Vivo is currently the largest mobile phone operator in Brazil and Brazil is the most promising telecom market in Latin America based on population and economic growth. Brasilcel is the controlling shareholder of Vivo with a 59.4% stake. Brasilcel is controlled by Portugal Telecom and Telefónica as both own 50%.
The timeline is crucial in this dispute: -On 6 May 2010, Telefónica submitted an unsolicited cash offer for the acquisition of Portugal Telecom's 50% interest in Brasilcel for a cash consideration of € 5,7 billion. The Board of Portugal Telecom rejected the offer. Telefónica then threatened to freeze the dividends from Brasicel. -On 1 June 2010, Telefónica submitted a revised offer of € 6,5 billion which Portugal Telecom is submitting to shareholders’ approval through an EGM that will take place on 30 June 2010 (following Telefónica’s request). -In the meantime, two weeks prior to the meeting, Telefónica requested that an additional resolution be added to the meeting in order to guarantee an additional dividend of € 1 per share. The request was rejected by the Chairman of the meeting. -Since then, on 24 June 2010, one week only before the meeting Telefónica is announcing a sudden reduction of its stake in Portugal Telecom by 8% (out of 10%).
Although the offer is contrary to Portugal Telecom’s strategy, shareholders have to consider the price offered as it provides an excellent premium, keeping in mind that for the first quarter of 2010, Vivo represented 50% of Portugal Telecom’s total economic value. Considering that Brasilcel has a 59.4% stake in Vivo, the implicit price earning would be approximately of 56. The multiple is high but not out of touch with previous acquisitions such as GVT by Vivendi in 2010.
Up until the offer, Portugal Telecom and Telefónica had a long-standing business relationship as their strategic alignment in Brazil started in 1988. Portugal Telecom current strategy is to remain in the Brazilian market and to expand on an international level while Telefónica’s strategy is to fully acquire a telecom business such as Vivo in order to merge it with Telesp, their under-performing fixed-lined phone business. Telefónica states that synergies and cost-savings from the operation would amount to € 2.8 billion. Financial analysts concluded that the acquisition would still be beneficial to Telefónica at € 7.5 bn, representing € 1 additional bn on the second offer. Vivo remains the best option in terms of cost for Telefónica.
Portugal Telecom already has a diversified portfolio in Portuguese speaking countries and re-investment alternatives in Brazil are limited for the Portuguese company. Nevertheless, we regret that the Board of Portugal Telecom has not provided shareholders with the valuation of potential investment in TIM Brasil or Telemar. Also, the Board of Portugal Telecom has never made a clear statement to advise its shareholders on the vote. Nevertheless, it stated that the offer ‘does not reflect the strategic value of Vivo’.
Telefónica was the largest shareholder of Portugal Telecom with 10% of the issued share capital and 10% of the voting rights, however the company was not certain of its entitlement to vote on the matter due to obvious conflicts of interests. Only two of Portugal Telecom’s, Banco Espirito Santo and Ongoing representing 18% of the capital in total, have stated that they intend to vote against the offer. Analysts say that the EGM outcome is extremely uncertain and that the vote will be tight. In disposing 80% of its stake in Portugal Telecom, Telefónica seems to lack confidence over the EGM result and at the same time is trying to convince shareholders to opt for cash and short-term returns. Telefónica intends to damage the image of Portugal Telecom. ECGS questions the intentions of Telefónica’s behind this speculative operation a week prior to the EGM.
ECGS considers as this stage, that the disposal of Vivo which is the ‘crown jewel’ of Portugal Telecom would be detrimental to long-term value. While there is no guarantee that returns from the disposal would be remitted to shareholders, nor that the disposal would allow Portugal Telecom to invest in a similar business in Brazil. We believe that the risk for Portugal Telecom to not finding a suitable investment in Brazil exceeds the risk of paralysing the management of Brasilcel.
ECGS has conducted a fully independent review of the offer and has concluded so far that in the absence of a guaranteed dividend, long-term shareholders of Portugal Telecom should refuse the offer and asked for a revised offer from Telefónica.
30/06/2010 Update
While Portugal Telecom EGM is taking place right now in Lisbon, we have just learnt that Telefónica has increased its offer for Vivo to € 7.15 bn overnight. Telefónica states that this is the final and definite offer.
Proxinvest has conducted a full analysis on the second offer of € 6.5 bn and recommended shareholders to oppose the resolution. The increased offer represents a 10% increase over the second offer and a 24% increase over the very first offer. Proxinvest regrets that the proposition does not refer to the dividend for Portugal Telecom’s shareholders.
This is a last attempt to convince PT’s shareholders to accept selling the Brazilian asset. However, most institutional shareholders had a voting deadline a few days prior to the EGM. Last week, the Spanish group has sold 8% of its stake in Portugal Telecom reducing its participation to 2%. We do not know who has bought the shares and who will vote them. Two days later, the Portuguese state bank Caixa Geral de Depositos S.A was required to vote against the offer by José Socrates, the Portuguese prime minister.
Let’s wait for the voting results!
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