PT / Telefónica in Brazil
Portugal Telecom’s chief executive says value cannot be measured in purely financial terms. Shareholders should ignore him. Of course it is a wrench to contemplate flogging the company’s crown jewels (its share of Brazilian mobile operator Vivo) and PT would certainly be a boring company both to run and to own without it. But everything has its price. Shareholders simply need to decide if Telefónica’s sweetened €6.5bn offer is higher than the net present value of its half of Vivo. Everything else is a distraction.
Settling on a value for Vivo is by no means straightforward. Discounted cash flows are sensitive to small changes in assumptions, which, in any case, are no more than educated guesses. Nevertheless, they provide a rough framework. Assuming an 11.5 per cent cost of capital and a long-term growth rate of 2 per cent, PT’s share of Vivo is worth about €4bn. Lowering the cost of capital to an optimistic 10 per cent and assuming a 2.5 per cent long-term growth rate still only values PT’s share at €5.2bn.
Yet PT chief executive Zeinal Bava is much cannier than his comments suggest. He rattled Telefónica into raising its €5.7bn offer and he might yet do so again. But even his “shareholder value” argument for holding out is shaky. PT says the offer is too low because the Spaniards could reap almost €4bn worth of synergies by combining Vivo with their fixed-line business Telesp. Perhaps. But a clean merger could only realistically be pulled off once PT was out of the way. The buy-out, then, crystallises more value than PT shareholders could reasonably expect to receive by staying put. The Portuguese have played their hand brilliantly; it’s time to cash in.
Fonte: Financial Times