Telefonica said in a statement to Madrid’s stock exchange, early on Saturday that the deal fell through after Portugal Telecom’s board of directors failed to accept the Spanish company’s offer by the deadline.  “The deal has been extinguished,” Telefonica said. Though PT shareholders voted two weeks ago to accept the offer, the Portuguese government used special voting rights to block the sale, citing national interests.

The European Union’s Court of Justice then ruled that the Portuguese government’s blocking of the deal was illegal.

Telefonica and PT each own 50 per cent of Brasilcel, a Dutch holding company which owns 60 per cent of Vivo. The Spanish company’s offer was to buy PT’s half of Brasilcel and following the court’s finding it extended the offer until July 16.

Telefonica is eager to expand its significant presence in the fast-growing Latin American sector, where it has an important foothold in burgeoning markets such as Chile, Colombia, Mexico, Peru and Venezuela and Brazil.  Brazil’s economy is booming, in contrast to Telefonica’s home territory of Spain which is struggling to emerge from nearly two years of recession.

PT is Portugal’s largest telecommunications operator and the Portuguese government demanded it maintain a foothold in Brazil as it did not want to lose PT’s Brazilian revenue stream.  Telefonica SA is a much larger company than Portugal Telecom SGPS SA, employing about 237,000 people compared with the around 32,000 employees at its Portuguese counterpart.

Telefonica would not comment Saturday on the possibility of legal action following the collapse of the deal. Calls to Portugal Telecom on Saturday went unanswered.