Portugal blocks Vivo sale, court battle looms

LISBON, PORTUGAL: Portugal vetoed the sale of Portugal Telecom's (PT) stake in Brazilian unit Vivo on Wednesday, stoking corporate governance fears and setting up a possible court showdown.

Lisbon's decision to block the sale by using its so-called "golden share" came after PT shareholders overwhelmingly accepted a sweetened 7.15 billion euro ($8.8 billion) offer from Spanish partner Telefonica.

It was the first time the government had used the golden share and surprised some, especially as Portugal is still struggling to attract foreign funds during the euro zone debt crisis and is seeking to maintain investor confidence.

In a statement later on Wednesday, Telefonica said it considered the use of the "golden share" illegal and added that it had given PT shareholders until July 16 to accept the offer.

Tim Daniels, an analyst at London brokerage Olivetree Securities, said: "This (government intervention) is an indication that not only is Portugal Telecom not for sale, but you as a shareholder have no say over what happens to this company.

"This demonstrates a lack of corporate governance in Portugal, which can be considered a graveyard for M&A," Daniels added.

Shares in PT slumped when trade resumed after a suspension, dropping 5.3 percent to 7.862 euros, but closed down 1.45 percent at 8.3 euros. Shares in Telefonica closed up 0.96 percent at 15.255 euros.

"We had not expected this," said an analyst at the telecoms unit at ING, whose fund management arm is a shareholder in both Telefonica and PT. "The company (PT) has been telling shareholders that in this situation the golden share could not be utilized."

PT shareholders had voted by 74 percent to support the sale versus 26 percent against.

While the government had given no indication ahead of the vote that it planned to exercise its veto, the head of the shareholder assembly, Antonio Menezes Cordeiro, said the veto was valid.

"They can try to challenge it but I don't see any reason for it," he told journalists. "The golden share is not illegal."

Socialist Prime Minister Jose Socrates has said repeatedly in recent weeks that Vivo is a strategic holding for PT in the fast growing Portuguese-speaking Brazilian market and that PT should maintain its international dimension.

Socrates was quoted by news agency Lusa as saying "the golden share is meant to be used when necessary."

PT had described selling its venture in Brazil, its only significant overseas market, as "amputating" its future.

Risk

Analysts said the veto highlighted regulatory risk and government intervention as increasingly difficult hurdles for telecom companies battling stagnating sales at home and looking to expand their presence in high-growth emerging markets.

A buy-out of PT's stake in Vivo would have given Telefonica the integrated telecoms business it desperately covets in Latin America's largest market.

While analysts said it was highly likely Telefonica would challenge the decision in the courts, the Spanish group made no mention of its plans in relation to the decision.

The decision by the government also came just a few days before the European Court of Justice is due on July 8 to vote on the legality of the golden share. Portugal's government also has special rights in Energias de Portugal.

"This decision by the government using the golden share will deepen the legal complexity of the situation in the short term and it is likely that Telefonica will challenge this decision," said Alexandra Delgado, an analyst at Millennium bcp.

Other analysts said Telefonica may also decide to wait for the July 8 decision before deciding on any course of action.

"The only thing Telefonica can do, I think, is waiting for the ruling on July 8," said Amanda Purton, head of equities research at Barclays Wealth, which is PT's 16th-largest shareholder.

"The Portuguese government ego wins a pyrrhic victory over reason at least until July 8," said Robin Bienstock, an analyst at Sanford Bernstein's.

Telefonica had battled opposition from PT management and its core shareholders, backed by the Portuguese government. It was also blocked from voting its own stake at the meeting, shareholders told Reuters.

However, Wednesday's vote showed that Portuguese shareholders also favoured selling Vivo.

Telefonica has long wanted full control of Vivo in order to merge the unit with its struggling fixed-line unit Telesp in Brazil, reaping between 2 and 4 billion euros in synergies, according to analysts.