CNBC's FABER REPORT:Telebras ADRs
Cheap, But Concerns Linger
Dow Jones Newswires
The following report was aired on CNBC-TV by CNBC reporter David
Faber:
Imagine if you will that it's 1984 and the breakup of the Bell telephone
system is getting underway, and the separation of the Baby Bells and
AT&T from Ma Bell takes place and the stocks of all the companies are
soon to trade independently and Ma Bell's stock price is riding high and
then Ma Bell, arguably the biggest and most important stock in the
country, loses half of its market value.
That scenario has in fact unfolded over the last two months in Brazil. And
the company in question, Telebras, has in fact lost 52% of its market value
since the beginning of August.
Telebras is the telephone company of the world's fifth-largest country and
its ninth-largest economy. It is a proxy for the Brazilian market and it will
very soon become 12 separately traded companies that include no
ownership by the government.
What Telebras also is, say analysts, is the cheapest telecom stock they've
ever seen and one that just keeps getting cheaper. In fact, any investor
drawn in by that perceived value previously has been burned, and badly.
How cheap is it now? Merrill Lynch calculates the current multiple to 1998
Ebitda at 2.7 times and estimates that Ebitda will grow 20% next year.
Merrill does add that the growth rate will slow.
Morgan Stanley's analysts estimate the current P/E at 5.5 and on next
year's earnings at 5.
The ADR's currently trading $25 below book value.
Morgan Stanley advised the government on the privatization and told
clients yesterday that the 12 new companies created through the split of
Telebras will list on the Sao Paulo exchange on Sept. 19, to be followed
later this month or early next by listings here in New York.
A key to the split of Telebras was the sale by the Brazilian government of
its ownership stake in the companies that have been spun off.
That so-called auction raised more than $19 billion and has given
controlling stakes in the wireless, local phone, and long distance
companies created to the likes of MCI, Spain's Telefonica, and Telecom
Italia.
Telfonica spent $5 billion alone for control of Sao Paulo's phone company
and another $1.1 billion for a cellular provider. MCI shelled out $2.3
billion for control of Brazil's long distance company, Embratel.
In fact, those buyers paid enormous premiums over the minimum price set
by the government and, as Merrill Lynch reports, the premium paid over
the current ADR price is staggering.
Merrill figures that the implied value of the ADRs given the bids in the
auction is $295 per ADR, roughly five times the current stock price. And
yet, the companies are expected to stick by their bids.
An MCI spokeswoman said the company is in Brazil for the long term, has
taken control of Embratel, and expects enormous growth. So do analysts,
who point out that Brazil has only 11 phone lines and 3 mobiles per 100
people.
Still, the continued concern in the market centers on a devaluation in the
Brazilian currency. If such a devaluation were to come, analysts say that
while line growth wouldn't be hurt, usage would, and so would the stock
price.
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