Retreat from Brazil
thestar.com
How Montreal entrepreneur Charles Sirois got a close-up look at the `seamy underbelly' of Brazil' s telecom world
TYLER HAMILTON
TECHNOLOGY REPORTER
Apr. 5, 2003. 08:10 AM
There's a good chance that Charles Sirois, the self-assured Canadian telecom entrepreneur, will never again do business in Brazil.
It was a short five years ago when Sirois, chairman and largest shareholder of Montreal-based Telesystem International Wireless Inc., walked confidently into the Portuguese-speaking country with grand plans of profiting from the privatization of its telecommunications sector.
Two weeks ago, the 48-year-old Quebec native — a wireless guru once dubbed "the next master of the universe" in the pages of Maclean's magazine — ran out of Brazil with his tail between his legs, leaving behind another business blunder on a growing list of struggling or failed investments around the globe, including a handful in Canada.
But Brazil proved more than a simple investment. For Sirois, it became a costly five-year drama, a period filled with heated boardroom battles, nasty lawsuits, sly business tactics, treachery and a cast of hardnosed and influential characters fitting for a Hollywood movie.
At the end of it all, with legal costs mounting, the company admitted defeat and chose to cut its losses. Having paid more than half a billion dollars to play in Brazil's mobile phone market, it walked away, corporate egos bruised, with a fraction of that amount.
TIW executives would not agree to be interviewed for this story.
But analysts, investors, investigators and other sources close to TIW's Brazilian dealings say the reason for the company's retreat can largely be attributed to one man: Daniel Dantas — a 47-year-old financier described in the Brazilian press as "one of the most brilliant in his generation" with the "ability to make enemies as spectacular as his talent for business."
Dantas, perhaps the best known private-equity investor in Brazil, runs an investment banking company in Rio de Janeiro called Banco Opportunity SA, and manages a fund that shares the same name.
Citigroup Inc., through its venture capital unit, has invested up to $700 million (U.S.) in this fund and is its largest shareholder.
Since 1998, Dantas has used the Opportunity fund to invest heavily in — and gain control of — former Brazilian state monopolies in telecommunications, transportation and shipping, as well as various entertainment and Internet-related ventures. Many of these deals bring in other partners — a combination of local pension funds and foreign investors with a management track record.
One of those foreigners was TIW. The Opportunity fund and TIW had invested together in 1995 in two other wireless ventures, but eventually sold out to BCE Inc. subsidiary Bell Canada International Inc.
TIW and Opportunity decided to join forces three years later to expand their holdings.
TIW is a mobile global communications operator with past and current investments in Romania, the Czech Republic, India and Western Europe. Bruno Ducharme, president and chief executive officer of TIW since its inception in 1994, is a loyal friend of Sirois and was his point man in Brazil.
A Montrealer who earned his civil law degree at McGill University and his MBA at the University of Pennsylvania, 45-year-old Ducharme has dedicated 13 years of his life to TIW.
There, under the grandeur of Sirois — but lacking his boss's charisma — Ducharme has earned a reputation for being guarded and, in a sense, paternalistic for the way he demands trust in how he operates, as well as for the decisions that he makes.
"Bruno is definitely, for TIW, Charles' grand strategist," said Lawrence Surtees, an analyst with IDC Canada Ltd. "He's very shrewd, a very smart operator."
The company, led by Ducharme, was eager in 1998 to expand its presence in the newly liberalized Brazilian telephone market, where a number of mobile phone companies were up for grabs through public auction.
"It was one of the sexiest developing markets, and it was opening up big time," added Surtees.
The auction raised more than $10 billion (Canadian) for the Brazilian government, which had a 10-year plan to raise more than $150 billion.
"TIW's idea was not to come in here and be a long-term player," said one analyst who has closely followed Sirois' investments over the years.
"The goal was to get in, buy cheap, create some value, and sell."
TIW walked away with equity interests in two of eight cellular holding companies sold off by the state. The acquired gems were Telemig Celular, claiming more than a million subscribers from the State of Minas Gerais, and Tele Norte Cellular, with about 800,000 customers throughout five states in northern Brazil.
The "Canadians," as they were called, a group of Brazilian pension funds and a company representing the Opportunity fund formed a consortium called Telpart that acted as the holding company for the two cellular phone acquisitions. TIW acquired 49 per cent of Telpart at a cost of about $380 million (U.S.). Opportunity picked up 27 per cent and the pension funds owned 24 per cent.
The arrangement seemed fair, but there was one fatal flaw. Caught up in the excitement of the auction, the three partners did not create a formal shareholder agreement and were left, instead, with a non-binding memorandum of understanding.
"There was a great deal of trust," Ducharme told a Latin American financial publication in October, 2000. "We had enough of a relationship not to need a 45-page shareholders' agreement beforehand."
It was an act of trust that Ducharme, in regular communication with Sirois, would soon regret. As early as two weeks after Telpart participated in the auction, Dantas began to redraw the lines of partnership. He could influence this because the pension funds, while direct equity owners in Telpart, were also investors in the Opportunity fund.
Dantas, characteristically audacious, managed to convince the pension funds to join forces with Opportunity to create another company, called Newtel, which would own 51 per cent of Telpart. More importantly, Opportunity's deal with the pension funds snagged it a 51 per cent stake in Newtel, giving Dantas indirect control over Telpart even though his fund held a minority interest.
The pension funds and TIW verbally agreed to this structure on condition that a formal agreement produced later would assure shared control of Telpart.
After 18 months of negotiations, that agreement never came. Having made its investment in Telpart on the premise of co-control, TIW felt betrayed. Without control, a sale of TIW's stake in Telpart could not fetch a premium.
To this day, observers aren't quite sure how Dantas could manipulate the situation so easily, or, from the opposite perspective, how TIW could be so easily misled. Allegations of wrongdoing run rampant in Brazil, but nothing concrete has been proven.
"It's astonishing they were so naïve in getting into bed with Dantas, and that's what it comes down to," said one money manager close to both companies.
"To get into a deal with Opportunity without having some kind of veto when you're providing the bulk of the money is ludicrous. TIW essentially bought the car and bought the gas and handed Dantas the keys."
Ducharme, an astute businessman and former lawyer accustomed to playing hardball, was reportedly fuming. Meanwhile, Dantas was calling the shots. The Brazilian was choosing management, appointing directors and approving questionable non-operational expenses. TIW's influence was quickly waning.
"Bruno had met his match," said one analyst, adding that TIW unexpectedly and reluctantly found itself in the middle of a battle for control of Telpart.
The battle grew more intense, with four disillusioned pension funds eventually joining sides with TIW after they realized Dantas had grabbed too much control. The two partners decided in July, 2000, to launch a lawsuit against Opportunity, charging it with violating Brazil's telecommunications law and breaching certain "good faith" agreements.
At first, it appeared Newtel's days were numbered. A Brazilian judge ruled against Opportunity and ordered the ownership structure back to its original form. But an appeal court took no time in quashing that decision, which forced TIW and Opportunity back to what were essentially paralyzed negotiations.
On July 25, Ducharme flew to Rio to meet with Dantas, as well as the Brazilian telephone regulator to get its formal position on the dispute. Nothing much came of the meetings. Sources say Brazil's phone regulator, Anatel, was at the time overly favourable to Dantas, a man with many connections to Brazil's political elite.
Over the next two years, as many as 20 lawsuits in and outside of Brazil were launched. Walkouts became common at Telpart board meetings. Opportunity repeatedly made offers to buy out stakes held by TIW and the pension funds. All offers were rebuffed as inadequate.
Graham Makohoniuk, director of equity research at Globalvest Management Co. in St. Thomas, Virgin Islands, manages about $500 million (U.S.) in Latin American equities, including shares in Telemig and Tele Norte. He said board meetings had to be held in large conference halls to accommodate all the lawyers and special advisers involved with the dispute.
"The meetings they had were just phenomenal, but nothing got done. It was quite the situation," said Makohoniuk.
"It was like a soap opera," said Dvai Ghose, a telecommunications analyst with CIBC World Markets who follows TIW. "Certainly, when you get two people in the same room that think they're better than the other, it doesn't lead to anybody giving way. Negotiations are tough. Nobody wants to be the one that looks weaker."
A source working for one of Opportunity's investors said both sides were pulling out all the guns in their legal arsenal against each other.
"The lawyers were making money, let's put it that way," he said. "Basically, they had the best 10 litigators in the country working for one side or the other."
Dantas, a former instructor at the Massachusetts Institute of Technology and a recognized "rising star" since his days at Brazil's top business school, is quite familiar with conflict in the business world. While battling TIW, he was also in a similar spat with Telecom Italia SpA over control of Brasil Telecom SA, the third-largest provider of fixed wireless services in Brazil.
Another ongoing dispute was with Luis Roberto Demarco Almeida, a former junior business partner who, after 10 months at Opportunity, was fired by Dantas. In 1999, the younger Demarco sued Dantas in a Cayman Island court, believing he was entitled to up to 3.5 per cent of the Opportunity fund as part of his employment agreement.
A nasty legal battle ensued, to the point where a Cayman judge accused Dantas last May of "gross abuse" of the judicial process. The judge also said Dantas had submitted false evidence in the case, which was finally settled last September for an undisclosed amount.
That same month, the Wall Street Journal reported that Brazilian officials were looking into possible securities-law violations related to funds managed by Dantas. A year earlier, allegations of tax evasion by Brazil's public ministry spurred the country's federal police to investigate his investment bank, Banco Opportunity. None of the allegations have been proven in court, and Opportunity has publicly denied any wrongdoings.
Ducharme wasn't to be outdone by his foe. The TIW executive had a few tricks up his own sleeve. Private investigators following the TIW-Opportunity dispute say the Canadian company established contact with Demarco — the former junior partner of Dantas — and the two negotiated an action plan to keep the legal pressure on Dantas, their "common enemy."
In a letter obtained by the Star, dated May, 2001, and referring to a previous letter dated April 26, TIW agreed to keep Demarco "indemnified and held harmless" for up to $1.4 million with respect to his own legal battles with Dantas and the Opportunity fund.
"If you help me in my case, I will help you in your case. That was Demarco's position," said one source.
The letter was sent from TIW general counsel Margriet Zwarts. It outlined a plan to sustain Demarco's lawsuit with Opportunity, guaranteeing him a specified amount for his efforts. Presumably, Demarco's past relationship with Dantas, and his knowledge of Banco Opportunity, would come in handy for TIW in its own dispute.
"This indemnity is subject to your exercising all reasonable efforts to receive more than $1,400,000 (U.S) in the Demarco Proceedings and to you keeping TIW fully informed of such proceedings," the letter states.
When asked about the authenticity of the letter, TIW refused to comment. A company spokesperson said executives — including Zwarts — were bound by a Cayman Islands court gag order not to speak about it.
Three months earlier, in February, 2001, another TIW plan was unfolding. Sources say Ducharme and Sirois hooked up with controversial Brazilian businessman Nélson Tanure, a former shipyard magnate, a friend to high-level Brazilian politicians and majority owner of Jornal do Brasil, the second-largest newspaper in Rio.
Tanure was influential in the media world, and he had the kind of local expertise that TIW lacked in its fight with Opportunity. Tanure's job was to make life miserable for Dantas.
"The Canadians, who understand nothing of Brazil, believed Tanure knew his opponent's tricks well enough to create a level playing field," stated a June, 2001, article in Veja, one of Brazil's most popular news magazines. The Star translated the article from Portuguese into English. "The two partners armed themselves in trying to weaken Daniel Dantas at both phone companies."
Tanure had his reasons for backing TIW. Sources say the Brazilian media boss stood to make a substantial commission if he could pave the way for a sale of TIW's stake in Telpart, but only if it fetched a premium. This required that he first unravel the mess Dantas had created. As a strategy, it made sense. Besides, TIW had nothing to lose.
But the plan was derailed when Tanure got caught in the crossfire of what appeared to be some sort of covert investigation. In April, 2001, a number of audio recordings publicly surfaced that revealed a series of tapped telephone conversations between Ducharme, Tanure, a close business friend of Tanure's named Paulo Marinho and famous Brazilian journalist Ricardo Boechat.
A selective transcript of the tapes, the origins of which are unknown, appeared in Veja. One dialogue is between Tanure and Ducharme as they define "performing strategies against the Opportunity bank of Daniel Dantas," the magazine stated. Another conversation focused on Boechat, a long-time syndicated columnist for Jornal O Globo, which is a direct competitor to Tanure's Jornal do Brasil. Boechat was considered one of the most respected journalists in Brazil.
In the transcript, Boechat is on the line with Marinho, and is heard reading a soon-to-be published column he had written that was supportive of TIW and the pension funds in their fight against Dantas. "The story is very good," replied Marinho. "It says everything we wanted to say."
Publication of the transcripts created a huge controversy in Brazil. Boechat, disgraced by his involvement in this plan, was fired from Jornal O Globo and eventually went to work for Tanure's competing paper. Seeking to avoid further involvement, TIW moved to severe its ties with Tanure.
Sources in Sao Paulo told the Star that Brazilian federal police are investigating issues surrounding the tapes.
Ducharme's and Sirois' attempts to level the playing field, perhaps beating Dantas at his own game, did not go as planned, and TIW began to grow tired of doing business in Brazil.
"They were trying everything," said Makohoniuk of Globalvest. "They basically had their balls in the wolf's jaws, and the wolf wasn't going to let go."
Wrestling control of Telpart from Dantas had become too costly, and the uncertainty surrounding the battle was hurting TIW.
The global telecommunications downturn was complicating matters, and, along with considerable devaluation of Brazil's national currency, the real, the value of Telemig and Tele Norte was deteriorating significantly.
On March 5, 2002, Ducharme announced that TIW — fed up with the Brazilian market and overextended with other ventures — was pulling out of Telpart.
It gave itself 12 months to sell off its equity interest in the holding company, and sure enough, a deal was announced last month, just within its limit. Having walked into Brazil with $380 million (U.S.) and a slew of capital and legal costs, TIW is departing with $70 million and sizable exit costs.
Who bought the company's stake? After two years of haggling, an affiliate of the Opportunity fund made the purchase and the two partners settled their legal dispute. Dantas had finally won.
When the Star attempted to contact Dantas for this story, an official for Banco Opportunity said the company's messy history with TIW is behind it now.
"One of the things they agreed on (with this deal) is they wouldn't talk about past problem," said spokesperson Nemericio Nogueira, on the phone from Sao Paulo.
Mark Boutet, a spokesperson for TIW, confirmed that confidentiality agreements as part of the sale and settlement prevent Sirois, Ducharme and other executives from commenting on relations with Dantas and his Opportunity fund.
One money manager believes that six months from now, Dantas will take the stake he bought from TIW and flip it for three times the amount — a final insult to the two Canadian executives.
What's clear today is that years of doing battle in Brazil and elsewhere have taken their toll on TIW, even if Sirois has been somewhat successful in sheltering his personal wealth. In March, 2000, the company had a market capitalization of nearly $5.5 billion (Canadian). Today, it sits at about $163 million, with shares trading in penny-stock territory since last May.
In that time, TIW has retrenched dramatically. In addition to Brazil, the company has walked away from wireless investments in Western Europe, Mexico, China and the United Kingdom, where Sirois overpaid for spectrum licences.
Last year, TIW was forced through a major capital restructuring while under bankruptcy protection. The company now focuses almost exclusively on Prague-based ClearWave NV, a subsidiary that oversees cellular operations in Romania and the Czech Republic.
"The magnitude and extent of the telecom meltdown globally meant Charles was incredibly vulnerable," said Surtees of IDC. "He was always leveraged six ways to Sunday."
Despite these struggles and a particular trying 2002, shareholders of TIW may be interested to learn that Ducharme earned $850,000 (Canadian) in salary and bonuses last year — when the stock first plunged below $1 — compared to $600,000 in 2001.
Closer to home, Sirois's investments have also struggled. Microcell Telecommunications Inc., the Montreal-based provider of the Fido mobile phone service, recently went through a debt restructuring. Look Communications Inc., the wireless TV and Internet provider based in Toronto, restructured under creditors' protection.
Industry observers also blame Sirois for selling Jean Monty a lemon when BCE bought the 77 per cent it didn't already own of Teleglobe Inc., the overseas telecommunications provider that two years earlier had, on Sirois's watch, acquired Dallas-based Excel Communications Inc. for $4.6 billion.
The BCE deal, completed in October, 2000, was valued at more than $7 billion in stock, with Sirois getting about $550 million — worth about $380 million if he still held BCE shares today.
BCE ended up selling the Excel portion of Teleglobe for only $400 million, and, after that, wrote off the Teleglobe purchase itself to the sad tune of $7.5 billion.
For some, TIW's retreat from Brazil is very much a bookend to the rapid expansion and spectacular contraction of Sirois's global wireless empire.
It's also a peek at how difficult it often is to conduct business in other parts of the world.
"Brazil has the highest degree of wealth concentration in the world, and is very much a country run by elites," said Makohoniuk.
"Down there, in any deal, it's second nature for somebody to think, `What am I going to get out of this?'"
Surtees said the business environment probably caught TIW off guard, and at the same time, forced the company to stoop to a different level.
"TIW's tactics and relationships in Brazil expose something we don't normally associate with telecom, which is a seamy underbelly." |
