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Sonae Closes In on Portugal Telecom

Ray Le Maistre

Yet another European incumbent carrier looks set to change hands after the Portugal Competition Authority (PCA) gave a preliminary green light to Sonae 's proposed acquisition of Portugal Telecom SGPS SA (NYSE: PT).

Sonae, which made its initial move in February this year, wants to combine the incumbent carrier with its own telecom business, Sonaecom , and had proposed a €9.50 (US$12.05) per share offer for PT, valuing the national fixed and mobile operator at about €11 billion ($13.96 billion). (See Eurobites: M&A, IPO & KPN.)

Now the PCA has given its initial blessing, but its final decision will only be announced after a 10-day period, following further submissions from the two parties about the Authority's conditions.

Should the acquisition take place, Portugal Telecom would become the third mid-sized European incumbent to change hands in the past year. In January, a consortium of private equity firms calling themselves the Nordic Telephone Company ApS completed the takeover of Denmark's TDC A/S (Copenhagen: TDC). (See TDC Unveils $12B Offer and NTC Completes TDC Offer.)

Then, after a protracted courtship, Irish incumbent eir accepted a near €2.4 billion ($3.05 billion) takeover offer from Australian finance group Babcock & Brown . The deal closed at the end of August. (See Eircom Accepts Offer.)

And in April 2005, Telefónica SA (NYSE: TEF) completed its acquisition of central European incumbent Cesky Telecom a.s. (See Telefonica Buys Cesky Telecom.)

Sonae's takeover bid is far from a done deal, though. The PCA has set a number of regulatory conditions to which Sonae must agree, including the separation of its fixed wholesale and retail businesses, and the sale of either PT's copper fixed access network or the incumbent's cable operator business (PT Multimedia). Sonae already has its own competitive fixed-line operator, Novis Telecom S.A.

Sonae must also allow a mobile virtual network operator (MVNO) to use its mobile network to become a competitor.

Despite those conditions, Sonae seems determined to continue, as it would be allowed to hang on to PT's market-leading mobile subsidiary, called TMN, with its wireless carrier Optimus Telecomunicações , which is the country's No. 3 mobile player. That consolidation, according to analysts at Lehman Brothers , accounts for the majority of the €2 billion ($2.54 billion) in post-merger cost savings Sonae hopes to achieve.

Jointly, Optimus and TMN would hold about 67 percent of Portugal's mobile market, while Vodafone Portugal has about 33 percent.

Portugal Telecom also holds a 50 percent stake in Brazilian mobile giant Vivo Participacoes SA , its joint venture with Telefónica.

According to local media reports, Sonae CEO Paulo Azevedo said he was still determined to proceed with the acquisition, and that holding on to either of PT's fixed broadband assets would allow Sonae to create a fixed/mobile service package, but that the conditions were more onerous than expected.

Now the regulator, Portugal Telecom, and its shareholders must wait for Sonae's next move, especially as PT's share price, currently at €9.85 ($12.50), continues to hover above the original bid price.

With PT having promised its shareholders a dividend sweetener should the deal not go through, Sonae may have to consider upping its bid. That, however, may be too bitter a pill to swallow given the set conditions, which will increase competition in fixed and mobile and incur additional costs for Sonae. (See S&P Negative on Portugal.)

Sonae may also have to deal with rival bids. With TDC and Eircom already under private equity ownership, rumors have persisted since Sonae's initial move that various consortia are waiting to spring an alternative bid.

Other European incumbents that may find themselves under acquisition scrutiny include Dutch carrier KPN Telecom NV (NYSE: KPN), which was linked with Telefónica earlier this year, and Belgacom SA (Euronext: BELG). KPN was forced to deny a rumor earlier this month that the neighbors had been in merger discussions. (See KPN, Siemens Under Scrutiny.)

KPN, which has had the "For Sale" sign in place since the Dutch government sold its protective "Golden Share," may become more attractive to bids once its ongoing network and business transformation program is nearer completion. (See Dutch Put KPN on the Block and KPN Lays Out IP Migration Plan.)

Swisscom AG (NYSE: SCM) and its neighbor Telekom Austria AG (NYSE: TKA; Vienna: TKA) are also potential consolidation candidates. The two operators held M&A talks in 2004, while Swisscom held merger talks with Eircom just last year. (See Swisscom Ends Eircom Talks and No Merger for Euro Carriers.)

— Ray Le Maistre, International News Editor, Light Reading

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