    Capitalization and Indebtedness

Not applicable.

C.    Reasons for the Offer and Use of Proceeds

Not applicable.

D.    Risk Factors

This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, results of operations or financial condition could be harmed if any of these risks materialize and, as a result, the market price of our preferred shares and our ADSs could decline.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our preferred shares and ADSs.

In the past, the Brazilian government has intervened in the Brazilian economy and made changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies have often involved wage and price controls, currency devaluations, capital controls, and limits on imports, among other things. Our business, financial condition, results of operations and the market price of our preferred shares and ADSs may be adversely affected by changes in government policies, especially those related to our industry, such as changes in telephone fees and competitive conditions, as well as general economic factors, including:

·          currency fluctuations;

·          exchange control policies;

·          internal economic growth;

·          inflation;

·          energy policy;

·          interest rates;

·          liquidity of domestic capital and lending markets;

·          tax policies; and

·          other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty over the possibility of the Brazilian government implementing changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies. In addition, possible political crises may affect the confidence of investors and the public in general, which may result in economic deceleration and affect the trading prices of shares issued by companies listed on the stock exchange, such as us.

We may not be able, as of the date of this annual report, to quantify the effects of the application of the transitional tax regime resulting from the convergence from accounting principles adopted in Brazil and IFRS.

In December 2008, the transitional tax regime ( Regime Tributário de Transição ) was instituted in Brazil in order to update accounting principles adopted in Brazil and align them with IFRS, thereby reducing the fiscal impact of the convergence of the two regimes. The applicability of certain rules under the transitional tax regime have been unclear and in 2010, the transitional tax regime became mandatory, without further explanation by the Brazilian government as to whether amendments to the rules under the regime would be made. During the convergence process of Brazilian GAAP to IFRS, additional rules may be implemented or further interpretation may be provided by the Brazilian government. As a result, as of the date of this annual report, we are not able to quantify all of the effects of the application of the transitional tax regime.

Our business may be vulnerable to the current disruptions and volatility in the global financial markets.

The international economy remains subject to risks and adjustments arising from the international financial crisis from 2008. The international financial system remains susceptible to unfavorable credit and liquidity conditions. Foreign and national financial institutions, including some of the largest commercial banks, investment banks, mortgage lenders, guarantors and mortgage insurance companies, could continue to experience significant

difficulties, including runs on their deposits and inadequate liquidity. Therefore, the prices of financial assets are likely to continue to reflect risk aversion, with increased volatility.

In an attempt to increase liquidity in the financial markets and prevent the failure of the financial system, various governments may continue to intervene in their financial systems, and perform tax adjustments. There is no assurance, however, that these measures will be successful in stabilizing conditions in international financial markets.

Despite the extent of the above-mentioned interventions, global investor confidence could remain low, the global financial markets could remain volatile and access to credit could still be lacking. The continuation or worsening of disruption and volatility in the global financial markets may have a material adverse effect on our ability to access the capital markets under appropriate financial conditions, which may adversely affect our operations. Furthermore, an environment of economic downturn may negatively affect the financial stability of our customers, which could result in a general reduction in Brazil’s economic activity and the consequent loss of income for us.

Political instability may have an adverse impact on the Brazilian economy and on our business.

Political crisis in Brazil can affect the trust of investors and the public in general, as well as the development of the economy. Political crises may have an adverse impact on the Brazilian economy, our business, financial condition, results of operations and the market price of our preferred shares and ADSs.

Inflation and government efforts to curb inflation may contribute to economic uncertainty in Brazil, adversely affecting our business and results of operations.

Brazil has historically experienced high rates of inflation. Inflation and certain of the government’s measures taken in the attempt to curb inflation have had significant negative effects on the Brazilian economy. In 2010, inflation measured by the Consumer Price Index (Índice de Preços ao Consumidor), or IPCA, published by the Instituto Brasileiro de Geografia e Estatística reached 5.8%, below the upper threshold of 6.5% established by the National Monetary Council, but above the central inflation target of 4.5%.

In 2011, the Brazilian monetary policy will continue to use the IPCA for establishing the inflation target. The inflation target for 2011 is set at 4.5%, similar to 2010. If inflation rises beyond this target, the basic interest rates may rise, directly affecting the cost of our debt and indirectly reducing the demand for products and services related to telecommunications. In 2011, factors that may adversely affect consumer inflation are, among others, the international commodities prices, the impact of buoyant domestic economic activity on domestic prices and the indexation of prices and tariffs.

Since 2006, telephone fees have been indexed to the Index of Telecommunications Service, or IST, reduced by a productivity factor. The IST is a basket of national indexes that reflect the industry’s operating costs. As a result, this index serves to reduce potential discrepancies between our industry’s revenue and costs, and thus reduce the apparent adverse effects of inflation upon our operations.

The fee rate increase authorized by the ANATEL, which will reference the IST, will be reduced by a factor of productivity and applied cumulatively after a period of 12 months. This can cause increases in costs and salaries above and below that of our revenue, with adverse impacts on our profitability.

Increases in interest rates may have a material adverse effect on our business.

The Monetary Policy Committee of the Brazilian Central Bank ( Comitê de Política Monetária do Banco Central do Brasil ), or COPOM, sets the target of the basic interest rate for the Brazilian financial system based on an expectation of convergence between the future inflation rate and the central inflation target. On December 31, 2010, the basic interest rate was 10.75% per year, compared to 8.75% per year on December 31, 2009. Further increases in the basic interest rate may occur throughout 2011, with adverse effects on our business. According to current market consensus, inflation measured by IPCA during 2011 will be higher than the established inflation target of 4.5%. Hence, the Central Bank of Brazil is supposed to increase interest rates during the year.

Fluctuations in exchange rates may adversely affect our ability to meet liabilities denominated or linked to foreign currencies and reduce our income in foreign currencies, which may have a material adverse effect on the market value of our preferred shares and ADSs.

The exchange rate between the U.S. dollar and the Brazilian real has experienced significant fluctuations in the recent years. Between 2000 and 2003, the real was devalued 68% against the U.S. dollar and gained 32% between 2004 and 2010. Between 2000 and 2010, the real depreciated by 9% against the U.S. dollar.

It should be noted that the IST, the current index applicable to telecommunication fees for fixed-line services, does not adequately reflect the true effect of exchange rate fluctuations. Thus, since 2006, telecommunication revenue, when converted to U.S. dollars, does not adequately reflect the true effect of exchange rate fluctuations, so that our results of operations could be adversely affected. See “ A. ––Selected Financial Data––Exchange Rates” for more information on exchange rates.

Political, economic and social developments, and the perception of risk in other countries, both in emerging and developed market countries, may adversely affect the Brazilian economy, our business, and the market price of Brazilian securities, including our preferred shares and ADSs.

The market for securities issued by Brazilian companies may be influenced, in varying degrees, by economic conditions in both emerging and developed market countries. The reaction of investors to developments in other countries may have an adverse impact on the market value of securities of Brazilian companies. Crises in other emerging countries or the economic policies of other countries may reduce investor demand for securities of Brazilian companies, including our preferred shares. Any of the foregoing developments may adversely affect the market value of our preferred shares and hinder our ability to access the capital markets and finance our operations in the future on acceptable terms and costs, or at all.

Exchange controls and restrictions on remittances abroad may adversely affect holders of our preferred shares and ADSs.

Brazilian law allows that, whenever there is a significant imbalance in Brazil’s balance of payments or a significant possibility that such imbalance will exist, the Brazilian government may impose temporary restrictions on capital outflows. Such restrictions could hinder or prevent the holders of our preferred shares or our Brazilian custodian, Banco Itaú Unibanco S.A. (acting as the agent for the depositary) from remitting dividends abroad. The Brazilian government imposed restrictions on capital outflows for a six-month period at the end of 1989. If similar restrictions are introduced in the future, they would likely have an adverse effect on the market price of our preferred shares and ADSs.

Risks Relating to the Brazilian Telecommunications Industry and Us

Extensive government regulation of the telecommunications industry may limit, in some cases, our flexibility in responding to market conditions, competition and changes in our cost structure.

Our business is subject to extensive government regulation, including any changes that may occur during the period of our authorization to provide telecommunication services. ANATEL, which is the main telecommunications industry regulator in Brazil, regulates, among other things:

·          industry policies and regulations;

·          licensing;

·          tariffs;

·          competition, including, therefore, our ability to grow by acquiring other telecommunications businesses;

·          telecommunications resource allocation;

·          service standards;

·          technical standards;

·          interconnection and settlement arrangements; and

·          universal service obligations.

Brazil’s telecommunications regulatory framework is continuously evolving. The interpretation and enforcement of regulations, the assessment of compliance with regulations and the flexibility of regulatory authorities are all marked by uncertainty. We operate under authorization from the Brazilian government, and our ability to retain this authorization is a precondition to our success. However, in light of the regulatory framework, we cannot assure you that ANATEL will not modify the terms of our authorization adversely. Furthermore, according to the terms of our operating authorizations, we are obligated to meet certain requirements and to maintain minimum quality, coverage and service standards. Failure by us to comply with these requirements may result in the imposition of fines or other government actions, including the termination of our operating authorizations. Any partial or total revocation of any our operating authorizations would have a material adverse effect on our business, financial condition, revenues, results of operations and prospects. In recent years, ANATEL has also been reviewing and introducing changes in the applicable regulation, especially regarding the interconnection fees among telecommunications service providers in Brazil. Interconnection fees, which are fees charged by telecommunications service providers to each other to interconnect to each others’ networks, are an important part of  our revenue base. To the extent that changes to the rules governing interconnection fees reduce the amount of interconnection fees we are able to collect, our businesses, financial conditions, revenues, results of operations and prospects could be materially adversely affected.

Therefore, our businesses, results of operations, revenues and financial conditions could be negatively affected by the actions of the Brazilian authorities, including, in particular, the following:

·          the introduction of new or stricter operational and/or service requirements;

·          the granting of operating licenses in our areas;

·          delays in the granting of, or the failure to grant, approvals for rate increases; and

·        anti-trust limitations imposed by ANATEL and the Administrative Council for Economic Defense (“CADE”).

Brazilian anti-trust regulation is based on Law No. 8,884 of June 11, 1994 which prohibits any practice or transactions aimed at restricting free competition, dominating the relevant market of goods or services, arbitrarily increasing profits, or abusively exercising a dominant market position. The Economic Law Office, or SDE, and the Secretariat for Economic Monitoring, or SEAE, also act towards promoting the principle of free, ample and fair competition among all providers, as well as toward correcting the effects of imperfect competition and repressing violations against economic order. We cannot continue to expand our growth through acquisition of other service providers given the anti-trust objections of ANATEL along with the fact that we currently already render SMP service all over the country. Consolidation of the other players in the telecommunications market will increase the competitive pressure on us due to the increase in their economies of scale and reduction of operational costs, and we may be unable to respond adequately to pricing pressures resulting from consolidation, which would adversely affect our business, financial condition and results of operations.

Our results of operations may be negatively affected by the application of the SMP rules.

Under the SMP regime, our subsidiaries receive payment for the use of their networks in accordance with a network usage payment plan, which includes outbound long distance calls. Until June 30, 2004, SMP service providers were able to opt to establish a price cap or freely negotiate our interconnection charges. In early 2005, ANATEL began permitting free negotiations for mobile interconnection, or VU-M, fees and by July 2005, local-fixed concessionaires and mobile operators had reached a provisional agreement with respect to VU-M fees for local calls, or VC-1 (the agreement guaranteed a 4.5% increase in mobile operators’ fees). ANATEL approved that provisional agreement and, in March 2006, approved another provisional agreement of 4.5% increase for VU-M fees for long-distance calls, or VC-2, VC-3, and international calls, among the same operators that had made the VC-1

agreement in July 2005. Currently, free negotiation is the rule, subject to ANATEL regulations. In July 2007, ANATEL approved a provisional agreement among the fixed line operators Telefônica, Telemar, Brasil Telecom, CTBC Telecom and Sercomtel and the mobile operators for interconnection fees for VC1, VC2 and VC3 calls that provides for an annual adjustment of approximately 1.97% to interconnection fees in Region I (Telemar’s Region) and an annual adjustment of approximately 2.25% in Region II (Brasil Telecom’s Region) and Region III (Telefônica’s Region).

In January 2008, ANATEL approved a provisional agreement among the fixed line long distance operator Embratel and the mobile operators for interconnection fees for VC2 and VC3 calls, for the period since January 2004, that provides for an annual adjustment of 4.5% as of March 2006 and an annual adjustment of approximately 1.97% or approximately 2.25% as of July 2007.

In July 2008, ANATEL approved a provisional agreement among the fixed line operators Telefônica, Telemar, Brasil Telecom, CTBC Telecom and Sercomtel and the mobile operators for interconnection fees for VC1, VC2 and VC3 calls that provides for an annual adjustment of approximately 1.89% to interconnection fees in Region I (Telemar’s Region) and an annual adjustment of approximately 2.06% in Region II (Brasil Telecom’s Region) and Region III (Telefônica’s Region).

In March 2009, ANATEL approved a provisional agreement among the fixed line long distance operator Embratel and the mobile operators for interconnection fees for VC2 and VC3 calls, for the period from 2007 to 2008, that provides for an annual adjustment of approximately 1.89% in Region I (Telemar’s Region) or approximately 2.06% in Region II (Brasil Telecom’s Region) and Region III (Telefônica’s Region) as of July 2008.

In September 2009, even though it had a provisional agreement between the fixed line operators Telefônica, Telemar, Brasil Telecom and Sercomtel and the mobile operators, without CTBC Celular, ANATEL decided not to approve the readjustment of the local (VC-1) and long-distance (VC-2 and VC-3) fixed-to-mobile calls. In February 2010, this readjustment of the VC-1, VC-2 and VC-3, relative to the period from 2008 to 2009, was approved by ANATEL and the provisional agreement of VU-M readjustment (68.5% of the approved readjustment of approximately 0.97% for the VC-1) could be applied.

In June 2010, ANATEL approved a provisional agreement among the fixed line long distance operator Embratel and the mobile operators for interconnection fees for VC2 and VC3 calls, for the period from 2008 to 2009, for the application of the VU-M readjustment (68.5% of the approved readjustment of approximately 0.97% for the VC-2 and VC-3).

The Invitation Document number 002/2007/SPV-ANATEL regarding the auction organized in December 2007 of new licenses for the 1900-2100 MHz radio frequency bands (3G licenses), states that, in the maximum allowed period of eighteen months from the publication of the Terms of Authorization (that occurred on April 30, 2008), the authorizations resulting from this auction will be combined with the existing SMP authorizations of the bid winners when pertaining to the same region of the general authorization plan of SMP (PGA-SMP). In accordance with this determination, in January 2010, ANATEL published an act determining the unification of our SMP authorizations in Regions II (states of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and the Distrito Federal) and III (state of São Paulo) of the PGA-SMP, with an SMP authorization for each one of these Regions (Terms of Authorization No. 005/2010 and 006/2010, signed in January 2010, for Region II and III, respectively). Moreover, ANATEL also determined that, from November 1, 2009 (eighteen months from April 30, 2008), in each Region of the PGA-SMP, the value of the VU-M must be unified for that Region and freely negotiated. Until such date, the mobile operators charged a value of VU-M for authorization of the SMP. In February 2010, ANATEL defined the VU-M to be paid for Oi (fixed and mobile operators) and for Brasil Telecom (fixed and mobile operators) to Claro, TIM, Vivo and Vivo Participações (the latter being the result of the ANATEL-authorized merger of Telemig Celular S.A. into Vivo Participações S.A. in March 2010), for region of the PGA-SMP, as a result of the unification of the SMP authorizations.

The free negotiation process for interconnection charges has been extended and will proceed until a future date to be determined by ANATEL, when a “cost based” reference interconnection value is expected to be set by ANATEL according to the rules and the regulation on SMP Network Usage Fees issued in July 2006 (Resolution 438/2006). Under Resolutions 438/2006, 480/2007, 483/2007,  503/2008 and 549/2010, the ANATEL developed a

new model to be implemented from a future date to be established by ANATEL to determine reference costs for the use of mobile networks—RVU-M—by SMP providers who have significant market power. These values will be used in arbitration cases involving VU-M’s value by ANATEL. ANATEL did not implement this model in 2010, as foreseen by Resolution 480/2007, and has not yet determined the date for this implementation. Under Resolution 438/2006, the free negotiation of the cost of use of mobile networks—VU-M—was maintained. However, in the arbitration by ANATEL, while the cost model will not be implemented until a date to be defined, ANATEL will decide the new value of VU-M by reference to the existing ratio (as of January 1, 2006) between the value of VU-M and the value of VC-1. In addition, under the ANATEL rules, the retail rates charged to customers for local fixed to mobile calls cannot be less than the sum of the interconnection fees charged on the local fixed and mobile terminations.

Under Resolution 438/2006, ANATEL also eliminated the partial “Bill & Keep” rule for network usage between SMP networks. The applicable rule is now “full billing,” where the SMP operator pays the entire call termination fee of the other mobile network. The rule of the partial “Bill & Keep” had been maintained by the SMP and SME (trunking) networks. Before “full billing,” an SMP operator used to pay for the use of another SMP operator’s network in the same registration area only if the traffic carried from the first operator to the second exceeded 55% of the total traffic exchanged between them. In that case, only those calls that surpassed the 55% level were subject to payment for network usage.

In November 2010, A natel published Resolution 549/2010 modifying Resolution 438/2006, providing that the groups that include SMP operators with participation rates lower than 20% in the market of mobile telephony in each one of the regions of the General Plan of Authorizations of SMP (PGA-SMP) are considered groups who lack significant market power in the offer of mobile interconnection, in their respective areas of authorization.

In October 2010, A natel published Public Consultation nº 37/2010 with a proposal for the Regulation of the Criteria of Readjustment of the Tariffs of the Calls of the Fixed Switched Telephone Service (STFC) involving accesses of the Personal Mobile Service (SMP) (VC-1, VC-2 and VC-3). The purpose of this Public Consultation is to reduce the fees to the consumer of the local (VC-1) or long-distance (VC-2 and VC-3) fixed-mobile calls and to reduce the amount of the mobile interconnection fees (VU-M). The plan is to reduce the VC-1, VC-2 and VC-3 by 10%  in 2011 and 2012, without considering inflation (inflation of 4% implies a VC cut of 6%). Because under the ANATEL rules the retail rates charged to customers for local fixed to mobile calls (VC-1) cannot be less than the sum of the interconnection fees charged on the local fixed (TU-RL) and mobile terminations (VU-M), the VCs and VU-M values should fall in tandem. Accordingly, in arbitration cases involving VU-M’s value by ANATEL, the VU-M cuts should follow the VC-1 cuts by 85%.

ANATEL also issued Regulation No. 460/2007 regarding number portability that implemented and developed fixed and wireless number portability in Brazil effective as of March 2009, with most costs to be borne by the operators. For SMP, number portability is applied for wireless codes of access of the same registration area. Until December 2010, there were 202.9 million cell phones in Brazil. After the start of number portability in September 2008, 1,278,539 people changed out and 1,476,271 people changed in our subsidiaries as operator as of December 31, 2010. For fixed operators, number portability is applied for fixed codes of access of the same local area. There can be no assurance that this new regulation will not have material adverse effects on the results of our operations.

We cannot predict whether the current regulatory regime will remain in place or whether any future regulatory change will have an adverse effect on our results of operations. We cannot assure you that the interconnection rates we negotiated will be upheld or that future negotiations will be as favorable as those that were previously set by ANATEL. If the readjustments that we negotiated are cancelled or if freely negotiated interconnection fees in the future are less favorable to us, our business, financial condition, revenues, results of operations and prospects will be adversely affected.

If the inflation adjustment index now applied to our prices is changed, the new index may not adequately reflect the true effect of inflation on our prices, which could adversely affect our results of operations.

The Brazilian government currently uses the General Price Index, or the IGP-DI (the Índice Geral de Preços Disponibilidade Interna ), an inflation index developed by the Fundação Getúlio Vargas , a private Brazilian economic organization, in connection with the prices charged in the wireless telecommunications industry. Starting

in 2010, the Brazilian government will begin regulating the telecommunications industry based on an economic model (FAC, or “Fully Allocated Costs”) that analyzes companies’ total costs based on a theoretical company’s costs and other factors. In connection with the introduction of this model, the Brazilian government will use a different inflation adjustment mechanism, the IST index ( Índice de Serviços de Telecomunicações ), starting at a date to be later determined by ANATEL. Under Resolution 438/2006, after the economic model will be implemented in a date to be defined, ANATEL will determine the reference cost of using mobile networks (RVU-M) for SMP providers who have significant market power, which will be used in the arbitration case by ANATEL to determine the value of VU-M. T he inflation adjustment of the RVU-M value uses the IST index. In the auctions by SMP of new radio frequency bands, ANATEL has been using the IST index for determining the value of the installments to be paid for the licenses. If this new inflation adjustment mechanism, or any other mechanism chosen by the Brazilian government in the future, does not adequately reflect the true effect of inflation on our prices, our results of operations could be adversely affected.

ANATEL’s new regulation regarding interconnection and network usage fees could have an adverse effect on our results.

Since the beginning of 2005, ANATEL published the following new regulations on interconnection and network usage fees of SMP providers, some of which could have an adverse effect on our results: (1) new General Regulation of Interconnection ( Regulamento Geral de Interconexão —Resolution No. 410/2005, or RGI); (2) the Regulation of Separation and Allocation of Costs (Resolution No. 396/2005); (3) the Regulation for Network Usage Fees of SMP providers ( Regulamento de Remuneração pelo Uso de Redes de Prestadoras do SMP —Resolution No. 438/2006 and Resolutions No. 480/2007, 483/2007, 503/2008 and 549/2010) and the Public Consultation nº 37/2010; (4) the Regulation for Usage of Spectrum in the 800, 900, 1800, 1900 and 2100MHz bands (Resolution No. 454/2006); (5) the Regulation for Methodology of the Calculation of the WACC (Resolution No. 535/2009); (6) the Invitation Document numbered 002/2007/SPV-ANATEL, relating to the auction organized by ANATEL of new 3G licenses, and stating that, in the maximum allowed period of eighteen months from April 30, 2008, the authorizations resulting from this auction must be combined with the existing SMP authorizations given to the bid winners when pertaining to the same region of the general authorization plan of SMP; and (7) the general plan for updating the Brazilian telecommunications regulation (Resolution No. 516/2008, or “PGR”). The following are some of the changes in the regulation that may adversely affect our results:

·          two SMP providers controlled by the same economic group can receive only one instead of two interconnection charges (VU-M) for calls originated and terminated in their networks ((3) and (6) above);

·          new negotiation rules for VU-M prices by which ANATEL will have a role in determining reference prices rather than the current free-market negotiation of prices. The reference prices will apply to SMP providers that have significant market power, which may be the case of Vivo and Vivo Participações (according to Resolution 549/2010 only the groups that include SMP operators with participation rates lower than 20% in the market of mobile telephony combined in each one of the regions of the General Plan of Authorizations of SMP are considered groups without significant market power in the offer of mobile interconnection, in their respective areas of authorization) ((3) and (7) above); Resolution 549/2010 results of Public Consultation 5/2010;

·        In October 2010, ANATEL published Public Consultation nº 37/2010 with a proposal for the Regulation on the Criteria of Readjustment of the Tariffs of the Calls of the Fixed Switched Telephone Service (STFC) involving accesses of the Personal Mobile Service (SMP) (VC-1, VC-2 and VC-3). The objective of this Public Consultation is to reduce the fees to the consumer of the local (VC-1) or interurban (VC-2 and VC-3) fixed-mobile calls and to reduce the amount of the mobile interconnection fees (VU-M). The plan is to cut the VC-1, VC-2 and VC-3 by 10% in 2011 and 2012, without considering inflation (inflation of 4% implies a VC cut of 6%). Because under the ANATEL rules the retail rates charged to customers for local fixed to mobile calls (VC-1) cannot be less than the sum of the interconnection fees charged on the local fixed (TU-RL) and mobile terminations (VU-M), the VCs and VU-M values should fall in tandem. Accordingly, in arbitration cases involving VU-M’s value by ANATEL, the VU-M cuts should follow the VC-1 cuts by 85% ((3) and (7) above);

·          reference prices were cost based commencing in 2008 in compliance with Resolution No. 483/2007. The prices are calculated according to the regulation on Costs Separation and Allocation (Resolution No. 396/2005) ((2) and (3) above);

·          VU-M prices must follow the discounts granted to fixed telephony customers for out-of-business hours calls ((3) above);

·          when receiving calls from public telephones, VU-M will adopt the same tariff rules that apply to public telephones ((3) above);

·          creation of VU-M price unification among SMP providers of the same economic group having significant market power ((3), (6) and (7) above);

·          the interconnection payments between SMP operators for traffic in the same registration area may occur independently of the traffic balance between the operators (this regime is referred to as “full billing”) ((1) and (3) above). Before the adoption of the above-mentioned regulation, payments between SMP operators for traffic in the same area only occurred when the traffic balance between any two companies was either less than 45% or in excess of 55% (this regime is referred to as “partial bill and keep”);

·          the Invitation Document numbered 002/2007/SPV-ANATEL relates to the auction organized by ANATEL in December 2007 of new licenses (3G licenses) for the 1900-2100 MHz radio frequency bands denominated the “F”, “G”, “I” and “J” bands, and states that, in the maximum allowed period of eighteen months from the publication of the Terms of Authorization on April 30, 2008, the authorizations resulting from this auction will be combined with the existing SMP authorizations given to the bid winners when pertaining to the same region of the general authorization plan of SMP. Vivo and Vivo Participações acquired spectrum licenses for the “J” band in regions where we possess SMP licenses. In addition, the Invitation Document modifies the rule for the renewal of radio frequency licenses and includes in the calculation of operating profits the remuneration received for the use of the SMP network together with the profits earned from the service plans. In accordance with this Invitation Document, in January 2010, ANATEL published on act determining the unification of our SMP authorizations in Regions II (states of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and the Distrito Federal) and III (state of São Paulo) of the PGA-SMP, with only one SMP authorization for each one of these Regions (Terms of Authorization No. 005/2010 and 006/2010, signed in January 2010, for Region II and III, respectively). Moreover, ANATEL also determined that, from November 1, 2009 (eighteen months from April 30, 2008), in each Region of the PGA-SMP, the value of the VU-M must be unified for that Region (two SMP providers controlled by the same economic group can receive only one instead of two interconnection charges (VU-M) for calls originated and terminated in their networks), and freely negotiated. Until such date, the mobile operators charged a value of VU-M for authorization of the SMP. In February 2010, ANATEL defined the VU-M to be paid for Oi (fixed and mobile operators) and for Brasil Telecom (fixed and mobile operators) to Claro, TIM, Vivo and Vivo Participações, for the region of the PGA-SMP, as a result of the unification of the SMP authorizations ((1), (3) and (6) above);

·          in 2008, ANATEL published the general plan for updating the Brazilian telecommunications regulation (“ Plano Geral de Atualização da Regulamentação das Telecomunicações no Brasil ”—Resolution number 516/2008, or “PGR”) ((7) above);

·          in November 2010, ANATEL published Resolution 550/2010 for the Regulation on Exploration of Personal Mobile Services by means of a Virtual Network, making possible the creation of the “agent” and the Authorization of Mobile Virtual Network ((7) above). Resolution 550/2010 resulted from Public Consultation 50/2009. In accordance with this regulation approved by ANATEL, Mobile Virtual Network Operators may operate either as agents or as virtual network licensees. An agent represents the personal mobile service provider through the establishment of a representation agreement, which must be ratified by ANATEL. The agent’s activity is not defined as a “telecommunications service” so this is of significant interest to companies that operate in other sectors such as large retailers, banks and football teams;

However, the activity of the virtual network licensee does fall within the definition of “telecommunications service” and is thus subject to all applicable rules;

·          in October 2009, ANATEL published Resolution No. 535/2009 relating to the Methodology of the Calculation of the WACC ((5) above);

·          in December 2008, Decree 6523/2008 was effective, relating to the general norms of customer interaction service by telephone, with the objective of improving the quality of services ((7) above);

·          in December 2010, ANATEL organized auctions for the 1900-2100 MHz radio frequency band denominated the “H” band, for extension bands and for available frequencies at “A”, “D”, “E”, “M” and TDD bands, according the Invitation Document number 002/2010/ANATEL . Vivo was awarded 23 licenses (14 spectrum licenses in 1800 MHz bands (“D”, “E”, “M” and extension bands) and 9 spectrum licenses in 900 MHz extension bands). In addition, the Invitation Document modifies the rule for the renewal of radio frequency licenses and includes in the calculation of operating profits the remuneration received for the use of the SMP network together with the profits earned from the service plans ((1) (3) (4) and (7) above); Invitation Document number 002/2010/ANATEL results of Public Consultation 51/2009;

·          in December 2010, ANATEL published Resolution 558/2010 transferring the bands of 451MHz to 458 MHz and 461 MHz to 468 MHz to the Personal Mobile Service (SMP) , Fixed Switched Telephone Service (STFC) and to the Multimedia Communication Service (SCM) . These bands are currently assigned for access to the services of telephony and data in broad band, particularly in rural areas ((7) above); Resolution 558/2010 results of Public Consultation 24/2009;

·          in August 2010, ANATEL published Resolution 544/2010 for the Regulation on Conditions of Use of Radio Frequencies in the Band of 2500 MHz to 2690 MHz. This band was assigned to the SMP Services and STFC in addition to SCM services and Pay Television by means of Multichannel Multipoint Distribution Service (MMDS) for which it was assigned previously ((7) above); Resolution 544/2010 results of Public Consultation 31/2009;

·          in February 2010, ANATEL published Resolution No. 537/2010 relating to amending in the regulation of the 3400 MHz to 3600 MHz band, allowing it to apply additionally to mobile services ((7) above);

·          in April 2009, ANATEL published Resolution No. 527/2009 relating to the regulation of the Broadband Power Line (BPL), allowing this service to apply to multimedia communication (“Serviço de Comunicação Multimídia—SCM”) ((7) above);

·        in June 2010, ANATEL published Public Consultation 21/2010 with a proposal of altering the Regulation for Inspection (Resolution 441/2006) ((7) above);

·        in June 2010, ANATEL published Public Consultation 22/2010 with a proposal of altering the Regulation for Sanctions (Resolution 344/2003) ((7) above) ;

·        in July of 2010, ANATEL published Public Consultation 27/2010 with the revision of the General Plan of Standards of Quality of the SMP (Resolutions 317/2002 and 335/2003) ((7) above) ;

·        in November 2010, ANATEL published Resolution 548/2010 for the Regulation for Evaluation of the Efficiency of Use of the Radio Frequency Spectrum ((4) and (7) above);

·        in December 2010, ANATEL published Resolution 553/2010 to allow the addition of the ninth digit in the numbers of the mobile telephones of area 11, raising the capacity of numeration in the metropolitan region of São Paulo and eliminating the problem of scarcity of numeration in this area ((7) above) ; and

·        in December 2010, ANATEL published Public Consultation 50/2010 with the Proposal for Revision of the Regulation of Industrial Exploration of Dedicated Lines (Resolution 402/2005) ((7) above).

Such new regulations could have an adverse effect on our results of operations because: (1) our interconnection charges could drop significantly, thereby reducing our revenues; (2) ANATEL may allow more favorable prices for economic groups without significant market power; (3) the prices we charge in some regions in which we operate are higher than those in certain other regions, and consolidation of those prices, competitive pressures and other factors would reduce our average prices and thereby reduce our revenues; (4) the granting of new licenses may increase competition in our area from other operators, which could adversely affect our market share, thereby reducing our revenues; (5) the inclusion in the calculation of operating profits the remuneration received for the use of the SMP network will increase the cost of renewing licenses; (6) in ANATEL’s general plan of updating the telecommunications regulation, ANATEL targets several areas of vital importance for the mobile telecommunications business, such as regulation to improve the quality of services that can cause the rise of operational costs, regulation of the virtual mobile operation (MVNO) that can cause an increase in competitive pressure, regulation against significant market power (“ Poder de Mercado Significativo —PMS”) arising from VU-M price unification among SMP providers of the same economic group having significant market power, that can reduce our revenues, and regulation of multimedia communication (“ Serviço de Comunicação Multimídia —SCM”), that can cause an increase in competitive pressure.

We face substantial competition that may reduce our market share and harm our financial performance.  

There is substantial competition in the telecommunications industry. We not only compete with companies that provide SMP service and trunking but also indirectly with companies that provide fixed-line telecommunications and Internet access services, due to the trend towards the convergence of these services.

We expect competition to intensify as a result of the entry of new competitors and the rapid development of new technologies, products and services. Our ability to compete successfully will depend on our marketing techniques and on our ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by our competitors. If we do not keep pace with technological advances, or if we fail to respond timely to changes in competitive factors in our industry, we could continue to lose market share and could suffer a decline in our revenue. Competition from other SMP communications service providers in the regions in which we operate has also affected, and may continue to affect, our financial results by causing, among other things, a decrease in our customer growth rate, decreases in prices and increases in selling expenses. We also face indirect competition from telecommunications companies providing fixed line services and from high-speed Internet service providers.

These factors have already contributed to a negative effect on our market share and our results of operations and could have a material adverse effect on our business and results of operations in the future.

The ultimate impact that existing competition will have on our business is not yet clear. Our competitors may be able to offer lower prices than we do and to develop and deploy more rapidly new or improved wireless technologies, services and products. Our response to competition may require us to lower rates or extend higher subsidies to our customers for the acquisition of handsets, thereby adversely affecting our margins.

In addition, market participants in other areas of Brazil may also seek to operate in our area, most likely through acquisitions. Recently, there has been consolidation in the Brazilian telecommunications market, and we believe this trend may continue. Consolidation may result in increased competitive pressures within our market. We may be unable to respond adequately to pricing pressures resulting from consolidation, which would adversely affect our business, financial condition and results of operations. We could be negatively affected by anti-trust limitations imposed by ANATEL and the Administrative Council for Economic Defence, or CADE. Brazilian competition regulation is based on Law No. 8,884 of June 11, 1994 which prohibits any practice aimed at restricting free competition, dominating the relevant market of goods or services, arbitrarily increasing profits, or abusively exercising dominant market position. The Economic Law Office, or SDE, and the Secretariat for Economic Monitoring, or SEAE, also act towards promoting the principle of free, ample and fair competition among all providers, as well as toward correcting the effects of imperfect competition and repressing violations against economic order. We cannot continue to expand our growth through acquisitions given the anti-trust objections of ANATEL along with the fact that we currently already render SMP service all over the country. However,

consolidation of the other players will increase the competitive pressure on us due to an increase in their economies of scale and a reduction in operational costs. 

While Vivo Participações was initially the only cellular operator in the State of Minas Gerais, the emergence of other wireless telecommunications operators in that area has created an intensely competitive environment for Vivo Participações in Minas Gerais. Currently, in addition to Vivo Participações there are four other wireless service providers operating within that same authorization area in Minas Gerais. The number of competitors will be five, in addition to Vivo Participações, with the acquisition by NEXTEL, in December 2010, of Band H licenses, in Minas Gerais, through the auction 002/2010/ANATEL. Vivo Participações faces competition from the following operators: (a) TIM, the “B” band frequency range operator that launched its services in December, 1998 – TIM is primarily owned by Telecom Italia (in July 2009, ANATEL published Act No. 3804/2009 determining the conditions to be followed to guarantee total separation between TIM and our subsidiaries) and operates in the entire State of Minas Gerais using WCDMA and GSM technologies; (b) Oi, the “D” band operator that launched its services in June, 2002—Oi is a subsidiary of Tele Norte Leste Participações S.A. (Telemar) and operates in the entire State of Minas Gerais using WCDMA and GSM technology; in the auction of 3G licenses, Oi acquired spectrum licenses for the “I” band in the entire State of Minas Gerais and operates using 3G technology; (c) Claro, the “E” band operator that launched its services in the fourth quarter of 2005—Claro is controlled by América Móvil and operates in an area that comprises most of the State of Minas Gerais using WCDMA and GSM technology—in the auction of 3G licenses, Claro acquired spectrum licenses for the “F” band in the entire State of Minas Gerais and operates using 3G technology; and, (d) CTBC Celular, an “A” band operator that provides services only in the Triângulo Mineiro region—CTBC Celular is controlled by CTBC, a fixed-line operator and uses both WCDMA and GSM technologies; in the auction of 3G licenses, CTBC Celular acquired spectrum licenses for the “G” band in the Triângulo Mineiro region and operates using 3G technology. In 2010, the intense competition in Vivo Participações’ market in Minas Gerais did not hinder the increase of its total market share, which was an estimated 33.47% on December 31, 2010, as compared to 33% and 28.7% on December 31, 2009 and 2008, respectively.

Our results of operations have been negatively affected by a decrease in our customer growth and could also be affected if our rate of customer turnover increases.

Our rate of acquisition of new customers can be negatively affected by market penetration. In addition, if our rate of customer turnover were to increase significantly, our results of operations and or competitive position could be adversely affected. Several factors in addition to competitive pressures could influence our rate of acquisition of new customers and their rate of customer turnover, including limited network coverage, lack of sufficient reliability of their services and economic conditions in Brazil.

The industry in which we conduct our business is subject to rapid technological changes and these changes could have a material adverse effect on our ability to provide competitive services.

The telecommunications industry is subject to rapid and significant technological changes. Our success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will be further developed.

The advent of new products and technologies could have a variety of consequences for us. These new products and technologies may reduce the price of our services by providing lower-cost alternatives, or they may be superior to, and render obsolete, the products and services we offer and the technologies we use, requiring investment in new technology. The cost of upgrading our products and technology in order to continue to compete effectively could be significant, and our ability to fund the upgrading may depend on our ability to obtain additional financing.

Certain of our debt agreements contain financial covenants, and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.

Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these agreements.

The cellular industry, including us, may be harmed by reports suggesting that radio frequency emissions cause health problems and interfere with medical devices.

Media and other reports have suggested that radio frequency emissions from base stations may cause health problems. These concerns could have an adverse effect on the wireless communications industry and, possibly, expose wireless providers, including us, to litigation. According to the World Health Organization (WHO), there is no evidence in the latest medical research that shows any relationship between radio frequency emissions of base stations and health concerns. However, expansion of our network may be affected by perceived risks if we experience problems in finding new sites, which in turn may delay expansion and may affect the quality of our services. On July 2, 2002, ANATEL published Resolution No. 303 that limits emission and exposure for fields with frequencies between 9 kHz and 300 GHz. In addition, the Brazilian government developed specific legislation for the deployment of radio frequency transmission stations that supersedes the existing state and municipal laws. In May 2009, the Brazilian government published Law No. 11934/2009 that limits the exposure for fields with frequencies up to 300 GHz. The new law uses the exposition limits determined by the International Commission on Non-Ionizing Radiation Protection (ICNIRP) and recommended by the World Health Organization (WHO). The new laws may create additional transmission regulations which, in turn, could have an adverse effect on our business.

We face risks associated with litigation.

We and our subsidiary are party to a number of lawsuits and other proceedings. An adverse outcome in, or any settlement of, these or other lawsuits could result in significant costs to us. In addition, our senior management may be required to devote substantial time to these lawsuits, which they could otherwise devote to our business. See “Item 8.A.—Financial Information—Consolidated Statements and Other Financial Information—Legal Matters.”

We may be required to record impairment charges relating to goodwill and long-lived assets in the future.

For IFRS purposes, we are required to test our goodwill for impairment at least annually. The excess of the book value of a company over its market value may indicate that an impairment exists. This impairment test is described in Note 2.2.i to our audited consolidated financial statements. The Company has substantial goodwill with a carrying value of R$1,440.4 million as of December 31, 2010. It is possible that we may be required to record impairment charges relating to our goodwill in future periods, and this would have an adverse effect on our results of operations. When we performed our last impairment test, our evaluation of our ability to recover the carrying value of our long-lived assets was based on projections of future operations that assumed a higher level of revenues and gross margin percentages than we have historically achieved as well as on assumptions that market place participants will make in valuing similar assets. We may not be successful in achieving these improvements in our revenues and gross margin percentages due to the competitive environment, changes in technology or other factors. If we are unable to achieve these improvements, we may be required to record impairment charges related to our long-lived assets, including goodwill, in future periods, and this could have an adverse effect on our operations.

In addition, we are required to record impairment charges on long-lived assets, including property, plant and equipment and finite-lived intangible assets (including concessions) if the carrying value of these assets exceeds the undiscounted cash flows expected from their use. This impairment test is also described in Note 2.2.i to our audited consolidated financial statements included in this annual report.

Risks Relating to Our Shareholding Structure

Our controlling shareholders have a great deal of influence over our business.

As of December 31, 2010, Telefónica S.A , our principal shareholder, owned, directly and indirectly, approximately 88.9% of our common shares and 59.4% of our total capital (or 59.6% excluding the treasury shares). See “Item 7.A.—Major Shareholders and Related Party Transactions—Major Shareholders.” Due to its share ownership, our principal shareholder has the power to control us and our subsidiary, including the power to elect our directors and officers and determine the outcome of any action requiring shareholder approval, including corporate reorganizations and the timing and payment of our dividends. The interests of Telefónica S.A. may differ from our interests or those of our other shareholders.

Risks Relating to Our Securities

Holders of our preferred shares or ADSs may not receive any dividends.

According to Brazilian Corporate Law and our by-laws, we must generally pay dividends to all shareholders equal to at least 25% of our annual net income, as determined and adjusted under the Brazilian Corporate Law. These adjustments to net income for purposes of calculating the basis for dividends include allocations to various reserves that effectively reduce the amount available for the payment of dividends. We were unable to pay minimum dividends for the fiscal years ended December 31, 2004, 2005 and 2007 because we had net losses. For the fiscal year ended December 2006, we were able to pay dividends because we had net income, but the amounts paid were insufficient to meet the minimum legal requirement. In addition, according to Brazilian Corporate Law, we would not pay dividends to our shareholders in any particular fiscal year if our board of directors determines that such distributions would be inadvisable in light of our financial condition. For the fiscal year ended December 31, 2008, the Board of Directors Meeting held on February 12, 2009 approved to pay dividends in the amount of R$402.6 million, which is sufficient to meet the minimum dividend required by law. According to the approval granted at the Board of Directors Meeting held on February 12, 2009 and at the General Meeting of Shareholders held on March 19, 2009, the dividends were paid on December 2, 2009 and, upon this payment, the voting rights of holders of Vivo’s preferred shares that previously existed due to Vivo’s failure to pay all requested dividends were terminated. Additionally, on February 9, 2010, the Board of Directors meeting approved the payment of dividends in the approximate amount of R$818.9 million for the fiscal year ended December 31, 2009, which were paid in two installments in April 19, 2010 and October 25, 2010. On February 18, 2011 the Board of Directors meeting approved the payment of dividends in the approximate amount of R$2,290.8 million for the fiscal year ended December 31, 2010. See “—Our preferred shares and our ADSs generally do not have voting rights.” 

Telemig Celular and Telemig Participações have paid dividends for the fiscal year ended in December 31, 2008 in an amount that is greater than that required by their respective by-laws. On November 13, 2009, Telemig Participações was merged into Vivo and consequently cease to exist. As of December 31, 2009, we had become the direct owner of 100% of the shares of Telemig Celular. Consequently, as of that date, we owned all of the shares of Telemig Celular and the Brazilian corporate provisions of the Telemig Celular by-laws requiring payment of dividends equal to at least 25% of Telemig Celular’s annual net income no longer were applicable. On June 1, 2010, Telemig Celular was merged into Vivo and consequently ceased to exist. As of June 2, 2010, we had become the operator in the state of Minas Gerais. Our ability to pay future dividends on our common shares, preferred shares and ADSs will depend on the financial results of our wholly-owned subsidiaries, Vivo S.A.

Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

We are organized under the laws of Brazil, and most of our directors and executive officers and our independent public accountants reside or are based in Brazil. Substantially all of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests due to actions by us, our directors or executive officers than would shareholders of a U.S. corporation.

The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our ADSs .

Investments in securities, such as the preferred shares or ADSs, of issuers from emerging market countries, including Brazil, involves a higher degree of risk than investments in securities of issuers from more developed countries.

The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States. These features may substantially limit the ability of holders of our ADSs to exchange their ADSs for the underlying preferred shares and then to sell the preferred shares at a price and time at which holders wish to do so. The São Paulo Stock Exchange had a market capitalization of US$1.5 trillion as of December 31, 2010, and an average monthly trading volume of approximately US$76.0 billion for the twelve months of 2010. 

In comparison, the NYSE had a domestic market capitalization of US$$13.39 trillion (excluding funds and non-U.S. companies) as of December 31, 2010. A liquid and active market may never develop for our common shares, preferred shares or ADSs, and as a result, the ability of holders to sell at the desired price or time may be significantly hindered.

Holders of our ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights.

Holders of ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and Brazilian Corporate Law. Moreover, our corporate affairs are governed by our by-laws and the Brazilian Corporate Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, or elsewhere outside Brazil. Under Brazilian Corporate Law, the rights of a holder of our common shares or preferred shares to protect its interests with respect to actions by us, our directors or executive officers may be fewer and less well-defined than under the laws of other jurisdictions.

Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares, preferred shares or ADSs at a potential disadvantage. In addition, the disclosure required of public companies in Brazil may be less complete or informative than that required of public companies in the United States or in certain other countries.

Our preferred shares and our ADSs generally do not have voting rights.

In accordance with Brazilian Corporate Law and our by-laws, holders of our preferred shares, and therefore of our ADSs, are not entitled to vote at meetings of our shareholders, except in limited circumstances. In accordance with Brazilian Corporate Law and our by-laws, holders of preferred shares will have full voting rights in the event that we do not pay minimum dividends to those shareholders for three consecutive fiscal years, and those shareholders will retain those voting rights until we pay minimum dividends again.

For the fiscal years ended December 31, 2008, 2009 and 2010, the Board of Directors approved to pay dividends which were sufficient to meet the minimum dividends required by Brazilian law. Upon payments of these dividends, the voting rights of holders of Vivo’s preferred shares that previously existed due to Vivo’s failure to pay all requested dividends in years prior to 2008 were terminated. See “—Holders of our preferred shares or ADSs may not receive any dividends” and “Item 10.B. — Additional Information— Memorandum and Articles of Association.”

Holders of our ADSs may find it difficult to exercise even their limited voting rights at our shareholders meetings. Holders of our ADSs may exercise the limited voting rights with respect to our preferred shares represented by the ADSs only in accordance with the deposit agreement related to the ADSs. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders meetings in certain newspapers in Brazil. To the extent that holders of our preferred shares are entitled to vote at a shareholders meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy or its equivalent under Brazilian law. By contrast, holders of the ADSs will receive notice of a shareholders meeting by mail from the depositary following our notice to the depositary requesting the depositary to do so, and so may not

receive voting materials in time to instruct the depositary to vote the preferred shares underlying their ADSs. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. If voting instructions for all or part of the ADSs are not timely received by the depositary, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of the ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of the ADSs may not be able to exercise voting rights, and will have no recourse if the preferred shares underlying their ADSs are not voted as requested.

An exchange of ADSs for preferred shares risks the loss of certain foreign currency remittance and Brazilian tax advantages.

The ADSs benefit from the certificate of foreign capital registration, which permits The Bank of New York Mellon, as depositary, to convert dividends and other distributions with respect to preferred shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for preferred shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under Resolution 2,689 of the Central Bank of Brazil, dated January 26, 2000 and issued by BACEN, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration.

If holders of ADSs do not qualify under Resolution 2,689, they will generally be subject to less favorable tax treatment with respect to our preferred shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.

Holders of our preferred shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of preferred shares or ADSs.

Brazilian Law No. 10,833, article 26, dated December 29, 2003, provides that gains on the disposition of assets located in Brazil by non-residents of Brazil, whether to other non-residents or to Brazilian residents, will be subject to Brazilian taxation. The common shares and preferred shares are expected to be treated as assets located in Brazil for purposes of the law, and gains on the disposition of common shares and preferred shares, even by non-residents of Brazil, are expected to be subject to Brazilian taxation. In addition, the ADSs may be treated as assets located in Brazil for purposes of the law, and therefore gains on the disposition of ADSs by non-residents of Brazil may also be subject to Brazilian taxation. Although the holders of ADSs outside Brazil may have grounds to assert that Law No. 10,833 does not apply to sales or other dispositions of ADSs, it is not possible to predict whether that understanding will ultimately prevail in the courts of Brazil, given the general and unclear scope of Law No. 10,833 and the absence of judicial court rulings in respect thereto. See “Item 10.E.—Additional Information—Taxation—Brazilian Tax Considerations.”

Item 4.        Information on the Company

A.    Our History and Development

General

We are incorporated under the laws of the Federative Republic of Brazil under the name Vivo Participações S.A., known as Vivo (and prior to the Merger, under the name Telesp Celular Participações S.A. ). We have the legal status of a sociedade por ações , or a stock corporation, operating under Brazilian Corporate Law. Our principal executive offices are located at Avenida Roque Petroni Junior, 1464, 04707-000, São Paulo, SP, Brazil. Our telephone number is +55 11 7420-1172, our facsimile number is +55 11 7420-2247, and our website is www.vivo.com.br . The information on our website is not part of this Form 20-F. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715.

According to market share data published by ANATEL, we are a leading provider of cellular telecommunications services in Brazil through our subsidiary Vivo S.A.

The following chart shows our corporate structure as of December 31, 2010:  

Telebrás and the Privatization

Vivo was originally incorporated as Telesp Celular Participações as a result of a restructuring of Telebrás in 1998. Before 1972, there were more than 900 telecommunications companies operating throughout Brazil. Between 1972 and 1975, Telebrás and its operating subsidiaries, known as the “predecessor companies” and collectively as the “Telebrás System,” were created, acquiring almost all of the telecommunications companies in Brazil, and creating a near monopoly over the public telecommunications services in Brazil.

In 1995, the federal government began a comprehensive reform of Brazil’s telecommunications regulatory system. In July 1997, Brazil’s national congress adopted the General Telecommunications Law, which provided for the establishment of a new regulatory framework, the introduction of competition and the privatization of the Telebrás System. In January 1998, in preparation for the restructuring and privatization of the Telebrás System, the cellular telecommunications operations of the Telebrás System were spun off into separate companies. In May 1998, the Telebrás System was restructured to form, in addition to Telebrás, twelve new holding companies. Virtually all of the predecessor companies’ assets and liabilities were transferred to the new holding companies, which we refer to as the new holding companies. TCP was one of the new holding companies. TCP was awarded all of the share capital held by Telebrás in TC, one of the cellular operating companies that had provided cellular telecommunications service in the state of São Paulo since 1993. The Brazilian government’s common shares of Telesp’s capital stock were purchased by the Portugal Telecom group.

Controlling Company

On December 21, 2010, Brasilcel N.V., the former controlling company, was merged with Telefonica S.A. Documents in connection with this merger transaction were received by Vivo Participações for registration in Brazil on January 26, 2011.

Brasilcel

Vivo was controlled by Brasilcel N.V., or Brasilcel, a company with headquarters in the Netherlands, that was a joint venture between Portugal Telecom and Telefónica until September 27, 2010. In September 27, 2010, Telefonica acquired 50% of the shares of Brasilcel from Portugal Telecom SGPS, S.A. and became the only controlling shareholder of Brasilcel.

In December 2002, Portugal Telecom and Telefónica transferred to Brasilcel all of their direct and indirect interests in the following companies (whose operations have been conducted by Vivo S.A. since our restructuring):

·          TCP

TCP controlled an “A” band operator in the state of São Paulo, GT, a “B” Band operator in the states of Paraná and Santa Catarina and TCO S.A. and its subsidiaries in the states of Acre, Amazonas, Amapá, Goiás, Maranhão , Mato Grosso, Mato Grosso do Sul, Pará, Rondônia, Roraima and Tocantis and in the Federal District, Brasilia.

·          TLE

TLE, which controlled “A” band operations in the states of Bahia and Sergipe, was one of the operating subsidiaries of Telebrás that was spun off as an individual company in July 1998. It received all the capital stock held by Telebrás in the subsidiaries that provided cellular telecommunication services in the states of Bahia and Sergipe, namely, Telebahia Celular and Telergipe Celular.

TLE was purchased by a consortium formed by Iberdrola Investimentos Sociedade Unipessoal Ltda., an investment company controlled by Iberdrola S.A. and Telefónica Internacional S.A., a subsidiary of Telefónica. On May 17, 1999, Iberoleste Participações S.A. purchased 3.07% of Telebahia’s capital stock and 6.54% of Telergipe’s capital stock in a tender offer. In February 2000, Telefónica and Iberdrola transferred their shares to Iberoleste, maintaining their same percentage interest in the consortium. On April 5, 2001, Telefónica purchased all the capital stock directly and indirectly held by the Iberdrola Group in TLE.

·          TSD

TSD, which controlled “A” band operators in the states of Rio de Janeiro and Espírito Santo, was one of the operating subsidiaries of Telebrás that was spun off as an individual company in July 1998. TSD received all the capital stock held by Telebrás in the subsidiaries that provided cellular telecommunication services in the States of Rio de Janeiro and Espírito Santo, namely, Telerj Celular and Telest Celular, respectively.

TSD was purchased by a consortium of Telefónica Internacional S.A., Iberdrola Investimentos Sociedade Unipessoal Ltda., NTT Mobile Communications Network, Inc. and Itochu Corporation. In May 2000, Telefónica acquired 67.51% of TSD’s capital stock through an exchange offer. On April 5, 2001, Telefónica purchased from the Iberdrola group, with the authorization of ANATEL, 7% of the capital stock of Sudestecel Participações S.A., a holding company that controlled TSD.

·          Celular CRT

Celular CRT controlled an “A” band operator in the state of Rio Grande do Sul. Cellular telecommunications services were first offered in the state of Rio Grande do Sul in December 1992 by a business unit of Celular CRT—Companhia Riograndense de Telecomunicações. The fixed and cellular operations of Celular CRT were split on June 25, 1998, and the cellular operations were spun off as Celular CRT. On May 4, 1999, Celular CRT obtained its registration as a publicly held company with the CVM for the trading of its shares on the over-the-counter market organized by Sociedade Operadora do Mercado de Ativos SOMA, starting on May 17, 1999. On September 8, 1999, Celular CRT registered with the Extremo Sul Stock Exchange and BM&FBOVESPA, pursuant to the applicable laws. The main shareholder of Celular CRT was the state of Rio Grande do Sul.

In 1996, the state of Rio Grande do Sul sold part of its stake in Celular CRT to Telefónica. In 1998, the remaining stake of the state of Rio Grande do Sul was sold to Telefónica. In 1999, Portugal Telecom subscribed a share capital increase of Celular CRT.

Acquisition of TCO

On April 25, 2003, TCP acquired 64.03% of the outstanding voting capital stock of TCO from Fixcel S.A. for approximately R$1,505.6 million, corresponding to R$19.49 per each lot of 1,000 shares acquired. TCO is an “A” band operator providing cellular telecommunications services in the Federal District of Brazil, as well as in the Brazilian states of Goiás, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and Tocantins. The agreement also included the acquisition of TCO’s “B” band subsidiary NBT, which provides cellular telecommunications service in the Brazilian states of Amapá, Amazonas, Maranhão, Pará and Roraima. On May 25, 2003, in compliance with Brazilian legislation, we launched a tender offer for the common shares of TCO not owned by us. The acceptance period ended on November 18, 2003. As a result of the shares tendered, we acquired 74.2% of the outstanding available common shares at the price of R$16.73 per 1,000 common shares. The total purchase price for the new shares amounted to R$538.8 million. On December 31, 2003 we held 90.73% of TCO’s ordinary shares, representing a 29.31% interest in TCO, excluding treasury stocks. We also announced the intention to launch an exchange offer for the remaining shares of TCO through which we would have become TCO’s sole shareholder. This would have been followed by a merger of TCO into TCP. After the launch of the exchange offer, the CVM raised questions on its compliance with Brazilian law. Although TCP and TCO believed, and believe, that the exchange offer complied with applicable law, TCP and TCO decided to terminate the exchange offer in January, 2004. See sections “—TCO’s Corporate Restructuring” and “—Merger of the Vivo Companies” below for more information on developments to TCO since we acquired it.

Introduction of the Vivo Brand

In April 2003, Brasilcel launched the brand name “Vivo,” under which TCP, TCO, TLE, TSD and Celular CRT operate. The creation of the Vivo brand constituted a consolidation of the commercial models throughout the entire country into a common commercial strategy and replaced the different brands under which the different companies offered their services in their respective states. The commercial strategy of Vivo is to increase its customer base as well as revenues by retaining customers and maintaining their distribution channels. The launching of the Vivo brand was accompanied by customer loyalty programs and other measures designed to contribute to the success of the commercial strategy. Guided by a common management team, Vivo designs marketing, promotional and other initiatives common to all companies and then tailors those activities to the particular markets of those companies.

TCO’s Corporate Restructuring

On June 30, 2004, the management of TCP and TCO approved the corporate restructuring of TCO and its subsidiaries Telegoiás, Telems, Telemat, Teleacre and Teleron. The reasons for restructuring were: (i) to improve TCO and its subsidiaries’ cash flow, which resulted in the transfer of a R$511 million tax benefit from TCP to TCO, generated by the amortization of goodwill in the amount of R$1,503 million, in connection with the acquisition of TCO and its subsidiaries by TCP in 2003 and (ii) to simplify the corporate structure of TCO’s subsidiaries, improve TCO’s capitalization and benefit the non-controlling shareholders of TCO’s subsidiaries.

VTO—Voluntary Public Tender Offer

On October 8, 2004, Telesp Celular Participações concluded its public tender offer (“VTO”) for up to 84,252,534,000 preferred shares of TCO by TCP. The number of preferred shares tendered in the VTO exceeded the maximum number to be acquired by TCP. Due to a pro-rata allocation, TCP purchased 0.5547 preferred shares for each preferred share tendered by a TCP holder. After the VTO, on January 7, 2005, the number of TCO shares held by TCP represents 32.76% of the total preferred shares and 50.65% of the total capital stock of TCO. Also under the VTO, Avista Participações Ltda., a subsidiary of Brasilcel, purchased:

·          common shares of TLE representing 10.0% of TLE’s total common shares and preferred shares of TLE representing 29.51% of TLE’s total preferred shares;

·          common shares of TSD representing 3.27% of TSD’s total common shares and preferred shares of TSD representing 4.89% of TSD’s total preferred shares; and

·          common shares of Celular CRT representing 4.48% of Celular CRT’s total common shares and preferred shares of Celular CRT representing 23.44% of Celular CRT’s total preferred shares.

Rights Offering

On November 8, 2004, TCP announced a capital increase of up to R$2,053,895,871.47, upon private subscription, with an issuance of 410,779,174,294 new shares, of which 143,513,066,618 are common shares and 267,266,107,676 are preferred shares, identical in every aspect to those shares currently existing, at the issuance price of five reais (R$5.00) per lot of one thousand shares, for both types of shares.

The capital increase was carried out in three subscription stages, with due regard to preemptive rights, and ended with an auction of the remaining shares held on January 4, 2005, which was confirmed by the Board of Directors at a meeting held on January 7, 2005.  The capital stock was increased to R$6,427,557,341.20, represented by 1,582,563,526,803 shares, of which 552,896,931,154 are common shares and 1,029,666,595,649 are preferred shares. Following the rights offering, Brasilcel held 94.9% of our common shares, 50.0% of our preferred shares, and 65.7% of our total capital stock.

Brasilcel’s Share Holding Increases of TLE, TSD, and Celular CRT

In July 2005, Brasilcel and its affiliates acquired additional voting capital stock of TLE, TSD and Celular CRT in respective Share Holding increases. As a result of those transactions, Brasilcel held:

·          68.72% of TLE’s common shares, 40.95% of TLE’s preferred shares and 50.67% of TLE’s total capital stock;

·          92.01% of TSD’s common shares, 90.27% of TSD’s preferred shares and 91.03% of TSD’s total capital stock; and

·          90.57% of Celular CRT’s common shares, 51.47% of Celular CRT’s preferred shares and 68.77% of Celular CRT’s total capital stock (excluding treasury shares).

In February 2006, shareholders of the Vivo Companies approved their consolidation with one another through a Brazilian law procedure (the “Merger”) whereby TCO became a wholly owned subsidiary of TCP pursuant to a merger of shares ( incorporação de ações ) of TCO and a merger of companies ( incorporação de empresas ) of TLE, TSD and Celular CRT with and into TCP, with TCP as the surviving company. Holders of common shares, preferred shares or (where applicable) ADSs of TCO, TLE, TSD and Celular CRT received common shares, preferred shares or ADSs, respectively, of TCP upon approval of the Merger by the requisite percentage of the voting shareholders of TCP, and of TCO, TLE, TSD and Celular CRT, as applicable. Upon the completion of the Merger, TCP was renamed Vivo Participações S.A. and has become the holding company of TCO and GT and of the remaining subsidiaries of TLE, TSD and Celular CRT.

The boards of directors ( Conselhos de Administração ) of each of the constituent companies to the Merger completed their respective approval processes for the Merger by December 4, 2005, and the respective shareholders approved the transaction as of February 22, 2006. The reasons for the Merger were to align the interests of the shareholders of TCP, TCO, and TLE, TSD and Celular CRT, which were previously under common control; to improve the liquidity of the resultant securities; to simplify the shareholding and organizational structure of the Vivo companies and expand its shareholder base; and to take advantage of important synergies among the companies, which were already operating under the common Vivo brand.

Pursuant to the Merger, Brasilcel and its subsidiaries hold 89.0% of TCP’s common shares. Under the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification, the agreements which govern the Merger, TCP underwent a capital increase in the amount of R$2,631,136,636.01 as a result of the Merger, from R$6,670,152,498.26 to R$9,301,289,134.27. The agreements also provided that Celular CRT’s preferred shares held in treasury are transferred to TCP in connection with the Merger. At the Vivo Shareholders Meeting held on

February 22, 2006, TCP reduced its capital in the amount of R$3,147,782,181.54, from R$6,670,152,498.26 to R$3,522,370,316.72, as approved by management and the shareholders and in accordance with Brazilian Corporate Law, which permits reductions in capital up to the amount of accumulated losses, allowing a more accurate valuation of the company and the possibility for eventual future distributions of dividends. TCP subsequently changed its corporate name to “Vivo.”  The total capital of Vivo following the merger was R$6,153,506,952.73 due to an increase in the amount of R$2,631,136,636.01 as a result of the Merger. For more information on the Merger, see the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification among TCP, TSD, TLE and Celular CRT dated December 4, 2005, which is included as an exhibit to this report.

CVM regulations permit the acquirer of a publicly held company to capitalize the tax benefits arising from the amortization of goodwill generated in the acquisition of that company, so long as preemptive rights are extended to the other shareholders of the publicly held company in connection with the capital increase. At the time of the Merger, any rights previously held by Vivo, in connection with its existing investment in TCO, or by certain controlling shareholders, in the case of TSD, TLE and Celular CRT, to capitalize credits of such companies will remain in effect. As a result, at the time of the Merger, Vivo retained its prior rights to capitalize its credits in TCO and such controlling shareholders acquired the right to use their credits in future capital increases of Vivo.

Capital Increase

On June 08, 2006, the Board of Directors of Vivo Participações approved a capital increase and issued a total of 15,705,528 new common shares at the issue price of R$12.37 in connection with Brasilcel’s capitalization of certain tax benefits relating to the goodwill it recorded when it acquired us in December 2002 and with preemptive rights exercised by our shareholders. CVM regulations permit buyers of joint stock companies to capitalize tax benefits derived from goodwill, provided preemptive rights related to such capital increase are extended to the other shareholders of the joint stock company. The goodwill Brasilcel capitalized included approximately R$193.9 million in tax benefits for the fiscal year ending on December 31, 2005 and approximately R$0.4 million for previous fiscal years, totaling approximately R$194.3 million.

The issue price was 100% of the weighted average of the closing prices registered by the São Paulo Stock Exchange in the 15 trading sessions held between April 07, 2006 and May 02, 2006. The preemptive rights were authorized to be exercised in the period between May 08, 2006 and June 06, 2006.

As a result of this capital increase Brasilcel’s holdings in us consisted of 89.3% of Vivo common shares, 47.5% of Vivo preferred shares and 62.8% of Vivo’s total capital.

The Meeting of the Board of Directors held on May 26, 2008 approved a capital increase of R$362,742, representing the tax benefit of the incorporated premium, and R$179,862 and R$182,880 for the years 2006 and 2007, respectively, with the issue of 31,959,675 new shares, comprised of 11,669,713 common shares and 20,289,962 preferred shares, ensuring the preemptive right provided for in Article 171 of Law No. 6404/76. The proceeds arising from the exercise of the preemptive right were credited to Portelcom Participações S.A. and Sudestecel Participações Ltda.

As a result of this capital increase Brasilcel’s holdings in us consisted of 89.5% of Vivo common shares, 48.7% of Vivo preferred shares representing 63.5% of Vivo’s total capital.

Corporate Restructuring of Our Operating Subsidiaries

On October 31, 2006, our shareholders approved the merger of Telergipe, Telebahia, Telerj, Telest, CRT, TC, TCO, Telegoiás, Telemat, Telems, Teleron, Teleacre and NBT (each an “Operating Subsidiary” and collectively, the “Operating Subsidiaries”) into Vivo S.A. (formerly known as GT) (the “Corporate Restructuring”). TCO - IP S.A. remained a separate entity, as it is not an SMP operator.

The remaining rights of the former non-controlling shareholders of TCO, Telegoiás, Telemat, Telems, Teleacre and Teleron survived the Corporate Restructuring of the Operating Subsidiaries as of November 1, 2006 and continue to exist under Vivo S.A.

Due to this Corporate Restructuring, the SMP and SCM services that were offered by the Operating Subsidiaries in their respective areas and regions, along with their clients and users, were transferred to Vivo S.A.

The Corporate Restructuring had no impact on Vivo’s consolidated financial statements, capital stock or shareholders’ equity.

The benefits of this restructuring included, among others, increased organizational efficiency, a more effective management and streamlined administrative and commercial functions.

Agreement with Telefónica and Telecom Itália

In October 2007, TELCO S.p.A (a company in which Telefónica holds a corporate interest of 42.3%) acquired 23.6% of the capital stock of Telecom Itália. Telefónica is one of the controlling shareholders of Vivo Participações through a joint venture with Portugal Telecom SGPS, S.A.. Telecom Itália also holds interest in the capital stock of TIM. However, Telefónica did not acquire any right to directly participate in the operations of TIM as a result of the acquisition of the corporate interest in Telecom Itália by TELCO S.p.A.

As a result, any transaction involving us and TIM is considered an ordinary mobile network business transaction which is regulated by ANATEL, as provided in the Act 68.276, dated October 31, 2007 and in the Act 3.804, dated July 7, 2009, both issued and published by ANATEL.

Acquisition of Telpart, Telemig and Tele Norte

On August 2, 2007, Vivo signed a stock purchase agreement with Telpart to acquire control of Telemig Participações (then the controlling shareholder of Telemig Celular) and Tele Norte Participações (then the controlling shareholder of Amazônia Celular S.A.) and 22.73% and 19.34%, respectively, of the total capital of both Telemig Participações and Tele Norte Participações for an aggregate amount of R$1.2 billion, subject to certain price adjustments, and the completion of the transaction being subject to customary closing conditions. Telpart was at that time the parent company of Telemig and Tele Norte. In addition, pursuant to the agreement, Vivo would acquire from Telpart certain subscription rights with respect to goodwill reserves for R$87 million (R$65.8 million regarding Telemig and R$21.1 regarding Tele Norte Participações). On November 9, 2007, ANATEL approved Vivo’s acquisition of Telemig pursuant to Action ( Ato ) No. 68,401.

On December 20, 2007, in accordance with the terms of Instruction CVM 358 of 01/03/02, Vivo publicly announced that it signed a stock purchase agreement with Telemar, a Brazilian telecommunications company unrelated to either Telpart or Vivo, for the sale of all of the Tele Norte shares it was acquiring from Telpart under the stock purchase agreement dated August 2, 2007, in order to facilitate its acquisition of the shares of Telemig. Subsequent to signing this stock purchase agreement, and pursuant to Action ( Ato ) No. 1,261 dated March 5, 2008 published in the DOU on March 7, 2008, ANATEL approved the transfer of shares of Tele Norte to Vivo and the subsequent transfer of these shares to Telemar.

The sale to Telemar was agreed to be in the amount of R$120,009,893.00, subject to the indexation set forth in the stock purchase agreement dated December 20, 2007, which was equivalent to the price Vivo paid for these same shares under the terms of the stock purchase agreement of August 2, 2007.

On April 3, 2008, Vivo announced that (i) all conditions precedent to the acquisition of Telemig were fulfilled, (ii) Vivo had paid the purchase price in the total amount of R$1.23 billion, comprised of R$1.163 billion in connection with the purchase of shares and R$70.511 million in connection with the acquisition of subscription rights, and (iii) Vivo had acquired, as of that date, the direct control of Telemig as a result of the acquisition of 7,258,108 common shares and 969,932 preferred shares of Telemig, representing 53.90% of the voting capital and 22.73% of the total capital of Telemig. The price per share paid by Vivo was approximately R$151.17 per common share and R$67.43 per preferred share of Telemig.

Vivo further announced that the interests acquired in Tele Norte Participações and, indirectly, in Amazônia Celular were immediately transferred to Telemar Participações S.A., for the same price and under the same conditions set forth in the agreement with Telpart. Such interests in Tele Norte Participações consisted of 1,292,679 common shares, 3,715 preferred shares and rights to subscribe to shares to be issued by Tele Norte Participações.

Also on April 3, Vivo announced that it would proceed with two tender offers through its subsidiary TCO IP S.A.: (i) a mandatory offer to non-controlling common shareholders in Telemig Participações and Telemig Celular, at a price per share of R$120.93 and R$2,100.03, respectively, which was subsequently launched on July 15, 2008 and (ii) a voluntary offer for up to one-third of Telemig Participações’s and Telemig Celular’s outstanding preferred shares, on a pro-rated basis, at a price per share of R$63.90 and R$654.72, respectively—which prices included a premium of approximately 25% of the weighted average price of the preferred shares of the respective company in the 30 BM&FBOVESPA trading sessions preceding and including August 1, 2007. The voluntary offer also included holders of preferred shares underlying the ADSs and was launched on April 8, 2008.

On April 4, 2008, the Company approved the transfer of the equity control of TCO IP S.A. from Vivo S.A. to Vivo Participações S.A. As a result of such transfer of control, TCO IP became a wholly-owned subsidiary of Vivo Participações.

On August 20, 2008, Vivo announced the results of the tender offers. Upon completion of the voluntary tender offer on May 12, 2008, TCO IP had acquired 7,257,020 preferred shares of Telemig Participações and 89,492 preferred shares of Telemig Celular, for a total purchase price of R$463.7 million and R$58.59 million, respectively. On July 25, 2008, TCO IP acquired 3,929 preferred shares of Telemig Celular for an aggregate amount of R$2.57 million, and on September 9 and 10, TCO IP acquired 4,000 preferred shares of Telemig Celular for the aggregate amount of R$2.6 million. Upon completion of the mandatory tender offer on August 15, 2008, TCO IP acquired 5,803,171 common shares of Telemig Participações and 78,107 common shares of Telemig Celular, for an aggregate price of R$732.6 million and R$171.2 million, respectively.

On August 26, 2008, Vivo Participações subscribed to a capital increase in TCO IP in the amount of R$1.149 billion, which was paid-in with the transfer and delivery, at book value, of 7,258,108 common and 969,932 preferred shares held by Vivo in Telemig Participações and Telemig Celular. As a result of this transaction, TCO IP’s share capital increased from R$905.03 million to R$2.05 billion and TCO IP became the direct controlling shareholder of Telemig.

On December 19, 2008, Vivo and Telemig announced the shareholder approval of a corporate reorganization pursuant to which TCO IP S.A. was spun off and incorporated into Telemig Participações and Telemig Celular. As a result of the acquisition from Telpart, the tender offers and the corporate reorganization, Vivo became a holder of 96.994% common shares and 36.177% preferred shares in Telemig Participações and 8.764% common shares and 6.308% preferred shares in Telemig Celular.

Capital Increase

In an extraordinary meeting held on February 12, 2009, our Board of Directors approved a capital increase as a result of the corporate restructuring process involving the Company and its controlled and controlling companies. For tax purposes, the goodwill amortization resulting from this corporate restructuring resulted in an accrued tax benefit in the total amount of approximately R$189.9 million corresponding to the fiscal year ended on December 31, 2008. It also represents the credits held by the controlling shareholder, Portelcom Participações S.A. (“Portelcom”), used to increase the capital stock from approximately R$6.7 billion to R$6.9 billion, with the issuance of 5,819,678 new shares. Of such new shares being issued, 2,124,989 are common shares and 3,694,689 are preferred shares, entitled to preemptive rights as set forth by Brazilian law.

The issue price of R$32.63 per preferred and common share, corresponded to 100% of the weighted average price of the preferred shares during the 10 trading sessions of BM&FBOVESPA, from January 28, 2009 until February 10, 2009, inclusive.

As a result of this capital increase Brasilcel’s holdings in us consisted of 89.56% of our common shares, 48.75% of our preferred shares, representing 63.61% of our total capital.

Corporate Restructuring and Deregistration of Telemig Participações and Telemig Celular

On March 23, 2009, in compliance with and for the purpose of Instructions CVM Nr. 319/99 and 358/02, the Board of Directors of Vivo, Telemig Participações, and Telemig Celular agreed to submit to the shareholders of all

three companies a proposal for a corporate restructuring consisting of the merger of the shares of Telemig Celular into Telemig Participações and of the shares of Telemig Participações into Vivo, with the objective of making Telemig Celular into a wholly-owned subsidiary of Telemig Participações and making Telemig Participações into a wholly-owned subsidiary of Vivo (“ Corporate Restructuring ”).

The purpose of the proposed Corporate Restructuring was to simplify the former organizational structure that comprised three publicly-held companies, two of them with ADRs traded outside of Brazil. The simplified structure reduces administrative costs and allows the shareholders of these three companies to participate in one company with shares traded on the Brazilian and international stock exchanges, thus increasing liquidity and facilitating the unification and standardization of the general administration of the businesses.

At a Special Shareholders’ Meeting held on July 27, 2009, the shareholders of Telemig Participações and Telemig Celular approved the Protocol of Merger of Shares and Instrument of Justification executed on May 29, 2009, which provided for the merger into Telemig Participações of all the shares of Telemig Celular, with the holders of the merged Telemig Celular shares receiving, without any further action by these holders, 17.4 common shares, no par value, of Telemig Participações for each Telemig Celular common share they held and 17.4 preferred shares, no par value, of Telemig Participações for each Telemig Celular preferred share they held, regardless of the class of Telemig Celular preferred shares held, but, as described below, the Telemig Participações shares that they received were exchanged for Vivo shares so that each holder of a Telemig Celular common share or a Telemig Celular preferred share ultimately received, without any further action by the holder, 23.838 Vivo common shares or 23.838 Vivo preferred shares, respectively, plus, in each case, cash instead of any fractional Vivo shares for which the Telemig Celular common shares and preferred shares ultimately were exchanged as a result of the Corporate Restructuring (the “Telemig Merger of Shares”).

On the same date, at a Special Shareholders’ Meeting, the shareholders of the Company approved the Protocol of Merger of Shares and Instrument of Justification executed on May 29, 2009, which provided for the merger into Vivo Participações of the shares of Telemig Participações, including those raised in the Telemig Celular merger of shares described above, with the holders of the merged shares of Telemig Participações receiving, without any further action by these holders, 1.37 common shares, no par value, of Vivo for each Telemig Participações common share they held, and 1.37 preferred shares, no par value, of Vivo for each Telemig Participações preferred share they held plus, in each case, cash instead of any fractional shares (the “Vivo Merger of Shares”).

The mergers of the shares of Telemig Celular and Telemig Participações did not result in any change in the number or types of outstanding shares of these companies or in the terms of any of these shares.  Instead, Vivo became the owner, directly or indirectly, of all of these shares, with Telemig Participações becoming a wholly-owned subsidiary of Vivo and with Telemig Celular becoming a wholly-owned subsidiary of Telemig Participações.  Ultimately, all of the non-controlling shareholders of Telemig Celular and Telemig Participações became Vivo shareholders and each shareholder received the same class of Vivo share (common or preferred) as that shareholder previously held in Telemig Celular or Telemig Participações.

The Corporate Restructuring was submitted to ANATEL for review, but its approval was not required to merge Telemig Celular into Telemig since this part of the Corporate Restructuring plan involves companies of the same economic group. Moreover, such merger was not subject to the approval of CADE - Conselho Administrativo de Defesa Econômica.

The charts below show the simplified organizational charts showing the corporate structure of Vivo, Telemig and Telemig Celular before and after the Corporate Restructuring.

Pre-Restructuring

The organizational chart below shows the corporate structure of Vivo, Telemig, and Telemig Celular after the implementation of the Corporate Restructuring described above. The Corporate Restructuring did not change the final composition of the control of the three companies involved.

Post-Restructuring

The Corporate Restructuring resulted in the following:

·          non-controlling holders of Telemig ADSs received 2.74 Vivo ADSs for each Telemig ADS they held plus cash instead of any fractional ADSs;

·          Vivo became a significantly larger company and more diversified, owning 100% of the capital stock of Telemig, which in turn owned 100% of the capital stock of Telemig Celular. Telemig’s interest in the net book value and net income (loss) of Telemig Celular therefore increased to 100%, and Vivo’s interest in the net book value and net income (loss) of Telemig therefore increased to 100%;

·          the preferred shares and ADSs of Telemig ceased trading on the NYSE on September 28, 2009, and were deregistered under the Exchange Act on December 15, 2009, and Telemig no longer files Annual Reports on Form 20-F or reports on Form 6-K;

·          the common shares and preferred shares of Telemig and Telemig Celular were delisted from the BM&F BOVESPA and deregistered from the CVM on October 16 and 19, 2009, respectively; and

·          the Restructuring allowed holders of common shares and preferred shares of Telemig and Telemig Celular to receive Vivo securities having substantially the same rights as their prior securities but that instead are expected to enjoy greater liquidity than the securities previously held by them.

The holders of common and preferred shares of Telemig and of Telemig Participações and of common shares of Vivo Participações who dissented from the merger of shares of Telemig and of Telemig Participações, were entitled, for a period of 30 days following publication of the minutes of the special shareholders’ meetings of the companies relating to the Corporate Reorganization, to withdraw themselves from the respective companies. The aggregate amount paid by Vivo or its affiliates with respect to all of the withdrawal rights exercised by holders entitled to withdraw from the companies was R$23.3 thousand for 405 shares.

The calculations prepared for the exchange ratios of shares of Telemig for shares of Telemig Participações and of shares of Telemig Participações for shares of Vivo Participações resulted in share fractions which were replaced on the market at auctions held on September 24 and 29, 2009 at BM&FBOVESPA. These over-allotment shares represent 54,169 common shares and 42,595 preferred shares, representing a net value of approximately R$40.95 per common share, and approximately R$43.20 per preferred share, to be paid pro-rata to the fractions held by the shareholders and investors prior to the auctions.

At a Special Shareholders’ Meeting held on November 13, 2009, the actual merger of Telemig Participações into Vivo Participações (as opposed to the merger of the shares) and the subsequent termination of Telemig Participações was approved, the appraisal and prior approval of which was submitted to ANATEL. ANATEL approved the actual merger of Telemig Participações into Vivo Participações on November 4, 2009. As a result of such merger, Telemig Celular became a direct wholly-owned subsidiary of Vivo Participações.

Finally, to further simplify our corporate structure, at a Special Shareholders’ Meeting held on June 1, 2010, the merger of Telemig Celular into Vivo Participações (as opposed to the merger of shares) and the subsequent termination of Telemig Celular was approved, the appraisal and prior approval of which was submitted to ANATEL. ANATEL approved the actual merger of Telemig Celular into Vivo Participações on March 11, 2010. At a Special Shareholders’ Meeting held on November 30, 2009, the inclusion into the corporate purpose of the By-laws of the Company of the activity of providing cellular mobile telephone service was approved in order to enable this merger of Telemig Celular into Vivo. As a result of such merger, Vivo S.A. became the sole direct wholly-owned subsidiary of Vivo Participações.

Post-merger of Telemig Participações and Telemig Celular into Vivo

Corporate Reorganization of Our Controlling Shareholders

A corporate reorganization was carried out on November 16, 2009 between Vivo’s controlling companies, resulting in the actual merger, into Portelcom Participações S.A. (“Portelcom”), of the companies Tagilo Participações Ltda., Sudestecel Participações Ltda., Vivo Brasil Comunicações Ltda. and Avista Participações Ltda., after which the merged companies were extinguished. At this same date, Brasilcel N.V. increased the capital stock

of Portelcom by transferring 1,910,428 common shares of Vivo to Portelcom. Nevertheless, the ultimate shareholding control was not changed and the reorganization does not involve Vivo, but rather only the controlling group companies holding shares in Vivo.

Corporate Reorganization of Telesp and Vivo Participações

On December 27, 2010, our management and the management of Telecomunicações de São Paulo S.A. – Telesp  (“Telesp”) (jointly referred to as the “Companies”), in compliance with and for the purposes of CVM Instructions Nr. 319/99 and 358/02 informed through a notice of material fact, that their respective Boards of Directors had approved a proposal of corporate restructuring consisting of a merger of shares of Vivo in their entirety into Telesp, aiming to unify the shareholding positions of both Companies (“Corporate Restructuring”).

Purpose

Other than the concentration of the shareholding position mentioned above, the Corporate Restructuring aims to simplify the current organizational structure of the Companies, both of which are publicly-held companies listed on BM&FBOVESPA and with American Depositary Receipts (“ADRs”) traded in the United States of America, allowing their respective shareholders to participate in one company with shares traded in Brazilian and foreign stock exchanges, thus providing for greater liquidity. In addition, the Corporate Restructuring will provide rationalization of the cost structure of the Companies and will facilitate the integration of businesses and the generation of synergies arising there from, thus positively impacting the Companies.

Implementation and structure

The managements of the Companies will follow the recommendations provided by Parecer de Orientação CVM nº 35/08 , aiming to contribute to the protection of the interests of the minority shareholders of both companies  and to assure that the transaction observes arms’ length conditions for controlling and minority shareholders in the exchange of shares. Therefore, independent special committees (“ Special Committees ”) were formed with Vivo and Telesp for negotiation of the exchange ratio of shares and to present their opinions regarding other conditions of the Corporate Restructuring that may be proposed, and to subsequently submit their recommendations to the Boards of Directors of the Companies.

The Special Committees have the following composition: (i) in Vivo: Ignacio Aller Malo, a member of the Board of Director; José Guimarães Monforte, an independent member of the Board of Directors; and Antonio Gonçalves de Oliveira, an independent member of the Board of Directors; and (ii) in Telesp: Fernando Xavier Ferreira, a member of the Board of Directors chosen by the majority of the members of the Board; Luciano Carvalho Ventura, a member of the Board of Directors indicated by the non-controlling shareholders; and Claudio Furtado, a third party chosen jointly by the other two members of the Special Committee .

The simplified organization chart below demonstrates the current corporate structure and the corporate structure after the implementation of the Corporate Restructuring described herein.

Current Corporate Structure

Controlling Group

The management of Vivo was informed by its controlling shareholder, Telefónica S.A., that after the corporate reorganization held as of December 21, 2010, as a result of a transaction implemented abroad, Telefónica, S.A. will hold directly the shares of the Brazilian holding companies (Ptelecom, Portelcom and TBS Celular) on the top of the control chain of our Company, which currently are held indirectly by Telefónica, S.A., through the holding Brasilcel, N.V. The proposed merger of shares will not change the composition of the ultimate control of the involved companies. As a result, the direct and indirect controlling shareholder will remain Telefónica, S.A.

Corporate Structure after the merger of shares

The totality of Vivo’s shares will be merged into Telesp, and the holders of the merged shares of Vivo shall directly receive new shares issued by Telesp.

In accordance with the Brazilian Corporate Law, as amended, and with Instruction CVM nº319/99, as well as the bylaws of the Companies, financial advisors and specialized companies will be retained for the preparation of complementary studies regarding the transaction and the preparation of valuation reports for the Companies that shall be used as reference for the determination of the exchange ratio of shares and the increase of capital stock resulting from the merger of shares, as well as for the purpose of article 264 of the Brazilian Corporate Law regarding the exchange ratio between the shares.

Once the valuation and the necessary analyses are finalized and the Special Committees of Vivo and Telesp have given their recommendation to the Board of Directors of the involved Companies, the exchange ratio and the other terms and conditions to be proposed by the Board of Directors of the Companies involved in the Corporate Restructuring will be disclosed to the public by means of a publication of a notice of material fact.  The proposals of the Boards of Directors will be subject to the approval by the shareholders in a general shareholders’ meetings to be held for this purpose, in accordance with the Brazilian Corporate Law and observing the disposition of Instruction CVM N. 319/99 and Parecer de Orientação N. 35/08, as well as the necessary regulatory approvals (as described in Item 4 herein below).    

General Shareholders Meeting’s call and Withdrawal Rights 

In addition to the notice of material fact to be published reflecting more details on the terms and conditions of the Corporate Restructuring that will be agreed as mentioned above, the meeting notice of the respective extraordinary shareholders’ meetings of the companies for voting on the restructuring will be timely published.

The shareholders holding common and preferred shares of Telesp and common shares of Vivo that disagree with the merger of shares of Vivo into Telesp will have, as from the date of the general extraordinary shareholders’ meetings of the Companies that will be called to vote on the Corporate Restructuring, the right to withdraw from the company, by receiving as reimbursement the amount of shares of which they are legitimate holders on the date of the announcement of the notice of material fact regarding the Corporate Restructuring. The value of the reimbursement of the shareholders that dissent from the transaction will be timely disclosed, jointly with the other conditions of the transaction.

Additional Information

The Corporate Restructuring will be submitted to ANATEL. The general shareholders meeting that shall vote on the corporate restructuring is also subject to approval by the SEC, in view of the trading of the companies’ ADRs on the New York Stock Exchange.

Before the corporate restructuring, the Brazilian entities TBS Celular Participações Ltda., Portelcom Participações S.A. and PTelecom Brasil S.A. (jointly, the “Holdings BR”) will be merged into Vivo. The Holdings BR currently have as their main asset the shares of Vivo Part and are controlled by Telefónica S.A.. The merger of Holdings BR will not result in any change in the number and the composition of classes of shares of Vivo, and shall not affect the current participation of the shareholders of Vivo.

Dividends and Interest on Shareholders’ Equity

Year ended December 31, 2008

In compliance with our by-laws, the general shareholders meeting on March 19, 2009 approved the payment of dividends in a total amount of approximately R$402.6 million). Such dividends, declared on the basis of the 2008 closing balance sheet, include the interest on shareholders’ equity ( Juros Sobre o Capital Próprio - “JSCP”) in the approximate net amount of R$136.9 million, as approved at a meeting of the Board of Directors of the Company held on December 17, 2008, and dividends in the amount of approximately R$265.7 million.

This amount results in an aggregate of interest on shareholders’ equity ( Juros Sobre Capital Próprio or “JSCP”) plus net dividends of approximately R$1.10 per common or preferred share. The above mentioned amounts were paid on December 2, 2009.

Year ended December 31, 2009

In compliance with our by-laws, the Board of Directors meeting held on February 9, 2010 approved the payment of dividends in the approximate amount of R$818.9 million. Such dividends, declared on the basis of the 2009 closing balance sheet, include the interest on shareholders equity (“JSCP”) in the approximate net amount of  R$88.5 million, as approved at the Board of Directors meeting held on December 14, 2009,  and dividends in the amount of approximately R$730.3 million. The above mentioned dividends were paid in two equal payments, on April 19, 2010 and October 25, 2010.

Year ended December 31, 2010

In compliance with our by-laws, the Board of Directors meeting held on February 18, 2011 approved the payment of dividends in the approximate amount of R$2,290.8 million. Such dividends, declared on the basis of the 2010 closing balance sheet, include the interest on shareholders equity (“JSCP”) in the approximate net amount of  R$187.0 million, as approved at the Board of Directors meeting held on December 17, 2010,  and dividends in the amount of approximately R$2,103.8 million. The dividends and interest on shareholders’ equity will be paid  until December 21, 2011.

This amount results in an aggregate of interest on shareholders’ equity ( Juros Sobre Capital Próprio or “JSCP”) plus net dividends of R$5.732990078 per common or preferred share.

Capital Expenditures

The primary focus of our capital expenditure program has been, and continues to be, the improvement of the capacity and quality of the services we currently offer and the provision of new services as well as the development of information systems.

The following tables set forth our total capital expenditures for the companies and periods indicated:

(1)   The financial information presented for 2009 and 2010 represents information from Vivo’s consolidated financial statements. 

(2)   Consisting primarily of free handset rentals, network construction, furniture and fixtures, office equipment and store layouts.

Our capital expenditure estimate for 2011 is approximately R$3.5 billion, which includes investments in network expansion, introduction of products and services that aim at maximizing the use of cellular telephony, as well as seeking ways to constantly improve the quality of services provided to our customers and acquiring additional licenses for radio frequency as a result of the public biding carried out by ANATEL in December 2010, to be delivered and paid during 2011.

We intend to fund these capital expenditures mostly with cash generated from operations. See “Item 5.B.—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

B.    Business Overview

According to data regarding market share published by ANATEL, we are among the leading providers of cellular telecommunications services in Brazil, with the help of our subsidiary Vivo S.A., the leading cellular operator in Brazil. Vivo S.A. is a cellular operator in the states of Acre, Alagoas, Amapá, Amazonas, Bahia, Ceará, Espírito Santo, Goiás (also encompassing the area of Distrito Federal , or the Federal district), Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Roraima, Santa Catarina, Săo Paulo, Sergipe, Tocantins and in Minas Gerais we provide direct cellular telecommunications services.

In Areas 1 and 2, Vivo S.A. uses a frequency range known as “A”, “L” and “J” band that covers 100% of the municipalities in its authorized areas in the state of São Paulo. On December 31, 2010, Vivo S.A. had 17,2 million cellular lines in service in these areas, which represented a 9.5% increase from December 31, 2009, and a market share of approximately 34.1% in São Paulo.

In Area 3, Vivo S.A. uses the band “A”, “L” and “J” frequency range that covers 100% of the municipalities and 100% of the population in the states of Rio de Janeiro and Espírito Santo. On December 31, 2010, Vivo S.A. had 8.6 million cellular lines in service in this area, which represented a 11.7% net increase from December 31, 2009, and a market share of approximately 39.1% in those states.

In Area 4, Vivo uses a frequency range known as “A”, “E” and “J” band that covers 71.5% of the municipalities and 92.3% of the population in the state of Minas Gerais. On December 31, 2010, Vivo had 6.8 million cellular lines in service in this area, which represented a 14.2% net increase from December 31, 2009, and a market share of approximately 33.5% in Minas Gerais.

In Area 5, Vivo S.A. uses a frequency range known as “B” band that covers 66.6% of the municipalities in the states of Paraná and Santa Catarina and 93.7% of the population of Paraná and Santa Catarina. On December 31, 2010, Vivo S.A. had 4.0 million cellular lines in service in this area, which represented a 11.3% net increase from December 31, 2009, and a market share of approximately 22.0% in those states.

In Area 6, Vivo S.A. uses the band “A”, “L” and “J” frequency range that covers 81.1% of the municipalities and 97.6% of the population in the state of Rio Grande do Sul. On December 31, 2010, Vivo S.A. had 5.3 million cellular lines in service in this area, which represented a 13.8% net increase from December 31, 2009, and a market share of approximately 42.8% in that state.

In Areas 7 and 8, Vivo S.A. is the leading cellular operator, by number of customers, in its authorization area and uses a frequency range known as “A”, “B”, “L” and “J” band that covers 54.8% of the municipalities in the states of Acre, Distrito Federal, Goiás, Mato Grosso, Mato Grosso do Sul, Rondônia,  Tocantins, Amazonas, Amapá, Maranhão, Pará and Roraima which covers 84.3% of the population in these states. On December 31, 2010, Vivo S.A. had 12.2 million cellular lines in service in these areas, which represented a 25.6% net increase from December 31, 2009, and a market share of approximately 34.1% in those states.

In Area 9, Vivo S.A. uses the band “A”, “L” and “J” frequency range that covers 59.8% of the municipalities and 85.8% of the population in the States of Bahia and Sergipe. On December 31, 2010, Vivo S.A. had 4.4 million cellular lines in service in this area, which represented a 24.2% net increase from December 31, 2009, and a market share of approximately 30.2% in those states.

In Area 10, Vivo S.A. uses the band “L” and “J” frequency range that covers 22.9% of the municipalities and 64.4% of the population in the States of Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte. On December 31, 2010, Vivo S.A. had 1.8 million cellular lines in service in this area, which represented a 106.8% net increase from December 31, 2009 and a market share of approximately 6.0% in those states. 

On September 18, 2007, with ANATEL’s approval, Vivo acquired the band “L” lots, except for lot 16 (area of Londrina PR in region 5) and lot 20 (area of Northern Brazil in region 8). Band “L” comprises lots in frequency ranges 1895 to 1900 Mhz and 1975 to 1980 Mhz, with 5 + 5 Mhz band width. As a result, Vivo managed to complete its last coverage gap and will soon be operating in the entire Brazilian territory. On December 20, 2007, with ANATEL’s approval, Vivo acquired the band “J” lots with 10 + 10 Mhz band width, with the exception of the lots in the state of Minas Gerais then acquired by Telemig Celular and now by Vivo.

Our Operations

The following tables set forth information about Vivo’s cellular telecommunications base, coverage and related matters at the dates and for the years indicated.

(1)   Churn is the number of customers that leave us during the year, calculated as a percentage of the simple average of customers at the beginning and the end of the year.

(2)   Projections based on estimates of the Instituto Brasileiro de Geografia e Estatística (IBGE).

(3)   Number of people within our region that can access our cellular telecommunications signal.

(4)   Percentage of the population in our region that can access our cellular telecommunications signal.

(5)   Number of cellular lines in service in our region, including those of our competitors, divided by the population of our Region.

(6)   Percentage based on all lines in service in our region at year-end.

Our Services

Before November 1998, our network used only AMPS analog technology. After the privatization of the Telebrás System, we began to use CDMA and TDMA digital technologies. In 2006, we began the implementation of a GSM network. In 2007, we began the implementation of a WCDMA network. Digitalization offers certain advantages, such as greater network capacity and additional revenue through the sale of value-added services. We continue to increase our network capacity and coverage to improve our quality of service and to meet customer demand.

We provide voice and ancillary value-added services, including voicemail and voicemail notification, call forwarding, three-way calling, caller identification, short messaging, limitation on the number of used minutes, cellular chat room, and data service such as wireless application protocol service through which clients can access WAP sites and portals. We offer direct access to the Internet through Data cards designed to connect compatible PDAs (Personal Digital Assistant, a handheld device that combines computing, telephone/fax, Internet and networking features) and laptops or cellular phones by a cable connection that offers corporate subscribers secure access to their intranet and office resources. We also offer some new services like Multimedia Message Service and MExE (Mobile Execution Environment), which enables the wireless device to download applications and execute them on the mobile along with a user interface that contains icons on the wireless device to identify the main services (such as Voice Mail, Downloads and text messaging (SMS) for easier access to our services.

We offer wireless roaming services through agreements with local mobile service providers throughout Brazil and other countries, allowing our subscribers to make and receive calls while outside of our concession areas.  We provide reciprocal roaming rights to the customers of the mobile service providers with which we have such agreements.

We also offer certain interactivity services with radio and television providers, allowing clients to listen to radio stations and watch TV channels at no additional cost.

In 2007, we launched:

“Vivo Pós + Speedy”—first major marketing initiative with Telefonica Brazil offering billed customers and Speedy (ADSL broadband service) customers a one year complimentary offer (free fixed-to-mobile and mobile-to-fixed calls during weekends) upon the purchase of a loyalty contract;

“Positivo Partnership”—exclusive agreement with the largest computer manufacturer in Brazil, Positivo Informatica, regarding several marketing initiatives to be conducted together with VIVO’s Internet Services, including various commercial bundles, special data plans, customized notebooks and trade marketing initiatives;

“Vivo em Ação 4”—the fourth edition of the first alternative multi-platform real ity game released by us in 2004 where players can use SMS, voice portal, WAP and other platforms to complete a mission and earn prizes;

“Leilão Vivo”—the first white label multi-interface reverse auction released in Brazil by a mobile operator;

“Vivo Play Dual Delivery”—an improvement to Vivo’s music download service allowing the user to download a track on a mobile phone and a computer with a single purchase;

Search and mobile marketing agreements signed with Yahoo;

A new WAP Portal (presently available only for Vivo employees but soon to be available for all clients);

A new Smartphone portal (presently available only for BlackBerry devices but soon to be available for all smartphones);

“EU VIVO CINEMA”—a Wapsite with information and downloadable contents about movies and the cinema;

“Music Phones”—first-ever launch in Brazil of music phones with embedded content;

“BlackBerry”—launch of BlackBerry®, a popular email solution for individuals and businesses;

“Vivo Avisa”—roll-out of the service “Who Called,” which can now be acquired by any Vivo customer; and

A translation center available for tourists during the Pan American Games in Rio de Janeiro in 2007.

In 2008, we launched:

“TV Digital”—exclusive handsets offered by Vivo in one of Brazil’s first offerings of no-pay TV services available from any location in Brazil;

“Rede 3G”—a high-speed and quality-signal third-generation wireless network;

“iPhone 3G—the latest generation iPhone for which existing Vivo customers were given priority to purchase;

“Vivo Windows Live” —access to Microsoft’s Messenger, Hotmail and Spaces applications;

“Vivo Residencial”—a telephone terminal for home use, similar to a traditional fixed line, but portable, with no installation required, and offering economical rates for all household users;

“Vivo 4 em 1”—combining four services in one package—pay TV, fixed-line calling packages, post-paid wireless calling plans and 3G mobile service (available only in certain areas);

“Vivo Play”—a leading digital music shop in Latin America, with more than 300,000 songs purchased monthly; and

“Vivo Co-Piloto”—a leading navigation service available in 152 cities in Brazil and compatible with four smartphone models, that was honored by InfoExame magazine as the best mobile phone navigation service available in Brazil.

In 2009, we launched:

“Vivo Twittando” – a social networking and micro blogging service that enables its users to send and receive tweets via the Short Message Service (SMS);

“Open Vivo” – a platform that developers can use to create and sell software in Vivo Download Store;

  ”Vivo Alerta Email” – an email notification solution with the option of setting up personal accounts on mobile phones to receive the notification by SMS or WAP Push;

 ”Vivo Foto Notícia” – a combination of mobile communication and a traditional newspaper that provides users flexibility to read newspapers on their mobile phones;

“SDP” – a platform that simplifies the implementation of new products and services; this project is part of a joint project between Telefonica and Vivo;

“Vivo Mobile TV” – a mobile TV service allowing the client to watch TV on their mobile phone;

“Kantoo English”  – an exclusive mobile learning platform focused on a basic English course for beginners, with reading, writing and verbal communication; with this application, Vivo launched the concept of mobile learning, which will help to better prepare our customers for the workplace and for their personal activities;

“Number portability” – a common project with other operators which allows the possibility of changing operators without changing the clients’ phone number;

“Videocall service” – a service that allows transmission of voice and image in real time;

“Vivo Me Liga” – a service that allows users without credit on their phones to ask others - via SMS – to call them;

“Vivo Transferência de Crédito” – a service that enables users to transfer pre-paid credit to other Vivo customers;

“Co-branded Credit Card – with Itaú” – a credit card issued by Banco Itaú that gives benefits to Vivo customers;

“Insurances Partnership - with Santander” – a line of insurance policies developed by Santander and sold exclusively to Vivo customers;

“Prepaid Internet” – a service that provides internet connectivity through three different packages – daily, weekly and monthly.

In 2010, we launched:

“Torpedo Center” – an application that allows the customer to manage SMSs, including  features such as back-up, custom signature and notification of temporary absence;

“Torpedo Mania” – a promotion with different hourly tariffs for SMSs;

“Torpedão Campeão” – a sales promotion during the 2010 World Cup that offered a package of 30 SMSs for R$ 4.00 plus taxes, with a daily lottery. The promotion had the participation of the four biggest operators in Brazil and was communicated in TV Globo , mainly in the Domingão do Faustão Sunday show;

“Torpedo Show” – a Vivo exclusive sales promotion that occurred during third quarter of 2010, that offered  a package of 10 SMS for R$ 2.99, with daily lottering;

“Pacote de 30 SMS/MMS” – launch of a package of 30 SMS or MMS, with a R$ 4.90 fee;

“Loja de Serviços Vivo” – launch of a interactive menu via SMS (1515) or WAP, where the customer has access to all Vivo’s VAS (Value Added Service) package offers;

“Kantoo Voz, SMS e Online” – development of mobile learning platform for the English language learning that uses SMS, voice and Internet access;

“Plataforma de Desenvolvedores Vivo” – an initiative to boost innovation in what concerns the development of mobile applications. Creates  an ecosystem of development that allows developers to reap the benefits of an innovative, open new markets and generate new business opportunities, and broaden the application offerings to customers;

“Portal FIFA”- an exclusive offer to Vivo´s customers with the 2010 World Cup and previous tournaments content for download to mobile handsets. During the World Cup, all customers that signed up for the service received the goals of his/hers favorite team in almost real time;

“Códigos 2D” – an application that allows customers to read 2D codes. During 2010, Vivo performed initiatives with Editora Abril in magazines such as Super Interessante and Veja in order to spread the adoption of the application.

Our Region

Vivo provides mobile telecommunications services in all of the Brazilian states in addition to the Distrito Federal , the Federal district, representing a total of approximately 8.5 million square kilometers and a population of approximately 191.5 million people. Vivo became a national operator when, on September, 2007, acquired a license of 1.9 GHz (“L” band)  to operate within 6 states located in the Northeast region (Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte),combined with the acquisition of Telemig, (as mentioned in “—Acquisition of Telepart, Telemig and Tele Norte”).

On April 29, 2008, Vivo signed the Terms of Authorization for using the sub-ranges of  radio frequency J, also known as Third Generation (or 3G) frequency, acquired as a result of the auction realized by ANATEL on December 18, 2007.

In the auction of frequencies of H Band and other remaining bands by Anatel in December 14 and 15, 2010, in compliance with the call notice No 002/2010/PVCP/SPV, Vivo S.A. was the winner in 23 of the blocks auctioned. The agreements related to the frequencies we acquired in this auction have not yet been executed.

As a result, Vivo will improve its capacity of rendering of services throughout the national territory and will operate in the 900MHz and 1,800MHz frequencies in a broad way.

The table below lists the 23 blocks in which Vivo had the winning offer:

(1)   Municipalities: Altinópolis, Aramina, Batatais, Brodo w squi, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guaíra, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria and São Joaquim da Barra, in the São Paulo state.

(2)   CN = Municipalities with the National Select Code.

(3)   Except Paranaíba municipality, in the MS state, and Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the GO state. 

The following table sets forth population, gross domestic product (GDP), and per capita income statistics for each state in Vivo’s service regions at the dates and for the years indicated:

(1)   According to the last revision published by IBGE in 2009.

(2)   According to the most recent IBGE data (2008). Nominal Brazilian GDP was R$3,031,864 million as of December 2008 calculated by IBGE, subject to revision.

Marketing and Sales

We closely follow the developments in the markets where we operate and constantly launch new promotions and advertising campaigns. All communications efforts reinforce our commitment to maintaining a superior level of quality in the products and services offered to our customers.  A strong customer acquisition objective and increased voice and data usage objective have been implemented across all of the company’s operators through mass sales promotions and segmented actions. Efforts to acquire new customers for prepaid and billed services have mostly been made through joint promotions designed to increase intranet traffic and stimulate the use of data services.

With the premise of keeping a sustainable customer base, the acquisition promotions have also been open to current customers who wished to change their cell phones. We are actively involved in a high-value customer loyalty program by offering discounts on cell phones and services through direct marketing actions.

On December 31, 2010, Vivo possessed 332 sales outlets (89 in São Paulo, 46 in the states of Rio de Janeiro and Espírito Santo, 35 in the state of Rio Grande do Sul, 37 in the states of Paraná and Santa Catarina, 21 in the states of Bahia and Sergipe, 29 in the states of Minas Gerais, 7 in the states that make up the northwest regions of Brasil and 66 in the states that make up the Midwestern and northern regions of Brazil). It also has an efficient network of 10,821 authorized retail and resale dealerships.  Consequently, Vivo has maintained its market leadership position, with a total of 11,153 points of sale.

Prepaid telephone card recharging was available at more than 550,000  locations, including our own stores, dealers, lottery shops, physical and online card distributors, and at smaller shops, drugstores, newspaper stands, book stores, bakeries, gas stations, bars and restaurants. Recharging is also provided online by several banks’ websites, by credit card’s machines and by telephone.

Customer Service

In 2010, Vivo managed to consolidate and expand the personalized sales project to all remote consumer relation channels, such as text message, chat, e-mail and web. This practice had been put in place at inbound customer service in 2009, and consists of exclusive offers that are tailored towards each client’s consuming habits and needs. This way, Vivo achieved the goal of turning inbound customer service into a powerful sales tool, that generated new business opportunities while capturing the times in which the customer initiated contact and respecting their willingness to communicate with Vivo.

In 2010, Vivo posted record numbers in electronic customer service. With the release of the new www.meuvivo.com.br portal, Vivo’s clients registered 40 million logged in sessions and 198 million on-line transactions, of which 6 million represented the business segment alone. Through the “Fale Conosco” service, 100,000 email-generated solicitations were solved. Driven by the goals of innovation and customer satisfaction, Vivo released to the southern regional its text-message-based customer service channel in November 2010. In two months, this channel reached 500,000 contacts served.

We continue to be the top telecommunications company in ANATEL’s ranking of mobile operators in Brazil. At the end of 2010, ANATEL’s ranking demonstrated that Vivo had the best performance among the largest companies operating in Brazil as measured by the IDA (Attendance Performance Index). Vivo also placed as the best among the key players in the telecom industry by having the smallest complaint ratio. Those numbers were supported by Vivo’s actions towards quality and expansion of the customer service channels.

Our challenge in 2011 is the implementation of customer relationship interaction model using all contact channels (Internet, SMS, Call Center – inbound and outbound, Chat, Email, etc.) through the Genesys platform. Also, improve customer support processes in every channel in order to get closer to the customers and their needs, considering all aspects of Brazil’s demography and regional distribution.

Higher quality, with lower cost

We implemented a strategy to increase the quality of our services while lowering costs.  While achieving the best signal quality, surpassing all of our competitors (according to ANATEL’s scoring system in 2010), we also took steps designed to improve the level of service of our customer care, generate greater customer satisfaction with our call centers and stores and reduce billing errors, leading to fewer claims against us. This strategy has been successful in increasing our customer satisfaction rating in 2010 and in lowering costs.

Our Network

Before November 1998, our network used only AMPS analog technology. After privatization, we began to use CDMA digital and TDMA digital technologies. In 2006, we began to implement a GSM Network. In 2007, we began to implement a WCDMA Network. Digitalization offers certain advantages, such as greater network capacity and additional revenue through the sale of value-added services. We continue to increase network capacity and coverage to improve our quality of service and to meet customer demand. By December 31, 2010, Vivo S.A.’s telecommunications network in the state of São Paulo, which provided CDMA digital, GSM digital and WCDMA digital services, covered 100% of the municipalities.

Vivo S.A.’s network is connected primarily through radio transmission system and a fiber-optic of our own and leased mainly from Telecomunicações de São Paulo S.A., or Telesp. The network consists of cellular switches, base stations and other network elements such as voicemail, prepaid service, short message service, home location registers, signaling transfer point, PDSN and gateways. Vivo S.A.’s main suppliers in the state of São Paulo are NEC do Brasil S.A., Nortel Networks—Northern Telecom do Brasil, Motorola do Brasil Ltda., Lucent Technologies do Brasil, Ind. e Com. Ltda., Huawei do Brasil Telecomunicações Ltda. and Ericsson Telecomunicações S.A.

Vivo S.A. began its activities in the states of Paraná and Santa Catarina (“Vivo PR/SC”) in December 1998 and, until 2005, offered services only through CDMA digital technology. As of December 31, 2010, the telecommunications network in PR/SC, which provided CDMA digital, GSM digital and WCDMA digital services, covered 66.62% of the municipalities, or 93.74% of the population, in its region. The PR/SC network is primarily connected by radio transmission system and a fiber-optic network of its own and  leased mainly from fixed operating companies (Brasil Telecom) and Copel—Companhia Paranaense de Energia S.A. The network consists of cellular switches, base stations and other network elements, such as home location registers, signaling transfer points and gateways. Vivo S.A.’s main suppliers in PR/SC are Motorola do Brasil Ltda. (presently Motorola Industrial Ltda. and Motorola Services Ltda.), Huawei do Brasil Telecomunicações Ltda., Alcatel Telecomunicações S/A and  Ericsson Telecomunicações S.A.

As of December 31, 2010, Vivo S.A. in the Midwestern and northern regions (“CO/N”) provided WCDMA digital, CDMA Digital and GSM digital services, covering 59.36% of the municipalities, or 85.88% of the population in its region. Our network is connected primarily through radio transmission system and a fiber-optic and of our own and leased from incumbent wire line companies. The network consists of cellular switches, base-stations and other network elements such as voicemail, prepaid service, home location registers and signaling transfer points. Vivo S.A.’s principal suppliers in CO/N are Nortel Networks—Northern Telecom do Brasil, Motorola do Brasil Ltda. (presently Motorola Industrial Ltda. and Motorola Services Ltda.), Huawei do Brasil Telecomunicações Ltda. and Ericsson Telecomunicações.

As of December 31, 2010, the telecommunications network of Vivo S.A. in Bahia and Sergipe (“BA/SE”) covered 63.01% of the municipalities, or 86.91% of the population, of its region.  Its network provided WCDMA digital, CDMA digital and GSM digital services. The network is connected primarily through radio transmission system and a fiber-optic network of our own and leased mainly from Tele Norte Leste Participações S.A., or Telemar. It also includes cellular switches, base stations, and other communication devices such as prepaid service, signaling transfer point, home location registers and gateways. Vivo S.A.’s main suppliers in BA/SE are NEC do Brasil S.A., Ericsson Telecomunicações S.A., Nortel Networks—Northern Telecom do Brasil, Motorola Industrial Ltda., Motorola Services Ltda., Huawei do Brasil Telecomunicações Ltda. and Lucent Technologies do Brasil, Ind. e Com. Ltda. 

As of December 31, 2010, the telecommunications network of Vivo S.A. in the states of Rio de Janeiro and Espírito Santo covered 100% of the municipalities in its area.  Its network provided WCDMA digital, CDMA digital and GSM digital services. This network is connected primarily through radio transmission and a fiber-optic system of our own and leased mainly from the incumbent wire line companies. The network consists of cellular switches, base stations and other communication devices such as voicemail, prepaid service, short message service, home location registers, signaling transfer points, PDSN and gateways. Vivo S.A.’s principal suppliers in these states are Nortel Networks—Northern Telecom do Brasil, Ericsson Telecomunicações S.A., Huawei do Brasil Telecomunicações Ltda. and Lucent Technologies do Brasil, Ind. e Com. Ltda.

As of December 31, 2010, Vivo S.A.’s network in the state of Rio Grande do Sul (“RS”) provided WCDMA digital, CDMA digital and GSM digital, covering 81.05% of the municipalities, or 97.57% of the population, of this region.  The RS network is connected primarily through radio transmission and a fiber-optic system of our own and leased mainly from Brasil Telecom.  The network consists of cellular switches, base stations and other communication devices such as signaling transfer point, home location registers and gateways. Vivo S.A.’s principal suppliers in RS are Nortel Networks—Northern Telecom do Brasil, Huawei do Brasil Telecomunicações Ltda., and Ericsson Telecomunicações S.A.

As of December 31, 2010, Vivo S.A.’s network in the northeast regions (“NE”) provided WCDMA digital and GSM digital services, covering 34.65% of the municipalities, or 71.26% of the population, of this region. The NE

network is connected primarily through radio transmission and a fiber-optic system of our own and leased mainly from the incumbent wire line companies.  The network consists of cellular switches, base stations and other communication devices such as signaling transfer point. Vivo S.A.’s principal suppliers in NE are Huawei do Brasil Telecomunicações Ltda. and Ericsson Telecomunicações S.A.

As of December 31, 2010, Vivo’s network in the state of Minas Gerais (“MG”) provided WCDMA, GSM digital, TDMA digital services and AMPS analog services (of which the last two have been gradually phased out), covering 71.51% of the municipalities, 92.31% of the population, of this region. The MG network is connected primarily through radio transmission and a fiber-optic system of our own and leased mainly from the incumbent wire line companies.  The network consists of cellular switches, base stations and other communication devices such as voicemail, prepaid service, short message service, home location registers and signaling transfer point. Vivo S.A.’s principal suppliers in MG are Nortel Networks—Northern Telecom do Brasil, Huawei do Brasil Telecomunicações Ltda., and Ericsson Telecomunicações S.A.

Our advanced network management technology ensures global management and supervision of all our network processes and network performance. The network management centers are located in São Paulo, Brasilia and Minas Gerais. The network management center of São Paulo monitors the critical network operational parameters of the countrywide transmission backbone, third parties’ networks, IP networks and service platforms. The network management center in Brasília monitors the critical network operational parameters in the Midwestern Region (CO), Rio de Janeiro, Espirito Santo, Rio Grande do Sul and Paraná/Santa Catarina. The network management center in Minas Gerais monitors the critical network operational parameters in the Northeastern region (NE), the Northern region (NO), Bahia, Sergipe, São Paulo and Minas Gerais. These centers are able to identify abnormalities in both our network and in third parties’ networks, using failure and signaling monitoring systems. In addition, quality and service standards are constantly monitored. The network management centers are integrated with maintenance and operations teams that maintain and operate cellular network elements, as well as cellular infrastructure and transmission, in addition to the radio network elements and computing bases, service platforms and communications backbones.

Our network is prepared to provide continuity of service for our customers in the event of network interruptions. We have developed contingency plans for potential catastrophes in our switching centers, power supply interruptions and security breaches.

Pursuant to the terms of our authorization to perform our services, we are obligated to meet certain requirements for service quality. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”

Sources of Revenue

We generate revenue from:

·          usage charges, which include measured service charges for calls, monthly fee and other similar charges;

·          interconnection charges (or network usage charges), which are amounts we charge other cellular and fixed-line service providers for the use of our network;

·          the sale of wireless devices and accessories; and

·          other charges, including charges for call forwarding, call waiting, text messaging (SMS), call blocking and Data Services, such as WAP and ZAP, downloads and MMS services, which are charged only when the customer’s plan does not include these services.

Our rates are subject to approval by ANATEL. See “—Regulation of the Brazilian Telecommunications Industry.”

The table below sets forth total net operating revenues in our operating subsidiary and us for the last two years.