Telefonica Raises 2nd Vivo Bid
Spanish telecom company, Telefonica (NYSE:TEF) has raised its bid for Portugal Telecom’s (NYSE:PT) stake in Brazilian mobile operator Vivo Participacoes (NYSE:VIV) by another 10% to €7.5 billion (US$8.73 billion).
Vivo, a 50:50 joint venture between Telefonica and Portugal Telecom, is the leading wireless carrier in Brazil with a market share of around 30%. Telefonica offered €5.7 billion (US$7.3 billion) on May 10, 2010, to acquire Portugal Telecom’s stake in the Brazilian entity and then raised its offer to €6.5 billion (US$8 billion) on June 2, 2010. The current offer is the second time Telefonica has raised its bid.
Portugal Telecom’s board and its shareholders have refused the current offer, with support from the Portuguese government. According to the government, Vivo is crucial to the growth prospects and development of Portugal Telecom. Strong results from Vivo are helping Portugal Telecom to offset the weakness in its home markets. The action of the Portuguese government could result in a conflict with the European Union (EU) authorities.
Telefonica is desperately seeking full control of Brazilian wireless kingpin Vivo. Exclusive control of Vivo will enable Telefonica to merge the entity with its Brazilian fixed-line voice and broadband unit Telesp (NYSE:TSP) which is struggling to perform. This will make the combined entity a full-service operator offering competitive bundled (fixed-line and wireless) services.
Latin America remains the key growth market for Telefonica. Healthy revenues and subscriber growth in this region are helping the carrier to partly offset the declines in its home market. Brazil remains the largest contributor of the company’s Latin American revenues.
With a resurgent economy, vast population and relatively low wireless and broadband penetration, Brazil offers an attractive growth opportunity for overseas telecom operators. The number of mobile accesses in Brazil reached 179 million at March end, representing roughly 17% year-over-year growth.
While Telefonica continues to lead the Brazilian wireless market, the carrier is exposed to increased competition. France-based media company Vivendi SA, which has acquired a controlling stake in the Brazilian telecom operator GVT Holding, poses an emerging threat.
Moreover, Telefonica’s biggest rival in Latin America, America Movil (NYSE:AMX) is reportedly integrating its Brazilian wireless and wireline assets. By combining Vivo with its Brazilian fixed-line business, Telefonica would be in a stronger position to compete with America Movil.
To counter intense competition and delve deeper into the lucrative Brazilian market, Telefonica is currently exploring various options including acquisitions. As part of this strategy, the carrier is seeking full ownership of Vivo which has been the principal growth engine for its Latin American operation over the last few years.
We are currently maintaining our Underperform recommendation with the Zacks Rank #5 (Strong Sell) stock.
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