UPDATE: Portugal Vetoes PT Vivo Stake Sale To Telefonica

The Portuguese government Wednesday vetoed a EUR7.15 billion bid from Spain's Telefonica SA (TEF) to buy Portugal Telecom SGPS S/A's (PT) indirect stake in Brazil's Vivo Participacioes SA (VIV) despite the approval of PT shareholders for the transaction.

The veto, through the use of a golden share, comes after Portuguese Prime Minister Jose Socrates said in Parliament last week that Portugal's strategic interest was linked to the dimension and economic scale of PT.

PT and Telefonica have been locked in a power struggle over Vivo, which the two Iberian telecoms control through a 50-50 joint venture in the investment vehicle Brasilcel, which in turn owns 60% of the Brazilian mobile phone company.

Both companies see Vivo as key to their future growth prospects.

The government veto also takes place just before the European Court of Justice is expected to rule next week on the legality of Portugal's golden share in PT, designed to prevent a hostile takeover.

European authorities claim Portugal's ownership of such a golden share breaches the principle of the free movement of capital. An official from Socrates' office couldn't immediately comment on the veto.

A Telefonica spokeswoman said 74% of PT shareholders had voted in favor of the Spanish company's offer at an extraordinary general meeting. She declined to comment on what the government's veto will mean for Telefonica's strategy.

"We have to study the decision first," the spokeswoman added.

Telefonica late Tuesday improved its offer for PT's half of Brasilcel for the second time. The Spanish company's first bid of EUR5.7 billion was swiftly rejected by PT's board last month. It then raised the offer to EUR6.5 billion.

-By Jeffrey T. Lewis, contributing To Dow Jones Newswires; [e-mail]; 34 91 395 8120