22 Jun 2005 14:18 GMT


PT's sale of Vivo stake to Moviles unlikely but not implausible - Merrill

LONDON (AFX) - A sale by Portugal Telecom SGPS SA of its stake in Brazilian mobile-telephony company Vivo to its partner Telefonica Moviles SA is unlikely but not out of question, Merrill Lynch analyst Mauricio Fernandes said.

Under this scenario, which has been discussed for a few weeks by the Brazilian press and telecom analysts, PT would use the proceeds to acquire a Brazilian fixed-line operator, with Tele Norte Leste Participacoes/Telemar SA being often cited as a possible target

Fernandes reiterated his view that it "would make little strategic sense for PT to exit its growth engine, Vivo, in order to add a cash cow, Telemar".

He added, however, that "certain events in the last year could make this scenario more plausible".

He cited the fact that Brazilian wireless fundamentals have deteriorated due to rapid growth and a bitterly competitive market.

Fernandes also mentioned the profit-warning issued last month by PT for its domestic wireless business.

He also cited a study by Merrill Lynch's European telecom analyst Jesus Romero showing that Vivo's cash flow contribution to PT five years from now will likely be similar to what Telemar would contribute today.

According to Fernandes, a deal under which PT would pull out of Vivo giving full control to Telefonica SA would be beneficial to Telemar's ordinary shares and neutral for Vivo's largest unit Telesp Celular Participacoes SA.

But such a deal would be negative for Telefonica's wireline unit Telesp Fixa, according to Fernandes.

Should Telefonica acquire 100 pct of Vivo and combine it with Telesp Fixa, "we believe that Teles Fixa's dividend, one of the primary reasons to own the stock, would be put at risk," he said.