Telefonica’s tender offer for three Latin American telecom firms sent the Latin markets into a flurry of activity in late winter, as the Spanish company offered minority shareholders a high premium to sell. That made overnight fortunes for some and invigorated the stocks of certain Latin telcos, but the offer also posed a few problems.
Telefonica’s decision to buy out the minority interests in Telefonica del Peru, Telefonica de Argentina, Telesp Participacoes and Brazilian cellular company TeleSudeste Celular Participacoes, will inch it closer to its goal of becoming a global company. But it will deplete many of the blue-chip stocks in emerging Latin markets, according to analysts. ‘The international funds may not be that interested in investing in local markets where, after Telefonica’s buyout, there will be a very low equity,’ says Oliver Mizne, analyst with CSFB Garantia in Sao Paulo. Analysts predict that markets like Peru and Argentina will suffer in the long run from the buy-out. But in Brazil the offer was a godsend, at least for some. ‘One pension fund made $200 mn overnight [because of the 40 percent premium over the trading price],’ reports Mizne. ‘That’s unheard of in Brazil.’ The buy-out offer was good news in Brazil overall, as other telecoms companies expect to attract local investors who decide to divest their Telefonica stocks, says Mizne.
And for Telmex, the rub-off effect of the Telefonica deal was glittering, as the Mexican company, long considered the preferred blue chip among Latin telcos, geared up to gain more investors interested in the bullish Latin telecom sector. ‘The stock price of Telmex went up for many reasons, but much had to do with the premium price Telefonica paid for its Latin telecoms,’ says Gerardo Copca, an analyst with Mexico’s Valores Finamex. Indeed, on January 28, Telmex’s stock was $53.91 a share; by February 8 it had jumped to $68.31.
In Peru and Argentina Telefonica’s offer sent markets into a frenzy, as analysts warned of a disastrous effect on their markets; both will lose much of their equity with the stock transfer. The Telefonica de Espana move already led Salomon Smith Barney to downgrade Peru in its model Latin American equities portfolio; and Peru’s markets will lose about 40 percent of the country’s local and ADR trading as a result of the deal.
Investors are also eyeing Argentina cautiously. Although stock prices soared immediately after the offer, investors were saying that with the loss of Telefonica de Argentina, the local market trading volume would drop 54 percent – making Argentina a non-market. The Spanish deal comes only a few months after Argentina lost another considerable stock, and saw a drain in its foreign investment portfolio, when Spain’s Repsol bought energy company YPF.
In Mexico, the deal was viewed with much interest, not least by Telmex. ‘I believe many of the funds will look toward other strong companies like ours,’ says Eduardo Alvarez, IRO at Telmex. ‘I know Telefonica expects many foreign and local funds to invest in their stock when they trade it in the Latin markets, but many are not going to want to invest in a global company if they are earmarked to invest in Latin America.’
Missing link
The jury is still out for Compania de Telecomunicaciones de Chile (CTC). Most analysts say it will benefit in the short run; and CTC’s stock price has already risen on expectations of a future takeover by Telefonica with a premium similar to the one in the current deal. CTC was excluded this time solely for legal reasons. In a 30-plus page report on the company, ING Barings predicts that for now it will remain a ‘missing link in Telefonica de Espana’s strategy for a seamless Pan-American footprint.’
To acquire CTC, Telefonica would, amongst other things, have to secure approval from 75 percent of all CTC shareholders. But Chilean pension funds, its largest shareholders, have already expressed their interest in such a sale if it brings the same financial benefits as the current offer. And ING Barings certainly thinks it could achieve 75 percent approval if the Spanish parent offered the same 40 percent premium. But analysts say they don’t expect any such offer for another 12 months.
Despite the Telefonica de Espana moves, the Latin telecom sector will continue to thrive, according to a report by Salomon Smith Barney. Other companies that could benefit from the investor bullishness and high demand for telecom stocks are Brazil’s Embratel Participacoes and Tele Centro Sul Participacoes.
As Latin America emerges from recent currency crises, growth patterns indicate more demand for phone lines and other equipment. Brazilian telcos are expected to grow considerably this year; and Brazil’s government predicts that the number of fixed phone lines in the country will grow by over 76 percent in the next three years. That’s good news for Telefonica: ‘It’s definitely becoming a giant in this business,’ says Copca of Valores Finamex.
Telefonica has not been shy about stating its goal to become a global company and a leader in the Spanish-Portuguese-speaking world – a potential market of 550 mn people. How this will affect the desires of Latin groups like Telmex, which might want to expand regionally, is not known. ‘Carlos Slim does have an interest in taking Telmex regionally,’ states Copca. Meanwhile, Telefonica has made an incursion into the Mexican market with a robust internet service boosted with the acquisition of Infosel, a pioneering Mexican internet company started by the newspaper Reforma.
Aggressive stance
Telefonica’s tender offer came after the company had taken an aggressive stance in the Latin American region, which had gained it some enemies. Last year, the Spanish company bought the Chilean internet access provider Telefonica Interactiva from CTC at a very low price, sending fears throughout the industry that the Spanish company would strip its smaller partners of their most valuable assets, including cellular, data and internet operations. There was also much unhappiness with management fees that affiliates were required to pay to the company’s main office.
Latin American pension funds and investors have lost faith in Telefonica de Espana since the Terra transaction, says ING Barings in a report. But aware of its bad PR image, Telefonica’s chairman, Juan Villalonga, traveled to Peru, Brazil and Argentina in late January, shortly after the announcement of the tender offer, and met with presidents Hernando Cardozo of Brazil, Fernando de La Rua of Argentina and Alberto Fujimori of Peru. Telefonica de Espana is offering to trade its stock in the Peruvian, Argentine and Brazilian markets after the tender offer is completed. The entire operation is expected to take four months from the date it was announced on January 13. But analysts predict that Telefonica’s stock will trade much in the Latin stock markets where there is considerably lower liquidity.
Pan-Am dream
Without doubt, Telefonica’s tender offer showed both bravado and great forethought, say analysts. ‘Since the start of privatization a decade ago, it has shown amazing deftness in its evolution from a staid, provincial, monopolistic bureaucracy to a nimble, aggressive, forward-looking and globally opportunistic telecom,’ wrote William Valentine in Worldlyinvestor.com, a week after Telefonica’s offer.
Telefonica aims to create a single, mammoth phone system to link fixed-line and wireless users across Latin America with clients in Spain. The company raised funds for its tender offer by issuing 922 mn new shares in its parent company for the equivalent of $27 bn. The company’s key goal is to become the leading provider of communications to the Spanish-Portuguese speaking world. But it also has its sights set on the US Hispanic web market: its subsidiary Terra Networks launched a network aimed at this group in late January, in a challenge to market leader StarMedia Networks.
In short, Telefonica is positioning itself to compete among the telecom titans – WorldCom, AT&T, Deutsche Telekom, NTT, BT and the combined Vodafone-Mannesmann.
This latest move is just its next step.
