FROM "Red Herring"
_______________________
AOL MOVES INTO LATIN AMERICA WITH CISNEROS
Add another territory to America Online's (AOL) empire.
The "world's most popular Internet online service"
announced plans Tuesday to enter the Latin American
market in a big way.
In a 50/50 joint venture with the Cisneros Group, one
of the largest media, entertainment, and
telecommunications organizations in Latin America, AOL
will now reach out to that region's consumers, helping
to operate localized services initially in Brazil,
Mexico, and Argentina, with other markets to be added
in the future.
Latin leverage
The Cisneros Group will make an initial investment of
$100 million to fund the joint venture, which will
combine America Online's technology, interactive
services, brand-name recognition, and access to its
global content and customer base of more than 14
million members worldwide with the Cisneros Group's
management, operations, and marketing expertise
throughout Latin America.
"This is a significant deal for two reasons," says
analyst Phil Leigh of Raymond James (RJF). "First,
because of the $100 million investment from another
party, AOL is in the strong position of having only a
carrying interest [in the deal]. ... And second,
because of this carrying interest, AOL will not have to
report any of the losses it will incur as the venture
gets up and running." (Because AOL has no financial
interest in the deal, it is not obligated under
accounting procedure to apply any losses, or benefits,
to its financial statement).
With that kind of leverage, it's easy to see why AOL
seems to be expanding so easily into international
markets.
As with its operations in Europe, Japan, Canada, and
Australia, AOL in Latin America will operate local
service with local management, local content, local
customer service and pricing, and access to the content
and members of AOL's other global services. These
Spanish- and Portuguese-language AOL services will in
turn be accessible to AOL members in the U.S. and
elsewhere. The joint venture will also be responsible
for developing the CompuServe brand in Latin America.
"It's similar to what they did in Europe and Japan,"
says Mr. Leigh. "It's a replay of the same movie, but
with a different audience."
Untapped market?
"Latin America is poised to become the next great
growth center for the interactive medium," says Gustavo
A. Cisneros, chairman and CEO of the Cisneros Group.
"With a population of close to 460 million people
sharing common languages and cultural values, the Latin
American market presents huge potential for expansion."
Although Latin America has low PC penetration rates
compared to many of the other markets AOL has embraced,
Mr. Cisneros notes that the region has a "recently
developed communications infrastructure and a
double-digit annual growth rate in computer
penetration."
Or, as Mr. Leigh puts it, "Latin America's just
beginning; it's in take-off stage, and it's the right
time to get in on the ground floor."
Not quite the ground floor
While AOL is perhaps the dominant online content
provider/ISP worldwide, the company will still have to
play catch-up in Latin America against New York-based
StarMedia. StarMedia made a splash in October when it
received an $80 million round of financing -- the
largest equity financing of a private Internet media
company ever.
StarMedia, which follows the Yahoo portal model, has
content deals with News Corporation (NWS), and is
currently the big name in the Latin America Internet
space. But Mr. Leigh plays down the challenge it might
pose to the AOL/Cisneros joint venture. "They are more
like a portal site than an online service," he says,
"so I'm not too sure Steve Case has anything to be
worried about."
And a confident Jack Davies, president of AOL
International, has this to say of the launch into Latin
America: "This new joint venture gives us a solid
foothold in the rapidly growing Internet online markets
... and solidifies our position as the global leader in
providing branded online services to consumers around
the world."
The Street agrees: AOL shares continued a 2-month-long
upward march, ending Tuesday's session up $3.06 to
$92.19 -- nearly 50 points, or 120 percent, higher than
where the price was at its October lows.
"This deal gives me one more reason to keep my Buy
recommendation intact," says Mr. Leigh. "AOL is one of
our firm's strongest recommendations."
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