Brazil's Telemar Shapes Up Shares, But Critics Want More
Dow Jones Online News, 06/05/2001 18:15
Terry Wade
Of DOW JONES NEWSWIRES
SAO PAULO -(Dow Jones)- Brazil's biggest phone company - Tele Norte Leste Participacoes SA (TNE) - is shaping up its shareholder structure, but not as much as some investors would like.
Telemar plans to announce within the next three weeks terms to fold 16 operating companies into one unit through stock swaps. After the operation, investors will be able to choose between buying stock of the operating unit - Telecomunicacoes Rio de Janeiro SA (E.TRJ), known as Telerj - or the Telemar holding company.
Telemar's plans kicked off rallies Tuesday among a number of its listed units ahead of the restructuring. Shares of operating units Telemig and Telebahia rose about 20% on hopes of sweetheart deals from Telerj, which will likely see its capitalization skyrocket as it absorbs its 15 sister units. Telerj's shares rose 17%, while preferred shares of Telemar - which is expected to realize tax advantages from the deal - rose 2.7% to 38.52 reals ($1=BRR2.38).
But shareholders of Brazil's bellwether stock would likely see better long-term share performance if Telemar were to absorb its soon-to-be enlarged operating unit altogether. This would make it more tempting for investors and make its share structure resemble Latin America's most liquid telecom play - Mexico's Telefonos de Mexico SA (TMX), or Telmex.
"In comparison to Telmex, the current shareholder structures of Brazilian telcos limit liquidity and transparency around earnings, making them less attractive for global investors," Deutsche Bank telecom analyst Tucker Grinnan said.
No Plans To Group All Ops Under Single Stock
Investors demand liquidity, which contributes to price appreciation, as a way of managing risk.
And market players say when stocks of holding and operating companies trade separately, it's often tough to determine how controlling shareholders will allocate operating revenues or tax benefits between the companies.
While a few Brazilian wireless carriers - such as Tele Sudeste Celular Participacoes SA (TSD) - have merged their operating and holding companies as part of a larger process of being absorbed by European parent Telefonica Moviles SA (TEM), fixed-line companies haven't followed suit and aren't expected to anytime soon. Many Brazilian firms use holding companies and operating companies as a way to maintain control among a small group of commanding shareholders.
Roberto Terziani, Telemar's investor relations director, told Dow Jones Newswires the company doesn't have any plans to group all of its operations under a single stock.
Terziani noted that the Telemar holding contains the carrier's data center unit, an upstart Internet access unit and will include a wireless unit. Telerj, in contrast, will basically be a pure fixed-line play. He added that it's too early to predict which company would have a higher valuation.
Could Help Close Gap With Telmex
In many ways, Telemar is following the path of one of Brazil's other three fixed-line heavyweights.
Brasil Telecom Participacoes SA (BRP) merged its six operating units into one operating company, Brasil Telecom SA, about a year ago.
But not all investors have embraced the change, mainly because Brasil Telecom Participacoes has talked at times of creating an American Depositary Receipt for the operating unit in New York.
Such a listing undoubtedly would cannibalize liquidity from the parent company's ADR, a fact that makes investors skittish.
The third fixed-line firm in the group, Telecomunicacoes de Sao Paulo SA, or Telesp, has a very small float, after Telefonica SA (TEF) bought up 90% of its shares in a 2000 tender offer.
Telemar has 12.8 million phone lines in service - the most of any phone company in Latin America - but generates much less revenue than Telmex, which is the dominant provider of Internet access and long distance services in Mexico.
Analysts say it's unlikely fast-growing Telemar, which plans to make capital expenditures of 8.2 billion reals ($1=BRR2.35) in 2001, will ever surpass the Mexican giant in terms of liquidity - as value-play Telmex is one of the two or three most liquid stocks in the region.
But a consolidated shareholder structure could help Telemar close the gap.
-By Terry Wade, Dow Jones Newswires; 5511-3813-1988; terry.wade@dowjones.com
(This story was originally published by Dow Jones Newswires)
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