Vivendi Picks Telefonica Over Telecom Italia for GVT Talks

Aug 28, 2014 3:36 pm ET

(Updates with Vivendi comment on Telecom Italia stake in 13th paragraph.)

Aug. 28 (Bloomberg) -- Vivendi SA agreed to enter exclusive talks with Telefonica SA over the sale of its GVT unit, favoring the Spanish phone company’s mostly cash offer for the Brazilian broadband provider over a counterbid from Telecom Italia SpA.

Telefonica’s offer is “particularly attractive” because it would generate a capital gain of more than 3 billion euros ($4 billion), Paris-based Vivendi said today. Telefonica earlier increased its offer by 11 percent to 7.45 billion euros -- including 4.66 billion euros in cash -- escalating a bidding war for one of Brazil’s fastest-growing Internet carriers.

The decision to start three months of negotiations with Telefonica places the Madrid-based carrier in a position to challenge America Movil SAB, the biggest broadband Internet provider in Brazil. Telecom Italia, which also sells wireless services in that country, risks being left behind as more consumers purchase broadband and mobile in combined packages.

“GVT has a high strategic relevance for Telefonica -- it’s a must have,” said Norbert Janisch, a fund manager at Vienna- based Raiffeisen Capital, which manages about 30 billion euros, including shares in Telefonica.

With a sale of GVT, Vivendi would continue on a path of reducing its portfolio of phone assets. Vivendi has announced more than $30 billion of disposals since last year, including the sale of French mobile carrier SFR, to focus on media. Vivendi bought GVT for $4.18 billion in 2009, beating Telefonica for the business.

Tim Sale?

Vivendi shares fell 0.3 percent to 20.14 euros at 3:08 p.m. in Paris. Telefonica slid 0.4 percent to 12.09 euros in Madrid. Telecom Italia rose 2.1 percent to 88.1 cents in Milan, partly on speculation that the carrier may have to consider selling its Tim Brasil division.

A Telecom Italia representative didn’t return a call seeking comment.

Missing out on GVT could prompt Telecom Italia to sell Tim because it would lack the scale to compete with bigger Internet providers, Berenberg Bank analyst Paul Marsch said this month.

Oi SA, the smallest of Brazil’s major wireless carriers, is looking for partners to make a joint bid for Tim and is only interested in taking a portion of its rival’s assets, people familiar with the matter said yesterday. Oi’s adviser, Banco BTG Pactual SA, is trying to get Telefonica and America Movil SAB to team up with Oi to buy Tim and then break it up, they said.

More Cash

Less than half an hour before Telefonica sweetened its bid today, Telecom Italia announced its 7 billion-euro offer, consisting of stock and about 1.7 billion euros of cash. Both companies want to combine GVT with their own Brazilian mobile- phone units.

While Telefonica is offering more cash, Telecom Italia’s proposal focused more on a partnership that would include the Italian carrier distributing content from Vivendi’s media assets, which include Canal Plus. Telecom Italia’s offer is of “relevance and quality,” Vivendi said.

Telefonica’s bid would give Vivendi a 12 percent stake in the entity from a merger of Telefonica Brasil SA with GVT. The cash portion would come from a share sale by Telefonica Brasil. Telefonica SA also plans a capital increase to help finance the deal, a Madrid-based representative said.

Italian Option

Telefonica’s offer also gives Vivendi the option to buy Telecom Italia shares held by the Spanish company, helping it address regulatory concerns in Brazil. Acquiring the rights to the shares is “attractive,” Vivendi CEO Arnaud de Puyfontaine said today on a conference call.

Brazil’s authorities in December called into question Telefonica’s role as Telecom Italia’s largest owner. Brazilian agency Cade said Telefonica had to cut its stake in the company and, a day later, said the Spanish carrier must completely exit Telecom Italia if it wants to remain in control of its own Brazil unit, the country’s largest mobile carrier.

Both Telefonica and Telecom Italia also proposed partnerships with Vivendi over content distribution. Vivendi produces television content through the Canal Plus pay-TV business, and owns music rights through its Universal Music Group unit.

Telefonica would boost its Brazil broadband market share to about 30 percent by buying GVT, allowing it to challenge America Movil, which has 32 percent. Oi is now the No. 2 with 27 percent. Tim has less than 1 percent of the market.

Telefonica’s wireless market share is 29 percent, compared with Tim’s 27 percent. Claro, owned by Carlos Slim’s America Movil, has 25 percent and Oi 19 percent.

Earnings Decline

Vivendi posted a 7 percent drop in second-quarter earnings to 358 million euros, excluding items such as interest, taxes and amortization. Sales fell 3.3 percent to 2.82 billion euros, hurt by changes in exchange-rates. Revenue at GVT, excluding currency movements, rose 13 percent to 434 million euros as it expanded to new cities.

Citigroup Inc., Mediobanca and BNP Paribas SA are advising Telecom Italia and Banco Bradesco SA is advising Tim. Goldman Sachs Group Inc. and Credit Suisse Group AG are advising Vivendi, and JPMorgan Chase & Co. and Banco Itau BBA is assisting Telefonica.

The race to buy GVT is the latest twist in a spat between Telecom Italia and its shareholder Telefonica over the future of Tim. While Telecom Italia Chief Executive Officer Marco Patuano is in favor of keeping Tim and expanding it through a merger with GVT, Telefonica had explored a plan to break up Tim and then split it among other operators, including Telefonica, people familiar with the matter said in May.

--With assistance from Manuel Baigorri, Aaron Kirchfeld and Amy Thomson in London, Christiana Sciaudone in Sao Paulo, Cornelius Rahn in Berlin and Adam Ewing in Stockholm .