Telefonica to Concentrate on Key Markets in 2002

Thursday, January 24, 2002

Latin America's largest telecoms company Telefonica (NYSE: TEF) will likely review its operations in Argentina and concentrate on the key markets of Brazil and Mexico this year, analysts told BNamericas.

The last two years have witnessed a flurry of acquisitions and buyouts by the Spain-based telco.

In June 2000 the company bought out minority shareholders in its LatAm subsidiaries Telefonica de Argentina (NYSE: TAR), Telefonica del Peru (NYSE: TDP), and Telesp (NYSE: TSP) in a US$18bn share swap code named Operation Veronica. Telefonica also closed the acquisition of four mobile operators in Northern Mexico from Motorola (NYSE: MOT) last year.

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In the last 10 years Latin American operations have come to represent a major part of the company's bottom line. International investment bank ING Barings estimates that Latin America will account for 45.7% of Telefonica's 2001 projected Ebitda of 12.9bn euros. Of the amount corresponding to the region, 11.5% will come from mobile assets and the remaining 88.4% from fixed assets.


According to international credit ratings agency Fitch analyst Erwin Van Lumich, Telefonica will likely be more inclined to review its operations in Argentina, with the aim of making them more efficient and profitable than they are now.

Telefonica and other public service companies in Argentina - unlike their compatriots in the banking sector - will not be particularly hard-hit by the crisis, Van Lumich told BNamericas from Barcelona. The company will be hit with losses in the forex markets, but unlike banks, will not face a currency mismatch in assets and liabilities. Telefonica management has communicated to Fitch that it expects the crisis's effect to be more or less neutral, Van Lumich said. Fitch - to be on the safe side - expects a slightly negative impact.

Telefonica carries an A+ credit rating, which is higher than fellow European telcos Deutsche Telekom and Vodafone. One reason for this is that Telefonica has relied more on equity swaps in its acquisitions than other big telcos, Van Lumich said.

Turning to the whole of Latin America, Van Lumich pointed out that Telefonica has largely completed infrastructure investments in its existing operations. In order to continue growing in Latin America in 2002, the company will have to build its client base and expand into new markets.


Brazil's mobile industry is expected to undergo considerable consolidation this year, for which Telefonica cannot afford to be too timid if it wants to carve out a strong long-term position in that country, Pyramid Research analyst Juliana Abreu told BNamericas.

Currently Telefonica is waiting for regulator Anatel to approve its joint venture with Portugal Telecom (NYSE: PT). The two companies together own five operators with coverage in all major Brazilian markets except Minas Gerias state, excluding Rio de Janeiro.

According to Abreu, Telefonica can enter Minas Gerais through the acquisition of an existing operator, through a partnership, or by acquiring PCS spectrum in the forthcoming March auction.

Telefonica has eyed Telemig, which is controlled by Telpart Participacoes, a partnership of Canada's Telesystem International Wireless (NASDAQ: TIWI), Brazil's Opportunity investment group and several Brazilian pension funds. However, Abreu said that Telemig has been unwilling to sell.

In Mexico, Telefonica has a relatively limited presence compared to its other markets, but is expected to "keep trying to expand its footprint to offer nationwide mobile coverage" in the country, Pyramid analyst Gabriela Baez told BNamericas.

According to Baez, the only routes Telefonica has available to expand its penetration in Mexico are through the purchase of PCS operators Unefon or Pegaso. Talks with Unefon broke down last year, and Telefonica has since been in negotiations with Pegaso. These talks are currently on hold, but should resume by March, Baez said


In Chile, where Telefonica owns 44% of incumbent operator Telefonica CTC Chile (NYSE: CTC), the company is likely to be very quiet unless it can persuade the government to modify a tariff decree that slashed CTC local rates.

Santander Investments analyst Christian Moreno told BNamericas that he does not foresee Telefonica making a tender offer on the remaining shares in CTC in the next 1-2 years because of the tariff degree.

Moody's telecoms analyst Dennis Saputo drove the point home, saying that the tariff decree is "key" for any new action. If Telefonica can obtain favorable modifications, he would expect a tender offer to be made shortly afterwards.

The auction of 2.5G and 3G spectrum in Uruguay was recently postponed until May at the request of Telecom Italia Mobile (TIM). According to Pyramid's LatAm director, Daniel Torras, Telefonica was reportedly disappointed with the delay, because it means that competition for the licenses will now likely be more intense.

In Peru, Telefonica will seek to solidify operations at local subsidiary Telefonica del Peru (NYSE: TDP). TDP plans to invest US$250mn this year to develop existing services and operations in the country, including mobile telephony.

Paraguay and Ecuador plan to sell their state-run telecoms companies this year, while fragmented ownership of Venezuela's incumbent operator Cantv (NYSE: VNT) could open the door for Telefonica to increase its 7% stake in the company. However, a Telefonica spokesperson in Madrid told BNamericas that the company doesn't plan to bid in either auction or raise its stake in Cantv.

Telefonica's countries of operation in Latin America include Argentina, Brazil, Chile, Colombia, El Salvador, Guatemala, Mexico, Peru, Puerto Rico and Venezuela.