Telefonica has been handed a boost in its efforts to buy Portugal Telecom (PT) out of Vivo, their Brazilian mobile phone joint venture, following news that attempts by the Portugese government to block the deal are illegal. The country’s government last week used its ‘500 golden shares’ in PT to block an overwhelming vote (74 percent majority) by PT shareholders that supported the EUR7.15 billion buyout. But the European Court of Justice (ECJ) today ruled Portugal’s action broke rules on the free movement of capital. “The holding of golden shares confers on Portugal an influence on the management of Portugal Telecom which is not justified by the size of its shareholding,” the court ruled. 

The ECJ decision came hours after Telefonica and PT agreed to work towards solving their acrimonious dispute over Vivo.  In a brief statement, Telefonica said it was willing to look for “possible solutions” for its bid to buy PT out of Vivo so that “all interested parties felt comfortable”.  PT replied that it was available “to maintain a dialogue with Telefonica aimed at analysing options that optimise the advantages for all parties”. Telefonica’s EUR7.15 billion offer is on the table until July 16. There are conflicting reports about how this deal will now likely pan out. The BBC cites analysts stating it will now proceed as planned, whilst the Financial Times (FT) reports that one possible solution would be to merge Vivo with Telesp, Telefonica’s underperforming fixed-line phone business in Brazil, and offer PT a stake in the merged group, together with a shareholder agreement guaranteeing it an active management role. The FT article notes it is estimated that PT could end up with close to 20 percent of a merged Vivo and Telesp in a potential deal that analysts said would be a face-saving solution for the Lisbon government, under which PT would maintain large-scale operations in Brazil. The Wall Street Journal warns that the process could get very complex if Portugal hasn’t complied with the ECJ ruling within about three months, as the European Commission can launch an infringement case against it, which could result in high daily fines until Portugal relinquishes the golden share. The chief executive of Banco Espirito Santo, PT’s largest shareholder, has even speculated that Telefonica could launch a bid for the whole of PT, rather than just buying 50 percent of Vivo.