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Portugal vs Telefónica

A visão do Economist desta partida ainda por terminar...

Watching Spain penetrate the Portuguese defence for a 1-0 victory in the World Cup this week was clearly too much to bear. On June 30th, to prevent Spain’s Telefónica seizing full control of Vivo, a valuable Brazilian mobile asset it jointly owns with Portugal Telecom, Portugal’s government used its golden share in the national telecoms operator to block the Spaniards’ attack. For shareholders in Portugal Telecom, the government has now become their archenemy. Just before the shareholder meeting Telefónica had offered a crazily high, revised price of €7.15 billion ($8.77 billion) for Portugal Telecom’s share of Vivo. Of the Portuguese firm’s shareholders who voted, three-quarters had just opted to accept the Spanish bid.

“The government is protecting the interests of the country,” explained José Sócrates, Portugal’s prime minister. Ever since Telefónica made its first offer of €5.7 billion some weeks ago, Mr Sócrates had left no doubt that the government regarded the stake in Vivo as strategic. Portugal Telecom derives 46% of its revenues from the fast-growing Brazilian unit and its future growth depends on it. The government instructed Caixa Geral de Depósitos, a state-owned bank, to vote against the sale to Telefónica. But Portugal Telecom’s board told investors this month that the government could not legally block the bid for Vivo using its golden share. “All our lawyers told us this was not possible,” says a person close to the company.

Telefónica could still prevail. On July 8th the European Court of Justice will say whether or not Portugal’s golden share breaks European Union rules on the free movement of capital. If, as expected, the court decides that it is illegal, Telefónica could renew its bid for Vivo, confident in the knowledge that both Portuguese and foreign investors voted for its offer.

The unexpectedly strong shareholder support for Telefónica’s bid suggests that the Spanish firm is offering far too much. Its latest offer, 25% higher than its initial bid, represents almost the whole market value of Portugal Telecom. Markets in Latin America, especially Brazil, are becoming more important for the Spanish firm as growth at home stalls.

For years Telefónica enjoyed a robust home market, with relatively high prices and a benign tax and regulatory environment. It used its strong base to turn itself into a global champion. Now, however, says Robin Bienenstock, a telecoms analyst at Sanford C. Bernstein, Telefónica is suffering along with Spain’s economy: the volume of voice traffic declined last year for the first time in decades, as people chose to save money by talking less on the phone. The government is newly focused on the price of telephony as unemployment soars, and the regulatory and tax environment is getting tougher.

Nor are things straightforward in Latin America. Telesp, a Brazilian fixed-line operator in which Telefónica holds an 88% stake, is losing business as people switch to mobile phones. Telefónica’s second-biggest market in the region, Venezuela, has proved more risky than expected, with the devaluation of the bolívar this year taking a toll on the group’s earnings. “The level of the bid for Portugal Telecom’s share of Vivo says more about the desperation of Telefónica than about the real value of the asset,” says Ms Bienenstock. This match, at least, is not over yet.