UPDATE 3-Portugal Telecom hits back at Telefonica over Vivo

* PT CEO says Telefonica threats amount to blackmail

* Says Telefonica CFO should quit his board

* Telefonica in interview threatens to bid for PT

* PT shares up 6.2 pct

(Adds Telefonica reaction to regulator, updates shares)

By Sergio Goncalves

LISBON, May 26 (BestGrowthStock) – Portugal Telecom (PT) (PTC.LS: )
accused Spain’s Telefonica (TEF.MC: ) of attempted blackmail on
Wednesday as the two telecom groups battled over their Brazilian
venture Vivo (VIVO4.SA: ), whose growth prospects are brighter
than their home markets.

Telefonica wants control of Vivo, Brazil’s top mobile
provider and which would complement its existing business there,
while PT wants to retain a presence in its only significant
growth area.

Shares in PT stood 6.2 percent higher at 7.8 euros at 1328
GMT after a Telefonica executive was quoted in a newspaper
interview threatening a hostile takeover of the smaller company
in an attempt to persuade it to let Vivo go.

It also said it might block the payment of dividends from
Vivo.

In retaliation, PT demanded the resignation of Telefonica’s
representative on its board and said it would not give in to the
Spanish company’s threats.

“The blackmail attempt over Vivo dividend distribution does
not intimidate us and is unacceptable,” PT CEO Zeinal Bava said
by telephone from New York.

Bava was responding to comments from Telefonica CFO Santiago
Fernandez Valbuena in the Financial Times about potentially
blocking Vivo dividends.

Valbuena also told the FT his company was keeping open the
option of launching a hostile takeover bid for PT, in which it
already owns 10 percent, if it refuses to sell out of Vivo.
[ID:nLDE64P0DA]

“After the declarations made by Telefonica’s CFO, he should
quit the PT board as he failed his duty of loyalty to PT and has
a conflict of interests,” Bava said.

The move to pressure PT also brought Portugal’s market
regulator into action. It has asked Telefonica to clarify its
position on a possible takeover bid for Portugal Telecom.

Telefonica said it had not yet taken a decision on any bid
but did not discount the possibility.

GOLDEN SHARE PROTECTION?

Earlier this month, PT’s board rejected Telefonica’s
unsolicited offer of 5.7 billion euros ($7 billion) for its 31.8
percent stake in the Brazilian firm despite it being pitched at
a 140 percent premium to Vivo’s closing price the day before the
offer was made.

But Telefonica remains desperate to expand in Brazil, where
it also owns fixed telephony company Telesp (TLPP4.SA: ), to
compensate for weak Spanish markets and ward off competition
from Mexican billionaire Carlos Slim’s growing Latin American
operations.

PT is just as keen to hold on to its operations in Brazil,
arguing that without them its future would be “amputated”.

Kepler Analyst Javier Borrachero said it would be unwise for
Telefonica to block Vivo’s dividends and difficult to take over
PT without support from the Portuguese government.

“It (Telefonica) would have a problem explaining why it has
blocked its own dividends as well as PT’s and also why it has
used methods which are not particularly ethical in order to do
it,” Borrachero said.

The Portuguese government holds a golden share that blocks
any one shareholder from owning more than 10 percent of the
voting rights.

“If the Portuguese government is against the sale of PT’s
Vivo stake it is probably against the sale of PT itself,”
Borrachero added.

Telefonica and PT each own a 31.8 percent stake in Vivo and
have jointly run it for the last 10 years.

Without referring directly to Valbuena’s comments,
Telefonica said in a presentation that dividends from Vivo were
subject to Telefonica’s agreement.

Telefonica is lobbying foreign shareholders in PT to back
its bid to take control of Vivo, sources close to the matter
said. [ID:nLDE64O1G4].

But a fund manager at one of PT’s top 25 shareholders said a
deal was absolutely not likely to happen.

“If they (Telefonica) didn’t try to do this move then their
shareholders would have said they should have done it. But why
would we want Portugal Telecom to sell off Vivo? It’s the only
way for them to grow for the next years,” the fund manager said.

“Otherwise PT is just Portugal and a bit in Mozambique. It
would be a boring story with absolutely no growth for the next
decades,” he said, adding it was not a question of price.

Some analysts had speculated Telefonica could sweeten its
offer but Chairman Cesar Alierta said two weeks ago Telefonica
would not increase its offer for the Vivo stake.

Stock Market Trading
(Additional reporting by Joel Dimmock in London, Jonathan
Gleave and Robert Hetz in Madrid, with Andrei Khalip in Lisbon;
Writing by Nicola Leske; Editing by David Holmes)
($1 = 0.8139 euro)

UPDATE 3-Portugal Telecom hits back at Telefonica over Vivo