Companies already are feeling the pinch from Brazil’s falling currency, which, at RCR press time,
had lost about 20 percent of its value against the U.S. dollar since Brazil’s central bank first moved to devalue the
real.
BellSouth Corp. said it will record a foreign exchange impact on earnings for the first quarter of about $172
million, or 9 cents per share, based on the floating rate of the real since Jan. 19.
BellSouth’s share of the U.S. dollar
debt of its Brazilian investments is about $1 billion. The company leads consortia that won B-band licenses in Sao
Paulo for $2.5 billion and Brazil’s northeastern region for $512 million.
Motorola Inc. previously announced it
would write off $15 million because of asset exposure based on the change in currency. The company realized 3
percent of its sales from Brazil in 1998.
Analysts believe similar announcements will follow.
“A number
of companies are taking charges against earnings based on the write-down of assets,” said Glenn James, partner
and regional director for Deloitte & Touche Consulting Group Inc.’s Latin American practice.
The Brazilian
government, in an attempt to boost the real, has allowed the currency to free float against the U.S. dollar. The nation’s
central bank also has raised interest rates in an effort to attract investment and discourage a jump in inflation, and its
Congress is passing key legislation to boost confidence in the stock market. But economists remain nervous and fear
further devaluation that could spill over into other Latin American countries and slow growth.
In July, Brazil
completed Latin America’s largest-ever privatization effort through the breakup of Telebras, the country’s former state
telephone monopoly. This resulted in the sell-off of eight cellular properties. Prior to the break-up, Brazil sold off 10 B-
band licenses.
Jeffrey Schlesinger, senior technology analyst with Warburg Dillon Read in New York, said it
appears construction will move ahead as planned. Analysts say negative effects from a currency change will be
mitigated since most major vendors have factories in Latin America, which will reduce the amount of foreign cost
increase they would otherwise experience, and today’s vendor contracts are mostly insulated from foreign currency
changes because they are negotiated in U.S. dollars.
“The underlying issue is what the interest rates will do to
subscriber growth and use of service. This will take a while to play out,” said Schlesinger.
Motorola has said
it is concerned about growth opportunities in Latin America, the company’s second-largest sales growth market in
1998. BellSouth said its commitment to Brazil and Latin America remains solid.
“We have tremendous
growth opportunities throughout the area, as evidenced by the 1 million cellular customers we added in Brazil in less
than eight months,” said Duane Ackerman, chairman and chief executive officer of BellSouth. “We are
convinced our Latin American investments will continue to be a growth engine for us as we enter the new
millennium.”
“Certainly we’re committed to Brazil, and we plan to be there for the long-term,”
said Scott Horne, spokesman for Lucent Technologies Inc., which recently won two Code Division Multiple Access
contracts in Brazil. “We accept the ups and downs as they occur.”
Lucent says it won’t incur any special
charges as a result of the devaluation.
“Our major contracts use U.S. dollar for financial terms and conditions.
Our exposure is limited,” said Horne.
“If you look at BellSouth and Bell Canada, when they invest in
Brazil, they are looking at 20 years or more. It’s a long-term investment for them,” said Truc Do, equipment
analyst with SoundView Financial Group in Stamford, Conn. “They need to invest in the project and get
subscribers … If the economy is in deep trouble and subscriber growth slows down a little, they might slow down in
increasing capacity, but I don’t see a slowdown in expansion.”
Experts say the companies that could carry the
most risk are those the Brazilian government awarded mirror licenses to last week. Brazil’s regulatory agency, Anatel,
is auctioning mirror licenses in an effort to create competition for the regional Telebras fixed telephone operating
companies. Many companies plan to deploy wireless local loop service.
Sprint Corp., France Telecom and Great
Britain’s National Grid won a nationwide mirror license for $42 million. Canbra Telefonica S.A., a consortium
consisting of WLL International Inc., Bell Canada, Qualcomm Inc., SLI Wireless S.A. and Taquari Participacoes S.A.
won a mirror license covering 16 states in Brazil. Canbra plans to spend more than $1 billion to deploy fixed wireless
and wireline telecommunications networks.
“They have some major decisions to make on the inflow of
capital,” said James. “The real issue is that [a devaluation] makes the inflow of capital dry up. We’ll see a
lot of capital flight out of the country.”
