Can BrazilCom make any money?
Brazil's Telebras Sale Seen A Huge Job For A Small Fee
By Geraldo Samor and Margarita Palatnik
RIO DE JANEIRO (Dow Jones)--Salomon Smith Barney Inc. (SB) and Morgan Stanley, Dean Witter, Discover & Co. (MWD) have just won Brazil's most-coveted privatization mandate, but many observers can't figure how they will turn it into a moneymaker.
'We're all shaking our heads,' said one Wall Street banker. 'It's difficult to understand how they could possibly make money out of this transaction. The fixed costs involved are close to what they propose for this enormously labor-intensive task.'
The Gargantuan task involves selling the government's 21% stake in federal telecommunications monopoly Telecomunicacoes Brasileiras SA, known as Telebras, by June. The deal is valued at up to $27 billion, and consortia competing for the mandate could charge a maximum fee of 0.25% of the sale proceeds.
Brasilcom, formed by Salomon and Morgan Stanley, offered to charge 0.0669% - such an aggressive price that the group walked away with the deal despite having placed third with its technical proposal.
On the losing side of the bidding was Telebrasil, the favorite to win the mandate after it received a perfect 10 for its technical offer. Telebrasil included names such as Merrill Lynch & Co.; Credit Suisse First Boston Corp.; NM Rothschild & Sons Ltd and ABN Amro Bank NV. It offered to charge 0.0991% of income from the privatization.
You could almost hear the thumps from some bankers pounding the table in frustration after the winner was announced.
'Based on what our consortium expected to pay for the subcontracted lawyers, auditors, human-resource professionals and others, we know that our group's proposed pricing would have resulted in a very, very modest net fee for the banks,' said John Chachas, a director in investment banking responsible for Latin America at CS First Boston. 'Since the winning group's fees were about $6 million less than ours, you can draw your own conclusions about their pricing.'
The hard-fought mandate establishes that the advisers will audit the Telebras system, bundling the company's 26 existing affiliates into three fixed-line companies, eight cellular-phone providers and one long-distance carrier.
They will also set the companies' minimum bid price, deal with issues ranging from the companies' debt situation to pending lawsuits, list the newly created companies on the U.S. stock market and map out strategic investors interested in buying a chunk of Telebras.
For all that work, Salomon officials swear they are turning a profit.
'Sixteen million dollars over just a few months: I don't know any mandate better than this in Brazil today,' said Luiz Chrysostomo de Oliveira, executive director of corporate finance for Brazil-based Banco de Investimento Patrimonio SA, which is 50% Salomon-owned.
'No one gets into this business to lose money,' agreed Antonio Muniz Freire, corporate-finance director at Banco Brascan SA. 'No one needs that tombstone, especially not a bank like Salomon.'
Chrysostomo added that the fee for the Telebras mandate is second only to the $60-million a Merrill Lynch-led group will earn when it completes the privatization of mining conglomerate Companhia Vale do Rio Doce SA, CVRD.
But though also huge, CVRD's privatization involved fewer components than those in Telebras' legal, accounting and auditing puzzle, and none of the restructuring. The bottom line: Brasilcom will do a much tougher job for much less pay.
Based on the bids that were opened, for a low-end Telebras price of $18 billion, Brasilcom proposed to charge some $6 million less than second-placed Telebrasil and almost $15 million below a consortium formed by Lehman Brothers and Dresdner Kleinwort Benson.
And, argues one U.S. banker, 'Lehman and DKB arguably know more about Telebras than anyone else, since both have worked for the Communications Ministry over the past two years.'
A member of the government committee that awarded the mandate said the public interest was well served because the government will pay very little to two banks that have 'well-established expertise.'
'They may even lose money, but they will fulfill their commitment,' he added, noting that he doesn't believe the winners will take a loss on the transaction.
He also said the government has its own defenses in case the consortium doesn't deliver.
The tender inviting bids calls for the government to pay the winning consortium an advance of $6.7 million in seven installments. 'If the work is of poor quality, we'll send it back' and halt payments, he said.
One frequent explanation for the aggressive pricing is that Salomon and Morgan Stanley are intent on buying market share.
'You bet they are,' said a Sao Paulo banker who didn't compete but also requested anonymity. 'They'll use this to go up in the ranks of the SDC,' short for Securities Data Corp., a company that, among other things, puts out a Who's Who of corporate finance.
The banker said Salomon and Morgan Stanley will be able to tout the newly won mandate as a badge of competence elsewhere in the world.
'This will make the eyes shine of other telephone operators, who will pay them appropriately,' he said.
The government official admits 'it's very hard to detect a situation of dumping' because there are too many variables involved in calculating a consortium's real expenses.
'As long as you cover your fixed costs, you can quote any deal at any price,' the official says.
Consortia that lost the bidding process have until Tuesday to file a complaint. So far, none has done so, and most are simply going about their business.
Merrill Lynch spokesman Robert Corrigan, summed up the bank's response: 'We hope the privatization proceeds successfully, and hope to work in the future with the Brazilian government.' -By Geraldo Samor; 55-21-580-9394 and Margarita Palatnik 201-938-2226. |
