Portugal blocks Telefonica’s bid to buy Portugal Telecom's stake in Vivo

The battle for Brazil's largest mobile service provider Vivo got murkier after the Portuguese government blocked Spain's Telefonica's bid to acquire Portugal Telecom's 50 per cent stake in Vivo at an extraordinary general meeting, citing conflict of interest.

The veto from the Portugal government may not have come as a surprise to Telefonica as the Portuguese Prime Minister, Jose Socrates had earlier threatened to block the sale of the Brazilian jewel to Telefonica.

Telefonica and Portugal Telecom own 50:50 per cent in their Brazilian mobile joint venture Vivo Participacoes, and both companies have been locked in a bitter power battle, where Telefonica proposed to buy Portugal Telecom's stake, while the Portuguese mobile operator refuses to part with its stake in Vivo.

Telefonica, which holds a 10 per cent stake in Portugal Telecom, had earlier threatened to launch a bid for Portugal Telecom itself if it does sell its stake in Vivo.

In order to tilt the vote in its favour at Portugal Telecom's shareholders meeting on 30 June, Telefonica last week sold 8 per cent of its stake in Portugal Telecom to Société Générale, UBS and TPG Axon, a New York-based hedge fund under an equity swap arrangement.

By selling an 8 per cent stake, Telefonica was essentially parking its stake with outside investors, which had no economic interest in the company, but was crucial for them voting on behalf of Telefonica in the extraordinary general meeting held to approve its bid for Vivo.