Telefónica Bids for Big Role in Brazil’s Wireless Market

Spain’s Telefónica SA offered $7.3 billion in cash to grab control of Brazil’s largest wireless carrier from its partner in the venture, Portugal Telecom, showing how global operators remain hungry for a bigger slice of Brazil’s market.

Portugal Telecom’s directors Monday rejected the offer, which they received May 6, saying the Brazilian joint venture, Vivo Participacoes SA, is a core part of its business and leaving Brazil would threaten its long-term growth prospects.

The move marks the start a public tug-of-war for Vivo, which the companies formed in 2001. Talking full control of Vivo has been one of Telefonica Chairman Cesar Alierta’s ambitions for years.

European phone companies face stagnant revenues in mature markets as customers scale back spending amid pressures from weak economic conditions and rising unemployment, positioning Brazil as one of their main growth markets.

Brazil had a total of 179 million cellphone subscriptions in March—up 17% from a year ago and equivalent to 93% of the population. Vivo is the country’s leading provider with 54 million subscribers.

European companies are lured by Brazil’s young population and fast-growing economy, which is expected to grow by 6.2% this year, according to a recent survey by the Brazilian central bank. In comparison, economists expect the Spanish and Portuguese economies to contract or just rise only modestly.

Telefónica’s unsolicited bid, represents the second attempt by Mr. Alierta to widen his company’s presence in Brazil after losing a bidding war late last year for Brazilian operator GVT to France’s Vivendi SA.

The €5.7 billion bid also underscores Telefónica’s financial muscle at a time when Spain’s economy is particularly fragile. The company said it secured funding for the offer with its own resources and current credit lines.

Talks over control of the joint venture have extended for years since they combined their Brazilian operations in 2001. Senior Telefonica executives say the company will wait until its bid expires next month and will explain its offer to other Portugal Telecom shareholders. Telefonica is the largest single shareholder of Portugal Telecom, with a 10% stake.

Telefónica said it is also offering €600 million for Vivo shares representing 11% of the company. The moves would give Telefónica 70% of Vivo and allow it to combine the business with its Brazilian fixed-line operator Telesp. Analysts estimate Telefónica could save up to €4.3 billion by merging the two companies.

Its main wireless competitors in Brazil are Claro, the local unit of Mexican billionaire Carlos Slim’s America Movil SA and locally-controlled Oi.

Telefonica needs to increase its range and scale in Brazil to better compete; Telesp is restricted to Sao Paulo state, albeit the country’s most wealthy region.

Mr. Alierta has expanded Telefonica’s foothold world-wide in recent years, including high-profile acquisitions in the U.K. and other European markets, as well as nabbing stakes in Chinese telecommunication peers. However, key among Telefonica’s challenges is how to maintain growth in Latin America. Revenue generated in the region rose 8% in the last three months of 2009 to €6.33 billion, while the company’s total revenue increased a more modest 1.2% to €14.98 billion.

The offer is a rich one, analysts said. According to Telefónica, it implies a valuation of 112.29 Brazilian reals for each Vivo voting share owned by Portal Telecom, a premium of about 150% on Vivo’s closing share price Monday.