Will Portugal Telecom accept Telefonica's offer for Vivo?
Telefonica increased to 6.5 billion euros its offer for Portugal Telecom's share at Vivo. Portugal Telecom (PT) owns 50% of the Group which controls 59.4% of Vivo's capital (88.9% of the ordinary shares and 44.1% of the preferential ones). The market cap of this PT participation at Vivo reached 2.4 billion euros in the 1st quarter of 2010 (1Q10).
Unlike what happened in January, PT didn't refuse the offer right away and booked a meeting with the shareholders on June 30th 2010 to analyze de offer. Considering that this offer represents 85% of Portugal Telecom's market cap (7.6 billion euros).
The most probable is that, after a long negotiation (PT trying to increase the value offered by Telefonica to the maximum), the companies will close the deal.
The purchase will allow Telefonica to integrate their fixed and mobile operations in Brazil, like what is happening to Oi and Claro/Embratel (more details).
Telefonica's option for Vivo also excludes the possibility of buying Tim in Brazil. It raises doubts about the permanence of Telefonica among Telco's owners (Telco is the group which controls Telecom Italia). According to Bloomberg News article, Marco Fossati, who is the second major shareholder at Telco, declared that in face of the offer for Vivo, "it doesn't make sense for Telefonica to remain as one of Telecom Italia's controllers since Telefonica has a strategy that is in conflict with Tim's strategy in Brazil".
What can Portugal Telecom do after selling its participation at Vivo?
Most likely, PT will try to purchase other operator in order to replace Vivo. In 1Q10, Vivo represented 49.8% of PT Group's net revenue and 40.5% of the EBITDA. The main options in Brazil would be acquiring participation at Oi or Tim.
PT tried, in 2007, to acquire participation at Oi. The company may return to this alternative now. Oi has gotten low market cap (5.3 billion euros) and is indebted due to the acquisition of BrT (net debt reaches 8.8 billion euros in 1Q10). However, PT will have to pay an expensive price to persuade shareholders to share operator's control with another partner.
Tim would be another option, but PT will hardly get to purchase Tim in Brazil. For Telecom Italia it isn't interesting to dispose of this asset and Tim's market cap reached 6.2 billion euros in May. Selling part of the participation in Tim Brasil to PT can be, however, a good option to Telecom Italia which has net debt of 33.3 billion euros.
Another possibility to PT would be replacing Telefonica at Telco, Telecom Italia's controller. Telefonica paid 2.3 billion euros for 42.3% of Telco in Oct/07.
Telefonica can, however, require during the negotiations that PT stay out of the Brazilian market for some time, since the company has access Vivo's confidential data.
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