Telefonica SA reached an initial agreement to buy Portugal Telecom SGPS SA’s stake in Brazil’s Vivo Participacoes SA after raising its bid a third time to 7.5 billion euros ($9.8 billion), people close to the talks said.

Telefonica confirmed the accord without giving a price. The agreement was reached late yesterday and the boards of both companies are meeting today to discuss it, said the two people, who declined to be identified before an announcement. Telefonica will initially pay 4.5 billion euros in the all-cash deal and the rest in two subsequent stages, one of the people said.

Telefonica Chairman Cesar Alierta has raised the offer by 32 percent from his initial bid in May to gain control of Vivo, Brazil’s largest wireless company. Alierta wants to merge Vivo with Telecomunicacoes de Sao Paulo SA, or Telesp, the Spanish company’s fixed-line unit in Brazil, to ride the growth in the Latin American country as business slows at home.

“Strategically, this was clearly necessary for Telefonica and the price reflects that,” said Alberto Espelosin, who helps manage about $12 billion at Ibercaja Gestion in Zaragoza, Spain, and owns Telefonica shares.

For its part, Portugal Telecom may reach an agreement within days to buy a stake in Brazil’s biggest phone operator Tele Norte Leste Participacoes SA, known as Oi, two people with direct knowledge of the negotiations said. Portugal Telecom will buy a 22.4 percent stake in Oi for about 3.7 billion euros, with influence over management, strategy, board representation and significant veto rights, one of the people said.

Bigger Than Whole

Portugal Telecom shares were suspended from trading, Euronext said today. The company declined to comment on the deals. Telefonica rose as much as 1.1 percent to 17.07 euros in Madrid, giving the company a market value of 77.7 billion euros.

Telefonica’s latest offer for Portugal Telecom’s stake in Brasilcel NV, their 50-50 venture that owns 60 percent of Vivo, is greater than the Portuguese company’s market value of 7.44 billion euros.

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.

The Vivo accord last night was reported earlier today by newspaper El Pais. Portugal Telecom will use about half of the proceeds to buy a stake of between 20 percent and 25 percent in Oi, El Pais said, citing unidentified people close to talks.

Seeking Growth

Telefonica’s bid values Vivo at more than 10 times this year’s expected earnings before interest, tax, depreciation and amortization. Telefonica trades at 3.5 times estimated Ebitda.

The Portuguese government had defined Portugal Telecom’s stake in Vivo as “strategic” for the country.

Both companies have sought growth in Brazil as markets at home cooled. Vivo had 30 percent of Brazil’s 179 million wireless subscriptions at the end of March, according to Anatel, the country’s phone regulator. Brazil is growing at the fastest pace in more than two decades even as European demand slows.

Telefonica, whose Brazilian unit Telesp’s first-quarter sales fell 1.4 percent in local-currency terms, needs a greater mobile-phone presence in the country.

Portugal Telecom has relied on Brazil for growth, with sales from the Latin American country rising 27 percent in the first quarter, while revenue at home fell 3.6 percent. Since 2006, Vivo has overtaken the fixed-line unit as the company’s biggest revenue contributor, accounting for half of sales in the first quarter.

Oi Bid

For Portugal Telecom, a deal with Brazil’s Oi would let it keep a presence in the country even as it sells its Vivo stake to Telefonica. Oi, based in Rio de Janeiro, provides Internet access, mobile, fixed-line and pay-television services.

The owners of Oi would likely control Brazil’s biggest phone operator under the terms of the talks, which are still in progress, said one of the people yesterday, declining to be identified because the negotiations are private.

Telefonica will partly fund the Vivo transaction with a 5 billion-euro loan arranged by Citigroup Inc., people with knowledge of the deal said July 8. The company offered to pay initial interest of 65 basis points, or 0.65 percentage point, on the three-year borrowing, the people said.

The cost of insuring against losses on Telefonica bonds rose 13 basis points to 172.5, according to data provider CMA. Credit default swaps pay the buyers the face value in exchange for the underlying security if a borrower fails to meet its obligations, less the value of the defaulted debt.

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