IHS Global Insight Perspective | |
Significance | The latest chapter in the Telefónica– Portugal Telecom story has closed with Telefónica refusing to countenance a further extension of a deadline on talks over the Brazilian mobile joint venture, Vivo. |
Implications | Telefónica will have to pursue alternative measures to gain control of Vivo as it aims to consolidate the operation with its fixed-line business, Telesp, and improve its competitive position while also building access to a strong market potential. |
Outlook | Telefónica will likely dissolve the joint-venture agreement through arbitration and then look to acquire a majority stake from the 40% of stock openly traded on the markets. |
Portugal Telecom (PT) ended a board meeting on 16 July 2010 without deciding whether to accept the 7.15-billion-euro (US$9.3 billion) offer from Telefónica for its 50% stake in the Brasilcel joint venture that owns a 60% majority stake in Brazilian mobile operator Vivo. Telefónica has ruled out an extension of the offer, which had been accepted by shareholders, only to be blocked by the Portuguese government using its’ golden shares. These in turn have since been deemed illegal by the European courts as it breaches rules on free movement of capital (see Portugal-Brazil: 8 July 2010: Portuguese Golden Shares in Portugal Telecom Struck Down by European Court of Justice).
PT requested an extension of the offer deadline to 28 July 2010, noting that discussions had “progressed in a constructive manner” and that “PT’s board of directors is committed to use its best endeavours to conclude them in a way that satisfies all parties”. However, Telefónica appears to have been unmoved by these entreaties. It stated, "Since the board of directors of PT has not accepted the offer within its deadline, such offer has expired.” The deadline had already been extended after the Portuguese government's move to use its golden shares to block the deal (see Brazil: 1 July 2010: Portuguese Government Uses Golden Share to Block Telefónica's Offer for Vivo).
Outlook and Implications
Telefónica faces mature domestic and European markets, as well as pressure in the Brazilian fixed-line market where it owns Telesp. The Brazilian mobile market offers good growth prospects and Telefónica aims to consolidate its Telesp fixed-line operations with the mobile operator to generate significant synergies as it faces out competition from América Môvil. However, with a similarly sluggish domestic market—and without the international depth of Telefónica—PT and the Portuguese government view the stake in Vivo as vital to the future growth prospects of the business, with significant potential in the Brazilian mobile market. The Portuguese government also sees strategic benefits in maintaining a stake in a major business in the large Portuguese-speaking country and had lobbied local investors to reject the deal. When this failed and Telefónica's improved—and widely considered generous—offer was approved by 73.9% of PT shareholders, the government was forced to use the golden shares (see Europe – Brazil: 30 June 2010: Telefónica Sweetens Its Offer for Vivo to US$8.78 Bil.)
Despite the golden shares being struck down by the European courts as contrary to rules on the free movement of capital, Reuters reported on 16 July that the government would not change its position unless the offer was amended. Cabinet Minister Pedro Silva Pereira noted that "the government has already manifested its opposition to the offer and if it is not altered, naturally the government's position cannot change". However, Pereira also noted that the government was not directly involved in the board-level negotiations between the companies. Enforcement actions could take months, with a final resolution potentially taking 18 months or more to conclude.
Telefónica is now likely to pursue alternative routes to gain a majority stake in Vivo. This would involve dissolving the Brasilcel joint venture through arbitration and acquiring the shares available on the stock market where 40% of its stock is publicly traded (see Brazil: 13 July 2010: Telefónica Mulls Dissolving Brasilcel JV to Grease Vivo Buyout—Report). There have also been threats that Telefónica would consider an outright hostile bid for PT if its efforts were stymied.