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Spain's Phone Giant Has Latin America Buzzing


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SPAIN'S PHONE GIANT HAS LATIN AMERICA BUZZING

Telefonica de Espaa is determined to be a global player in telecommunications--and the cost be hanged. That's why, when the Spanish telephone company bid for a stake in Peru's telephone operator in January, it blew away rivals with a bid of $2.2 billion, more than double the next highest offers from the likes of Southwestern Bell and GTE.

The bold move paid off. Peru is now part of an estimated $5 billion worth of Telefonica holdings in Latin America--the fastest-growing region of the world after Asia. The company even has a beachhead in the U.S. with its 79% stake in Puerto Rico's long-distance carrier TLD. Suddenly, the $10 billion public carrier is being hailed as a visionary--quite a huge change for what had been one of the least esteemed of all the European operators. As William Coleman, an analyst with James Capel in London, notes, "Telefonica has one of the most attractive, if not the most attractive, portfolio investments in telecommunications in the world."

EXPLODING DEMAND. So rivals are noticing. GTE Corp. and AT&T are among the most prominent of those sparring to purchase a 25% to 35% stake in Telefonica's Telefonica Internacional (Tisa) subsidiary for an estimated $1.6 billion. Insiders at Telefonica say GTE has the edge and is close to clinching an agreement, but one which may not preclude AT&T or others from joining. "Our only condition is to keep a majority stake," says Telefonica Internacional CEO Ignacio Santillana. GTE and AT&T will only say that they're talking to Telefonica on a range of issues.

Telefonica de Espaa started investing in Latin America in 1988 when the shaky political situation there kept North American rivals on the sidelines. Now, both political and market reforms are taking hold throughout the continent and demand for phone service is exploding, making Telefonica's initial $3.5 billion investment look like a strategic coup. "They've turned huge money losers to profit in a very short time," says Joshua Levenberg, an analyst at Pyramid Research Inc. in Cambridge, Mass. Tisa's first-quarter profits this year rose 89%, to $30 million, and analysts are forecasting profit growth of 20% a year well into the next decade.

An alliance between Telefonica and GTE, the world's fourth-largest phone operator, would be a win-win play. In the next five years, GTE wants to double the 11% of its sales generated outside the U.S. Telefonica, in turn, would be able to extend its reach in Latin America, thanks to GTE's controlling position in Venezuelan phone operator CANTV and mobile licenses in Argentina. A link would also bring Telefonica fresh capital and access to GTE's topnotch communications and multimedia technology. "We need a partner to help confront competition in new technologies," says Santillana. The two would also be a powerful team for any bidding in Brazil, the "largest oppmrtunity on the horizon," says GTE Vice-Chairman Michael T. Masin.

AT&T could also benefit indirectly from a GTE-Telefonica link. Telefonica has a 25% stake in Unisource, a Dutch-Swiss-Swedish consortium catering to multinationals. Unisource, in turn, has a stake in WorldSource, AT&T's network consortium for multinationals. Wrap together a Unisource-AT&T-Telefonica-GTE partnership, and you've got an unmatched globe-spanning network.

CABLE CONNECTION. True, when it comes to offering lucrative network services for multinationals, Latin America is not at the top of anyone's list--yet. Foreign phone companies are scrambling for a position in the region now to benefit from soaring demand for service as economic growth takes off. "You're not buying a Peruvian telephone company for the business it has today. You're buying it for the business it will have by 2001," says Tom Will, president of the Miami-based consultancy Intercom Corp.

The problem with investing in the future, though, is figuring out a way to pay your bills today. Tisa's resources have been strained by its recent Peru bid, and Santillana must figure out how to refinance $1 billion in bridge loans taken out to pay for the deal. What's more, his buying spree isn't over: He's snapping up cable licenses in Latin America so he can become first in the region with new multimedia services. An alliance now with a deep-pocketed partner would be particularly timely.

But that shouldn't be hard to forge, much to Santillana's satisfaction. He still recalls how executives at large U.S. telecommunications companies gave him the cold shoulder just four years ago. Now it's his turn to keep would-be allies waiting.

TELEFONICA DE ESPANA EXTENDS ITS REACH

PERU

--$2.2 billion paid for 85% stake in ENTEL and CPT, the Peruvian national phone operators

PUERTO RICO

--Paid $142 million for a 79% stake in TLD, the long-distance operator, gaining it possible entry point into the U.S. market

CHILE

--Owns 43.7% stake in CTC, operator of 95% of local networks, and 20% of ENTEL-Chile, the main long-distance operator

ARGENTINA

--Leads a consortium that owns a 60% stake in TASA, one of two common carriers

VENEZUELA

--Owns 16% of a consortium that has a 40% controlling stake in CANTV, a phone operator

URUGUAY

--Has 10% stake in the cellular operator Teco Tasa as part of a consortium led by TasaGail Edmondson in Paris, with Tim Smart in Stamford and bureau reports DATA: PYRAMID RESEARCH LATIN AMERICA


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