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Spain's Phone Giant Has Latin America Buzzing


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SPAIN'S PHONE GIANT HAS LATIN AMERICA BUZZING

Telefnica de Espaa is determined to be a global player in telecommunications--and the cost be hanged. That's why, when the Spanish telephone company sought a stake in Peru's telephone operator in January, it blew away rivals with a bid of $2.02 billion, more than double the next highest offer. Peru is now part of an estimated $5 billion worth of Telefnica 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--a huge change for what had not long ago been one of the least esteemed of European carriers. As William Coleman, an analyst with James Capel in London, notes, "Telefnica has one of the most attractive, if not the most attractive, portfolio investments in telecommunications in the world."

Ask GTE Corp. or AT&T. They're among those sparring to pay an estimated $1.6 billion for a 25%-to-35% stake in Telefnica Internacional (Tisa), the subsidiary through which Telefnica has been making its bold moves. Insiders at Telefnica say GTE has the edge and is close to clinching an agreement, but AT&T or others could still join. "Our only condition is to keep a majority stake," says Telefnica Internacional CEO Ignacio Santillana. GTE and AT&T will say only that they are talking to Telefnica on a range of issues.

EXPLODING DEMAND. Much of Telefnica's new luster comes from its moves in Latin America. In 1988, when political instability kept North American rivals on the sidelines, Tisa pounced. Now, demand for phone service is exploding, making Telefnica's $3.5 billion investment look like a coup. "They have 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. "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," adds Tom Will, president of Miami-based consultancy Intercom Corp.

The potential alliance between Telefnica and GTE, the world's fourth-largest phone operator, also could be a coup. In the next five years, GTE wants to double the 11% of its sales generated outside the U.S. Telefnica, in turn, would extend its reach in Latin America, thanks to GTE's controlling position in Venezuelan phone operator CANTV and mobile licenses in Argentina. The link would also bring Telefnica fresh capital and innovative technology. "We need a partner to help confront competition in new technologies," says Santillana. The two companies would also be a powerful team for bidding in Brazil, the "largest opportunity on the horizon," according to GTE Vice-Chairman Michael T. Masin.

AT&T could benefit from a GTE-Telefnica link, too. Telefnica has a 25% stake in Unisource, a Dutch-Swiss-Swedish network consortium that caters to multinationals. Unisource, in turn, has a stake in WorldSource, AT&T's network consortium for multinationals. Wrap together a Unisource-AT&T-Telefnica-GTE partnership, and there's potential for an unmatched globe-spanning telecommunications network.

DEADLINE RUSH. For now, Tisa has plenty on its plate. Having won the Peru bid, Santillana is looking for ways to refinance $1 billion in bridge loans. And Telefnica is getting ready for big changes in its home market--one of the most protected in Europe. In June, Spanish officials announced that they now would be willing to meet the 1998 European Union deadline for allowing competition in phone service, even though Spain, along with Ireland and Greece, won the European Union's permission last year to retain its monopoly until 2003. Telefnica Chairman Candido Valazquez says he is prepared to sacrifice his phone monopoly in exchange for being allowed to enter new businesses, particularly cable TV.

New business will require some fresh capital, as will Telefnica's mverseas buying spree, which has continued recently with Latin American cable-TV deals. So an alliance with a deep-pocketed partner would be particularly timely. Santillana says that he isn't worried, though. The big U.S. phone companies gave him the cold shoulder four years ago when he wanted them to join in his Latin American push. But this time, he notes with satisfaction, it's his turn to keep would-be allies waiting for their phones to ring.TELEFONICA DE ESPANA EXTENDS ITS REACH

PERU

$2.02 billion bid 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 a possible entry point into the U.S. market.

CHILE

Owns 43.7% stake in CTC, operator of 95% of local networks and 30% 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 the CANTV, a phone operator.

URUGUAY

Has 10% stake in the cellular operator Teco Tasa as part of a consortium led by TASA.

DATA: PYRAMID RESEARCH LATIN AMERICA

Gail Edmondson in Paris, with Tim Smart in Stamford, Conn., and bureau reports


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