The Case study: A better price for an asset

The story
In 2003, a 50:50 joint venture between Portugal Telecom and Spain’s Telefónica acquired 60 per cent of Vivo, the leading Brazilian mobile operator. In the subsequent years, Vivo experienced double-digit annual growth, as it reaped the benefits of its own heavy investments and booming consumer demand.

In May 2010, Telefónica made a €5.7bn cash bid for PT’s share of the joint venture. The sum represented a premium of more than 100 per cent to Vivo’s market value. The Spanish operator said the offer was full, fair and final.

The challenge
Zeinal Bava, chief executive of PT, had to decide what would be best for his shareholders. The easy option would be to accept Telefónica’s bid, due to the hefty premium. However, Vivo was PT’s prize asset, accounting for a significant proportion of revenue and most of its growth.

Rejecting the offer from its bigger partner in the hope of extracting a higher price was risky, including the danger that it could harm PT’s credibility with investors.

The strategy
The basis of PT’s overall response was a consistent message that its share of Vivo was not for sale and that its value to Telefónica was much higher than the Spanish operator’s offer reflected. This was communicated in a number of investor roadshows.

On May 10, the PT board had unanimously rejected the €5.7bn offer on the grounds that Vivo was core to PT’s strategy and that selling the stake would harm PT’s long-term growth prospects. Selling its Brazilian assets would “amputate PT’s future”, said Mr Bava.

PT’s senior management, including Mr Bava, then embarked on a global investor roadshow to highlight that the offer did not reflect Vivo’s true value, given Brazil’s economic transformation, and that potential synergies were being grossly undervalued by Telefónica’s offer and not being shared with PT shareholders. Crucially, PT’s credibility in the capital markets was high. In fact, the management team had won several awards for its investor relations work.

Meanwhile, PT’s board felt Telefónica was unlikely to walk away from such a strategic deal. It was generally known that the Spanish company wanted full control of Vivo in order to merge it with its struggling Brazilian fixed-line operator. And as one of the world’s biggest telecoms companies, Telefónica was under pressure from investors to strengthen its presence in Brazil.

The results
Despite the onset of unprecedented hostility between the two companies, Telefónica raised its offer to €6.5bn. This was again rejected by PT’s board because it calculated that the offer still did not reflect the strategic value of Vivo to Telefónica.

However, the board also called a shareholders’ meeting for June 30 to allow them to vote on this key decision. Another roadshow was getting under way and it looked likely that shareholders would reject the new offer. Late on June 29, Telefónica raised its offer again, to €7.15bn. At the meeting the next day, 74 per cent of PT shareholders accepted the bid. At this point, the Portuguese government blocked the deal by using its “golden share” in PT, but all parties eventually agreed in late July 2010 to a final price of €7.5bn.

The sum Telefónica paid for PT’s stake in Vivo was bigger than PT’s entire pre-bid market capitalisation. PT retained its presence in Brazil by using €3.7bn to buy a 24 per cent stake in Oi, the country’s largest integrated telecoms operator. It returned €1.5bn of cash to shareholders and used the rest to boost its financial flexibility.

The lessons
The value of an asset depends on who owns it, and what synergies and value can be extracted from it.

Meanwhile, several factors allowed PT to reject an apparently attractive offer and achieve a better deal for shareholders. These included: unanimous board support; a record of delivering results; understanding the strategic importance of the asset to the bidder; and good investor relations that ensured wide shareholder support.

-Financial Times, 1 Oct. 2012