Telefonica SA called its initial bid for Portugal Telecom SGPS SA’s stake in Vivo Participacoes SA of Brazil “fair, full and final.” Chairman Cesar Alierta paid 1.8 billion euros ($2.3 billion) more to close the deal.

Telefonica yesterday agreed to spend 7.5 billion euros in cash on Portugal Telecom’s holding in their 50-50 venture that controls Vivo, Brazil’s largest wireless operator. That was 32 percent more than the 5.7 billion euros Alierta first offered.

The raised bid, equal to more than the entire market value of Portugal Telecom on Tuesday, is a reflection both of the hard bargain driven by Portugal Telecom’s board and the Portuguese government, and of Alierta’s determination to secure growth in Brazil as his home market of Spain cools.

“Portugal Telecom’s management deserves kudos for preserving the deal and extracting the maximum value,” said Robin Bienenstock, an analyst at Sanford C Bernstein. “Such a bet by Telefonica on Brazil means that problems in Spain are more serious and likely to be more lasting than investors had previously expected.”

Telefonica today said second-quarter sales in Spain fell 3.2 percent while revenue in Latin America soared 16 percent. Overseas growth boosted profit to 2.12 billion euros from 1.83 billion euros a year earlier, beating analysts’ average estimate of 1.94 billion euros.

Slim, Vivendi

Alierta’s challenge is to wring cost savings out of the purchase to prove he didn’t overpay. The acquisition will make Telefonica the largest phone company in Brazil, where growth is faster than in Europe even as competition grows from America Movil SAB, controlled by Mexican billionaire Carlos Slim, and France’s Vivendi SA.

He needed to gain control of Vivo to merge it with Telefonica’s Brazilian fixed-line unit, Telesp, and put an end to the slide in operating profit at the business. Vivo yesterday posted a 30 percent jump in profit for the second quarter.

“Time will tell if Telefonica has overpaid,” said Roger Appleyard, head of global credit research at RBC Capital Markets in London. “There is a value to stemming the decline of Telesp on top of the synergies they may extract with the merger, so probably not.”

The acquisition would be Telefonica’s biggest since 2006, when it bought Slough, England-based O2 Plc, the U.K. mobile- phone operator, for 17.7 billion pounds ($31.5 billion), the largest in its history.

Excluding the Vivo deal, Telefonica has made or agreed to 86 other acquisitions worth $95 billion since 1996, according to Bloomberg data.

Government Veto

Telefonica’s final offer for Portugal Telecom’s stake in Brasilcel NV, their venture that owns 60 percent of Vivo, was greater than the Portuguese company’s market value of 7.44 billion euros on July 27, the last trading day before the improved bid was disclosed.

Telefonica on May 6 offered 5.7 billion euros for the stake. It raised the bid to 6.5 billion euros in June and in the same month increased it to 7.15 billion euros, after the two earlier offers were rejected by the company.

The third offer, which won approval from the Lisbon-based company’s investors, was blocked by the Portuguese government last month using special veto powers.

“It makes you think whether the government veto was part of a greater plan to get a higher price, because that is what it achieved,” said Appleyard.

Reviving Telesp

Telefonica needs Vivo to revive Telecomunicacoes de Sao Paulo SA, or Telesp as the fixed-line unit in Brazil is known. The company posted a fourth quarterly drop in revenue in the second quarter. Its earnings before interest, tax, depreciation and amortization peaked in 2006 and are expected to fall again this year, according to Bloomberg estimates.

Vivo ended June with 56 million clients. The carrier controls 30 percent of Brazil’s mobile-phone market, according to Anatel, the country’s phone regulator. Telefonica said a combined Vivo-Telesp group would have 69 million clients, based on March figures.

Both Telefonica and Portugal Telecom are betting on Brazil to spur growth. Domestic demand is fueling Brazil’s fastest expansion in more than two decades. Latin America’s biggest economy will grow this year 7.3 percent, according to central bank estimates.

Portugal Telecom yesterday agreed to pay 8.44 billion reais ($4.8 billion) for a 22.4 percent stake in Brazil’s Telemar Norte Leste, known as Oi. The company didn’t want to relinquish the Vivo stake without securing another fast-growing business.

‘Win-Win’

It “is a win-win from our perspective,” Portugal Telecom Chief Executive Officer Zeinal Bava said. “Brazil continues to be an important strategic bet for Portugal Telecom.”

The unemployment rate in Brazil’s six major cities fell to 7 percent in June, the second-lowest reading on record, according to figures from the national statistic agency. Spain has a 20 percent unemployment rate, the highest in the euro region, and the country’s economy is forecast to shrink for a second full year in 2010.

Telefonica’s transaction with Portugal Telecom marks the end of their Brazilian alliance started in 2001 and allows Alierta to complete a deal he has been pursuing since at least 2006.

“Brazilian mobile was the biggest gap in Telefonica’s footprint,” said Georgios Ierodiaconou, an analyst at ING Groep NV. “It’s been their main target for a few years.”

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