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Telefonica faces tight vote over Vivo

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CIOL Bureau
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MADRID, SPAIN: Spain's Telefonica faces a tight vote by shareholders of Portugal Telecom over its attempt to buy out their joint venture in Brazil, after Portugal's regulator dealt a blow to its strategy.

Portugal Telecom, or PT, shareholders are scheduled to vote in Lisbon on Wednesday on the Spanish carrier's $7.9 billion bid to buy out PT's stake in their Brazilian venture Vivo

"I probably wouldn't (bet) on the result at this point," said Kevin Yates, analyst for RBS. "It's probably as tight as the football match tonight."

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With Spain due to play its Iberian rival Portugal in the World Cup on Tuesday at 1830 GMT, Portuguese newspapers have linked the rivalry on the football field in South Africa to the battle by PT Chief Executive Zeinal Bava to keep Vivo.

PT management has rejected Telefonica's sweetened bid for Vivo -- the biggest mobile phone company in Brazil, as have two major Portuguese shareholders and the Portuguese government, which has a golden share in PT.

But foreign investors who control about 65 per cent have been less vocal about their intentions and could vote either way.

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Telefonica, which until recently held 10 per cent of Portugal Telecom, last week sold 8 per cent in what Portuguese media interpreted as an attempt to have the votes count, as Telefonica would likely be barred from voting because of its conflict of interest.

However, Portugal's market regulator said on Monday the stake should be considered as still belonging to Telefonica for the purposes of the vote.

The chairman of the shareholder meeting will have the last word on whether Telefonica can vote on Wednesday.

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The Portuguese government argues its leading telecoms operator should retain Vivo to continue its presence in Portuguese-speaking Brazil, a fast-growing telecoms and internet market, particularly since PT has few other assets abroad.

Telefonica wants full control of Vivo to merge the unit with its struggling fixed line unit Telesp in Brazil.

The Spanish company has heavily lobbied foreign investors in PT, which include Brandes Investment Partners and Deutsche Bank, many of which also hold shares in Telefonica.

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Many analysts think the vote could nevertheless go against Telefonica as shareholders try to squeeze up to 7.5 billion euros out of the Spanish telecoms giant.

"It now looks like the odds are tipping towards rejection of the bid," said Robin Bienenstock from Bernstein in a note to clients, saying Telefonica could decide to walk away from the deal or use litigation rather than improve the offer.

"It would appear that PT and (Telefonica) are now playing blindfold chicken. The problem with chicken is that you might both swerve the right way at the last moment and avert disaster, or the reverse could be true."

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A seasoned telecom banker not involved in the deal said it was unlikely that Telefonica and PT would unveil a recommended offer before the vote on Wednesday, because relations between the companies were so strained.

"I think Telefonica will lose the vote and will find out what it needs to secure a recommendation before coming back next time," the banker said.

Amanda Purton, head of equities research at Barclays Wealth, which is PT's 16th-largest shareholder, said: "Originally, this was something PT did not want to discuss at all, and they have moved on to: 'We are looking at it but we need a higher price.'"

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"So a revaluation (higher price) is definitely on the agenda at the moment."

Unlikely to give up

Telefonica needs a simple majority -- 50 per cent plus 1 -- to win its bid for Brasilcel, the company through which it and PT control Vivo.

There are no minimum quorum rules, meaning a low attendance at the meeting would not cancel the vote.

Telefonica is not expected to give up if the shareholder vote goes against it.

"Should the bid not be accepted, I expect Telefonica to continue its pursuit of Vivo with a raised bid, due to the strategic importance of Vivo to Telefonica," said Daniel Jones, a partner of Onda Analytics, a telecoms investment research firm.

A leading Telefonica shareholder, who declined to be named, told Reuters Telefonica was paying a premium for Vivo but would be prepared to increase its bid.

"They are certainly paying up, but the joint venture was not working at all," he said.

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