Phil, excellent story...thanks. To your credit, I'm taking the liberty to post the link and the story....can't hardly wait till tomorrow to get some more orders rolling.
sf
PS: Everyone should subscribe to the New York Times...they hopefully won't mind my posting this ooone story to help boost on-line readership. I won't ever do it again.
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nytimes.com
New York Times Business Section
Sunday March 8, 1998
4 Strategists for Privatizing Telebras
By CLIFFORD KRAUSS
NEW YORK -- Brazil is blessed with lush jungles, the samba and joie de vivre. The
country's telephone service, however, is another matter. Getting a dial tone and holding a
conversation free of static are minor miracles, and the waiting list for lines, now 5 million potential
customers long, moves more slowly than an Amazonian swamp.
Many analysts and money managers view this sorry state of
affairs as a world-class investment opportunity, now that the
Brazilian government is moving to completely privatize its
huge telephone company, known as Telebras, as soon as
July, and to divide it into 12 or so separate operations.
Analysts expect profits to rise smartly as soon as private
managers begin cutting bloated bureaucracy and investing in
new infrastructure to meet the tremendous Brazilian demand
for both cellular and conventional service. Added revenues
are also expected from the introduction of such services as
voice mail, call-waiting, call-forwarding and "800" numbers.
"Telebras has to catch an investor's attention, given its growth
potential and its current valuation," said Jeffrey A. Everett,
manager of the Templeton World I fund, which holds a $100
million stake in the company. "Privatization is going to be
positive, and we think the future looks very bright."
Telebras shares, traded as American depository receipts on
the New York Stock Exchange, have taken a wild ride in
recent months. Lifted by expectations of the coming
privatization, the ADRs hit a high of $167 in early July 1997.
Then turbulence from the financial crisis in Asia spread to Latin America, and a selloff in the
Brazilian stock market drove the stock down as low as $83 last fall. Since then, however, fears
have subsided that Brazil will devalue its currency, the market has stabilized and the telephone
stock has rebounded, to $127.5625 at Friday's close.
A research report this month from J.P. Morgan said its $170 target for the stock this year "is
easily achievable" if the Brazilian government met its July goal for completing the privatization
process. If there are legal or regulatory delays, most analysts predict that they will last no more
than a few months.
In mid-February, the Brazilian government took an important step toward its July target by
appointing a consortium led by Salomon Smith Barney to guide the sale of all or virtually all of its
remaining stake in the company. That stake, which is worth $25 billion, comprises 21.3 percent
of the outstanding Telebras shares and, more important, 50.04 percent of its voting shares.
Wall Street analysts say that many foreign companies -- AT&T, MCI, GTE, Bell Atlantic, Bell
Canada, Telecom Italia and France Telecom -- are preparing bids for control of the various
pieces.
"There are not too many opportunities like this in the world -- huge telephone service markets
with pent-up demand," said Raymond E. Liguori, head of Latin American equity research at
Merrill Lynch. "There's India, China and Brazil, and Brazil is now."
Analysts note that telephone companies in other Latin American countries have improved service
and profits greatly after privatization. For example, the Venezuelan telephone network,
Compania Anonima Nacional Telefonos de Venezuela, was privatized in 1991 and management
was handed over to GTE.
Over the next five years, the number of employees was cut by 28 percent and the number of
service lines was increased by 63 percent. The company's stock, which has the symbol VNT,
was initially listed on the New York Stock Exchange in November 1996 at $18. It closed on
Friday at $35.50.
Donald W. Hoskins, manager of U.S. Trust's Excelsior Latin America fund, sees at least as
much upside potential for Telebras. Brazil's telephone market is far less developed than those of
its neighbors; it has only 9 telephone lines per 100 inhabitants compared with 20 per 100 in
Argentina. Moreover, he said, "23 million out of the 170 million Brazilians have the purchasing
power equivalent to Europeans."
And even with the rise in Telebras shares since October, the stock still seems relatively
inexpensive. It is trading at roughly 10 times its estimated 1998 earnings per share, Hoskins said,
compared with an average of more than 12 for other Latin American telephone companies and
of more than 17 for North American ones.
"It's cheap," Hoskins said.
When Telebras is privatized, it is also expected to be divided into 12 more manageable pieces,
including one long-distance company, eight cellular companies and three regional "baby Brases."
So any ADR owned before the privatization will probably be split into 12 separate holdings, and
analysts have come up with four possible investment plays.
One strategy is to buy Telebras now, and to sell it just before it is privatized and spun apart.
According to this view, many investors will sell the bulk of the spinoffs immediately after
privatization because they will not want to keep track of 12 foreign securities with various levels
of liquidity and future growth potential.
Also, "investors fear that other investors will dump the little guys," said Luanne D. Zurlo, director
of Latin American equity research at Credit Suisse First Boston. "It's a knee-jerk reaction."
Such thinking anticipates a second tack, which is to buy and hold Telebras through the
privatization, and then, quickly, jettison the shares of a few of the weaker spinoffs before they
tumble. Some possible candidates are the four cellular companies planned for the impoverished
northern provinces.
A third option is to hold all 12 securities, weather the expected turbulence in some of the spinoffs
in the first year after privatization and then reap the benefits over the long term. And a fourth,
contrarian play is to wait for the breakup and the subsequent declines in some stocks, pick up
those whose prices are driven down further than seems justified, and then hold them for the long
term.
Liguori, the Merrill Lynch strategist, says he strongly believes in the third approach.
"Most individual investors should follow my Aunt Margaret's strategy," he said. "She owned
AT&T prior to the breakup and she held on to all the pieces for more than a decade and she had
some phenomenal returns." |
