It’s no surprise that Telefonica, the Spanish telecommunications giant, wants to control

the Brazilian mobile operator, Vivo. In fact, the invitation to Portugal Telecom (“PT”)
to participate in the capital was a made many years ago to allow Telefonica to acquire as
many properties as possible under bidding regulations then in effect. It is worth
remembering that the concession for the State of São Paulo “A” band operations
(currently Vivo) sold in the Privatization of Telebrás, was won by Portugal Telecom,
with a bid of R$ 3.58 billion, and not Telefonica. Telefonica is now offering € 5.7
billion for 50% of the company, or 145% of market value.

But today, Telefonica is a world player, and PT is a company with a substantial and
profitable domestic base, with investments in Timor East, Angola, Namibia, Cabo
Verde and Macão, but without Brazil, has limited growth opportunities. Comparative
information on the two companies is included below. The 51 million Brazilian
subscribers are considered 100% by both companies.

December 2009 Comparative Info. Telefonica PT

Gross Income € 56.7 billion € 6.8 billion
Total Assets € 108.1 billion € 14.8 billion
Equity € 24.3 billion € 2.3 billion
Fixed Accesses 40.6 million 3.9 million
Mobile Accesses 202.0 million 58.6 million

The interesting aspect of this effort by Telefonica is that compared with previous
attempts there appears to be an aggressiveness to their approach, both in the public way
their cause is being divulged, as well as the significant, above market price they are
willing to pay. Their strategy is to appeal to the shareholders of PT over the heads of
management.

Why would the management of PT be so avidly against the sale of their stake in Vivo?
First they would reduce the revenues of the company from one of € 6.7 billion to € 3.7
billion. But in terms of strategy, which as seen above has been to follow the Portuguese
language (with the exception of Namibia), in which Brazilian investments are not only
natural, but obligatory, being 90% plus of the Portuguese speaking world. But with the
sale of the Vivo stake, what would be PT’s continuing strategy? Assuming they became
a company with lots of cash to invest, what acquisitions might be available? A number
of pundits have made the point that Oi, the Brazilian operator based in the North and
North-east of the country is without a telecommunications operator as one of its
shareholders. However, after ten years of successful operations Oi seems to be of the
opinion that they don’t need an operator. The only other option would be to distribute
the value received for the shares to existing shareholders.

Further aspects of this situation that are important for a clear understanding are i)
Telefonica currently owns 9.9% of PT, ii) the Government of Portugal has a “Golden
Share”, which means they have the power of veto over any deal, however, the European
Tribunal of Justice is considering the Golden Share issue and may rule that it is anti-
competitive and iii) Telefonica’s arch enemy, Carlos Slim Helú, the Mexican billionaire
businessman with substantial telecom holdings in Brazil, including NET, Claro and
Embratel, also has a shareholding of 5% in PT, and has apparently been in
conversations with at least Banco Espirito Santo, currently a 7.7% shareholder of PT
about ways in which they might work together to frustrate Telefonica’s plans.
The problem for PT is up to what point the board of directors may withhold the right of
shareholders to receive an offer which is clearly economically attractive. Of course,
telecommunications companies are strategically important to countries, and the
Portuguese Prime Minister, José Socrates has made it clear that PT is regarded by the
Government in this light.

Thus, the stage is set for a continuing battle with a number of players with colliding
interests. So far the only interest groups not to declare their interests are the
shareholders of PT. We will see if they are allowed their chance.