BCI's misadventures in Latin America
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In the late 1980s, Latin American countries started to sell off their state-owned monopolies. For Ma Bell, its seemed like a perfect opportunity. What ensued, though, was more a case of innocents abroad.
Robin Taylor
Financial Post
Thursday, August 08, 2002
BCI was lured into Brazil with dreams of capturing the whole northeast of the country, including Rio de Janeiro.
It is almost unprecedented. A company is winding itself up voluntarily without being forced to do so by bankruptcy proceedings. With the sale of its major assets to its former Mexican partner America Movil SA, all that is left now for Bell Canada International Inc. is the "mopping up" of outstanding claims and the sale of its orphan properties in Mexico and Brazil. By the time it is done, BCE will have thrown away the better part of three-quarters of a billion dollars, not to mention the losses of retirees and small investors who believed in the BCE name. Even in the smoking ruins of the telecom wasteland, this is an ignominious flameout.
When companies breathe their last, the post mortems look for logic -- the bad market conditions, the ruinous investment, the fatal flaw. But sometimes, the end is marked more by the mundane failure to pay attention.
When BCE announced its planned wind up of BCI in early June, it said that what went wrong with BCI was what went wrong with telecom. Granted, these are bad times, but what surfaces most often in speaking with those involved, is a picture of naiveté in international markets and a disturbing lack of focus. This was no failed convergence strategy. BCE never knew what it wanted BCI to be when it grew up -- and investors have paid the price.
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So what went so terribly wrong?
The late 1980s and early 1990s saw the first wave of international opportunities as countries started to sell off their state monopolies and invite competition. Mexico, Argentina and Chile were among the first to woo foreign investors. For Ma Bell and other established monopolies, the writing was on the wall that growth in their home markets would slow and competition would erode margins. So in 1990 it set up a division to scout out investments.
Bell Canada was going to have to downsize and BCE was "looking for a way to deploy the surplus people." They had people who knew networks, and privatizations promised profits, so why not take advantage? It was a pattern and a business model BCI would use repeatedly.
The initial idea was to compete in privatization auctions, buy established operators and run the networks for a few years and get out at a high price. It wasn't evident that all constituencies in BCE saw this as a way to build a base for long-term revenue growth.
They first tried to bid in Venezuela for a piece of the national operator. The Canadians were shocked at the winning price tag, and having been embarrassingly outbid, they realized this was a game that was going to be played for keeps.
So they tried another tack -- go for cheaper, greenfield licences, build the networks and hold them for five to eight years -- a viable plan, although with the exception of Comcel in Colombia, BCI never held on to anything for that long. From investments in New Zealand to the U.K., to cable companies in the United States, and then later forays into India, China, Korea and Latin America, it is difficult to find a common thread.
In fact, talking to those involved about BCE's international strategy is like asking the proverbial three economists for their five opinions. Even to those inside, it never seemed clear what the strategy was, either then or now. With the benefit of hindsight, what seems most evident is that the strategy changed every time BCE made an investment. Sometimes it worked, and sometimes it didn't.
In 1998 key BCE executives attended a finance conference sponsored by Nortel Networks Inc., and were asked about their international strategy. "Basically, they answered that they had so much money to invest and they would sprinkle it around like poker chips," recalls a former Nortel vice-president who was in the audience. "They admitted their international strategy was to gamble."
Not only did BCE gamble, more often than not it also hedged its bets by taking minority stakes. Although this was sometimes forced by licence requirements, the Canadians did not habitually seek to gain majority control over time, as BellSouth Corp. or Telefonica SA did religiously. What that often meant was that it was saddled with unwieldy shareholder groupings that couldn't make decisions -- or overrode BCI's views entirely. Mostly contractors, consultants and Bell retirees ran their businesses abroad and they were rightly seen by partners to have no influence. The problem surfaced over and over again, in Mexico, in Brazil and in Venezuela.
An engineer who helped BCI plan some of its South American ventures opines that "BCI was seen as a retirement home for Bell Canada executives and the top of the house didn't pay attention."
In 1994, BCI made its first major bet in an emerging market, a regional mobile licence in Colombia, which would become the company's cash cow for many years.
The bidding rule for the duopoly auction was that the winner of the second licence sold had to pay 90% of the winning price of the first licence and BCI had conniptions when it heard what the other winner had paid. Nortel had a big equipment sale riding on the licence and only when it guaranteed the business plan's five-year return, did BCI decide to go ahead. BCI beat the business case handily and by early '98, with more than 400,000 subscribers, Derek Burney, BCI president, called it "the anchor of our portfolio." It was also one of the few cases in which BCI held the majority share.
With Colombia well underway, BCI looked to the bonanza shaping up in Brazil. Starting in 1996, the country was going to auction off wireless and then fixed-line concessions. It was widely seen as the last big chance to get a foothold in a major market. The Chinese were dragging their feet on foreign investment, India had proved a bust for most, but Brazil was starved for phone service -- where the profits of pent-up demand in a cozy duopoly beckoned.
BCI was coming late to the party. Where BellSouth and others had been scouting around for five years, researching the market, building alliances and planning network builds in meticulous detail, BCI had been largely absent and the local partners they needed were already spoken for. Even though BCI had a small presence in Brazil through a cable investment, no one wanted to dance.
Finally, and at the 11th hour, they worked themselves into a bidding group that had been cobbled together by Telesystem International Wireless of Montreal. TIW needed BCI's subscriber base to qualify but with both of them fighting to be the operating partner and with no fewer than 10 pension funds and financial investors rounding out the consortium, it was a recipe ripe for conflict. Still, when the dust settled, they had won mobile licences in Brasilia and in the state of Rio Grande do Sul -- because no one else wanted them. This was in 1997 and 1998.
Gerry Vazquez was TIW's vice-president for Latin America at the time and remembers that the Canadians co-existed uneasily. "A lot of the relationship was strained," he allows. Others have observed that part of the problem was that BCI had a "complex" about being the experts, coming from the BCE family.
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Meanwhile, in Mexico, BCI became involved in Axtel, which looked like a dream deal. The government was auctioning off licences for new operators to compete nationally against Telèfonos de Mexico SA (Telmex) for local telephony. Landline penetration was low and a robust 15% growth was forecast, against 2%-3% in North America. In that environment, profitable niches could be mined -- and as an added bonus, the licence was relatively cheap.
More to the point, BCI went into the venture with a strong, well-connected and deep-pocketed local partner, the Milmo-Zambrano family, owners of Cemex. This is a family in the stratosphere of the Mexican mega rich, a world of private jets, weekend trips to the ranch and birthday parties serenaded by Latino pop stars. These were people who were used to getting their own way. It didn't matter that they didn't know the phone business - that was supposed to be BCI's job. But in the end the Mexicans ran all over the Canadians.
The problems started almost as soon as the licence was granted in mid '98. It didn't help that it took almost a year to contract a supplier, but then BCI made a risky technology choice -- a fixed wireless product that was expensive for Mexico, that was unreliable and couldn't handle Internet connections. It was a complete mismatch with the business plan that targeted small businesses and high-end residential customers who wanted second lines.
It also didn't help that BCI sent high-cost expats, a host of engineers, technical advisors mostly on contract and mostly resented by the local team and who just saw the high overhead.
The Mexicans were no joy either, apparently. To many, it looked like this was a company the kids had been given to play with. In Mexico, there is even an expression for it -- "the Juniors."
Tomas Milmo was barely in his thirties when Axtel SA started and he surrounded himself with family members and friends of his generation. If BCI had problems building the network, it wasn't evident that the partners knew how to run a business.
Somewhere along the way, BCI lost any semblance of control. BCI, as a minority owner, either would not or could not protest. Many of their consultants were sent home as the network started service and those who stayed had limited influence.
The marketing plan was abandoned. Commissioned salespeople were hired to flog the service and the whole pitch went down-market. To boost the subscriber base, systems were loaned out on a "try and buy" basis, but because much of the equipment was portable, it mostly disappeared. By the end of this experiment, almost a third of the subscriber base had to be cut off as bad debts. The disappearing terminals piled on expenses and Axtel ran out of cash to expand. Today, it is said that almost 50,000 repossessed Axtel telephone sets are sitting in warehouses throughout the country.
By the time BCI had announced its Telecom Americas deal with Axtel's competitor, Telmex, in mid-2000, Mr. Milmo had the excuse to send most of the remaining Canadians home. By March, 2001, the Canadians had washed their hands completely, and reclassified the investment as a "discontinued operation." Since then, investment banks have been looking for a dignified disposal.
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Venezuela saw another display of the BCI approach. It partnered with a local bank and financial investors to bid for a broadband wireless licence. BCI was to bring the technical knowledge and run the operation. Again, they chose an unproven technology that was already causing problems with a frequency that didn't match the licence, causing delay while competitors marched ahead. As in Mexico, BCI sent secondees, retirees and consultants. The partners hired local management without industry experience to develop marketing plans. Basic demand studies and market research weren't done until late in the game.
"There was large scale confusion in the BCI ranks," says a business planner who worked on the project and did not want to be identified. "They had no idea what markets they wanted to serve or what services they wanted to offer."
Basically, it was a mess.
In October, 1997, BCE spun off BCI through an IPO. And even though BCE retained a 74% share, some thought they had largely washed their hands of BCI and didn't want to pump in more cash.
But BCI still wanted to do more, and presumably BCE as majority owner went along with that. Flush with success in Colombia, BCI had recently doubled its bet by buying another mobile company, Occel, and did so just before the country entered its worst recession in 80 years.
By 1999, Colombia was limping, Axtel was burning through its cash at an alarming rate and the two wireless properties in Brazil, Americel and Telet, were spending aggressively as the networks were built out. To top it off, Brazil devalued, throwing business plan projections way off-course.
But it was on the Vesper fixed-line network in Brazil that BCI finally really blew its brains out.
Local telephony concessions covering vast areas and millions of unserved customers beckoned in Brazil. Axtel was on its way (or so BCI thought) and on the surface, the deals looked too good to pass up. There was an inexpensive licence, a weak incumbent, low penetration and the opportunity to serve the whole Northeast of Brazil, including such major cities as Rio, Belo Horizonte and Salvador. They didn't ask why most other major phone investors were sitting this one out.
Even though they had done little market research of their own, they thought it would be a walk in the park -- except BCI didn't have the money to do it and BCE didn't want to foot the bill. Enticing Nortel with the prospects of equipment sales, BCE persuaded Nortel to pony up a $150-million seed loan to help fund BCI's equity investment. When BCI's own parent didn't want to put up the cash, it should have been warning enough for Nortel to stay away. But Bell leaned on Nortel's CEO of the time, John Roth, and the deal went ahead.
This wasn't a small project; to install 2.2-million new lines in three years as the government asked would mean that capital spending alone could top $1-billion. But BCI's funds kept them on a short leash so they went into the project as minority owner with partners that were chosen more for convenience than synergy -- and, just like in Mexico, they were partners BCI couldn't control.
They hooked up with VeloCom Inc. of Denver, Colo. -- financiers and venture capitalists -- and with Qualcomm, which mostly wanted to use Vesper to build a showcase for its CDMA technology in Brazil.
Bill Dunbar had retired from Northwest Tel when he was tapped by BCI to start up Vesper (officially called Megatel do Brasil SA) in Rio and become its chief operating officer. Like many of the contractors and consultants BCI would later send down to look after their interests, he had never been to Brazil but he did know something about running a phone company, at least in Canada. BCI's role in Vesper was to be the operator but it didn't take long for him to realize things didn't look quite right.
For one thing he sensed right away that there was "a lot of jealousy and infighting" among the shareholders. For another, he thought it was odd that he didn't see a business plan until he got off the plane in Rio, and even then it was one originally put together by Nortel to encourage BCI to bid. He didn't see any market studies done by BCI. What stood out most, though, was that they had the wrong technology for the high-end residential and business customers they wanted to catch and the projected revenues per user were way out of line.
Did he voice his concerns? Apparently so, but he was just a consultant and the protests never seemed to go anywhere. "I got no direction and no parameters from BCI," Mr. Dunbar says.
Overspending was rampant, according to insiders. The Canadians overbuilt for growth and built for Canadian standards, often at three times the cost. Financial controls were chaotic and the engineers had full rein. BCI had the contract to build and run the network, but it's debatable if that meant they were to be absent from financial decisions. Management systems were iffy -- for the longest time they had no bad-debt list -- and the billing system chosen by BCI just didn't work.
Little more than three months after winning the licence in Rio, Vesper Sao Paulo was launched with the same partners and same lack of preparation. The marketing plan was questionable and targeted the high-spending business customer, largely already served. Again, they mismatched the technology to the market. To boot, Vesper faced a formidable competitor in Telefonica.
Still, BCI and partners launched service with installation fees and monthly rates that were 30% and 44% higher than Telefonica's, with predictable results. Then they targeted the "budget customers" and two years after launch they were "shocked" that 35% of their subscribers were bad debts. Thousands of expensive terminals had disappeared. It was Mexico all over again.
Still, it is not clear that BCI ever had free rein to build and operate the network the way they wanted. Qualcomm was pushing its product, and BCI felt compelled to advocate for Nortel, since that's where its equity had come from. It is not sure if VeloCom ever trusted either and in any case, it was a situation bound to cause suspicion. BCI's role in all this? "They were spineless," said an equipment salesman who had a front-row seat.
David Leonard founded VeloCom and for a while was chairman of Vesper. "It would have been nice to have had an operating group, and BCI appeared to meet that," he says, adding that VeloCom would not have invested with them had he thought BCI would not be there for the long term.
Vesper's plans were ambitious and that meant ambitious spending. But before long, BCI's management changed and that changed everything.
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Michael Sabia came into the picture in late 1999 with the expressed mandate to discipline this problem child. But by the time he was sent to the rescue, it was mostly damage control. BCI's bets in Mexico and Brazil were sucking cash, Venezuela was looking shaky and the double bet in Colombia was sinking steadily south.
To his credit, he saw that BCI couldn't be all things everywhere. Focus was needed. But some observers felt that he didn't want focus, he just wanted out.
From the time he took the reins, it basically took little more than half a year for the pieces to fall into place. He ordered the sale of the remaining Asian interests. In June he announced the sale of BCI's interest in Korea for a neat $1.47-billion and by August BCI had reaped another $790-million for its Taiwan PCS stake.
Then he leveraged BCE's links to SBC Communications Inc. and SBC's links with Telmex and its wireless affiliate, America Movil SA, to contribute most of BCI's Latin American holdings into the new entity, Telecom Americas.
It was a complex deal involving the swapping of numerous properties and assets, and the horse-trading and valuation debates must have been fierce. But then Mr. Sabia left and the deal didn't close until five months later, leaving lots of time for more changes.
Vesper was left out of it (it wasn't really a mobile company), and Axtel, which competed with Telmex, just didn't fit. Whether it got the final deal it really wanted, BCI had orphan investments to contend with, orphans that continued to suck cash.
Vesper was the first to go. After the deal with the Mexicans, the interest lay elsewhere, and by late summer 2000, BCI asked VeloCom to take them out. The stake was valued at US$875-million -- but the bottom fell out of the market and by the expected closing date in early 2001, VeloCom was unable to raise the funds and the deal was off.
At that point, BCI, and presumably the BCE people that had stayed on the board, saw it as good money being thrown after bad and they stopped funding all capital calls. By the end of 2001 the value of BCI's stake had evaporated to next to nothing. Qualcomm finally made a deal to take them out. This "triggered a very difficult year with the other shareholders," said a witness to all the Vesper debates.
Getting rid of Axtel has proved more difficult, and with the government's 49% cap on foreign ownership, a sale won't be easy. It's already been on the block for more than a year and a half. Still, the business is stabilizing, its EBITDA is positive and, with asset prices tumbling by the day, a buyer may yet be found.
In the end, what really sank BCI was bad timing and a disconnect with what the Mexicans wanted to do. The Mexicans were and are very consistent -- they aim to be the largest wireless operator in Latin America and they have the muscle and ambition to do it. They see long-term value in the region and are gangbusters confident. In space of a few months after its Telecom Americas deal, the Mexicans pushed to splash out almost US$1-billion for the cellular rights in the state of Sao Paulo and up the stakes in Americel and Telet -- soaking up a lot of cash in the process.
But when the telecom bubble burst, BCI was unable to sell either Axtel or Vesper. And following the Mexican lead, they had committed to a lot more spending in Brazil. The $2.3-billion that had come in from Asia was flying out the door at an alarming rate. It begs the question, if BCI saw Telecom Americas as a graceful exit, why didn't they get out while they were ahead? In retrospect, the whole thing looks a bit schizophrenic.
Look at the sequence of events. The deal for Telecom Americas was announced in June, 2000, and Mr. Sabia was out the door and back to BCE almost as soon as the ink was dry. The deal didn't close, however, until November -- five months later. Only then did Siim Vanaselja, the chief financial officer of BCI, leave his post to take up the same job at BCE. Very soon after, further big bets were made in Brazil while BCE maintained members on the BCI board. As 74% owner, there were no decisions made pertaining to BCI of which the top management of BCE was not fully aware. By the time they were prepared to say basta in December, 2001, and stop further funding to BCI, the only way out was a fire sale.
Did they go along with the aggressive Mexican strategy to keep buying assets because they feared dilution? Did they wait because they hoped the Mexicans would take them out at a higher fair market value? If they held on driven by an exit strategy, then along with many investors, they spectacularly mistimed the market.
The obituary of BCI has to say that all too often attention simply wasn't paid. In too many cases, their lack of control meant they couldn't build and operate the networks and make them run properly, let alone profitably. After spending millions on licences in markets they didn't know and hadn't researched, they sent retirees and consultants to protect their interests -- in other words, people who had no long-term vested interest in making the ventures work.
BCE today is going full circle, back to being just stable, staid Ma Bell. But sooner or later, even today's shell-shocked investors will want something more and growth is unlikely to be found so close to home.
America Movil, on the other hand, is going like blazes and they may well have the last laugh. It controls what it owns, can do what it likes, and it has scooped up bargain-priced properties with good chances to live up to their potential. The Mexicans have one of the strongest positions in Latin America's biggest wireless markets and they are sending ambitious mid-career managers who want to make their mark. They just announced their second quarter and even in the nuclear wasteland of telecoms and Latin American turmoil, they have managed to make money and widen their gains.
They are paying attention and it shows.
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