UPDATE: PT To Sell Vivo Stake To Telefonica, Buy Oi Stake

Portugal Telecom SGPS SA (PT) confirmed Wednesday it would sell its stake in Brazil's Vivo Participacoes SA (VIV) to Telefonica SA (TEF) for EUR7.5 billion and use some of the proceeds to buy a 22.4% stake in Brazilian telecommunications company Oi (TMAR5.BR), after months of struggle over Vivo between the two Iberian telecoms.

Brazil has become a battleground for Portugal Telecom and Telefonica with both companies increasingly drawn to the high-growth region as revenue declines in their mature home markets and they suffer the lingering impacts of a severe recession.

The country's young population and relatively low mobile penetration rates also make it a prime market to pick up new wireless and Internet customers.

Portugal Telecom's agreement to buy a stake in Oi for up to EUR3.7 billion will allow it to keep its exposure in Brazil while Telefonica will take full control of the cellular operator Vivo. Telefonica wants full control of Vivo so it can merge it with its fixed-line telecommunications company Telesp (TSP).

Brazil has about 183 million cellphone accounts, and Vivo is the market leader with a market share of 30%. But rivals are close behind; Claro--the local unit of Carlos Slim's America Movil SA (AMX)--Oi, and Telecom Italia SpA's (TI) TIM Participacoes (TSU) are all moving to offer combined fixed-line, Internet, television and cellphone services to extend their grip on the market.

Both Telefonica and Portugal Telecom have fought hard for Vivo since Telefonica's first bid in May. The latest EUR7.5 billion bid is the third time Telefonica has raised its offer for the stake in Vivo, and it is now more than half of Portugal Telecom's market capitalization of EUR1.13 billion.

Portugal Telecom said it would receive the proceeds for its Vivo stake in three installments, the last in October 2011.

Portugal Telecom's shares reacted well to the deal and at 1315 GMT they were up 4.4% at EUR8.67 while Telefonica's shares added 0.6% to EUR16.98.

Company Web site: http://www.telefonica.com

-By Jason Sinclair and Santiago Perez, Dow Jones Newswires, 34 913958127, [e-mail]