The government of Brazil received premiums of more than 200 percent over minimum bid requirements on some of the cellular properties it auctioned off last week.
The sealed-bid auction last Wednesday that split Telecomunicacoes Brasileiros S.A. (Telebras) among several international and local players earned the government nearly $19 billion. The government’s controlling stakes in Telebras’ eight cellular properties, three local landline properties and its long-distance property were sold as part of the company’s privatization.
Commenting on the auction, Fernando Xavier Ferreira, president of Telebras, said that “investors’ strong response and the premiums paid are evidence of the value that Telebras has built over recent years. These results demonstrate the conviction among some of the most sophisticated investors that Brazil is embarking on a period of sound growth.”
While U.S. telecommunications companies BellSouth Corp. and AirTouch Communications Inc. were rumored to be interested in buying some of the properties, neither did. In fact, no U.S. telecommunications companies picked up any of the cellular properties up for grabs.
BellSouth did submit a bid for the Telemig Celular property, which covers the state of Minas Gerais, but lost out to Canada’s Telesystem International Wireless Inc., said Al Schweitzer, a spokesman for BellSouth.
“We obviously do a lot of research and study the business cases of potential acquisitions,” said Schweitzer. “We submitted a bid that we felt reflected the value of that property. We’re disappointed that we didn’t win, but it’s not the end of the world.”
BellSouth last year paid $2.5 billion for the coveted Sao Paulo B-side cellular license. That network today is signing up customers on the order of 30,000 per week, said Schweitzer. The company also won a B-band cellular license for Region 10, which covers several northeastern states.
Long-distance giant MCI Communications Inc. accounted for the largest U.S. win in the auction with its bid $2.25 billion for Telebras’ long-distance arm-Embratel.
Jorge Fuenzalida, a manager in Deloitte Consulting’s telecom practice, said the difficulties some U.S. companies experienced during Brazil’s B-band auction may have caused them to pull away during this auction.
British Telecommunications plc and France Telecom also were expected to be significant players in the auction but came away with nothing.
Portugal Telecom bid more than $3 billion for Telesp Celular, the property that covers Sao Paulo and competes with BellSouth’s B-band network. Portugal Telecom paid a premium of 226 percent for Telesp for which the government required bids of at least $930 million.
“The price of Sao Paulo and its suburbs was aggressive, but Brazil has continued to surpass expectations for demand,” said Fuenzalida. “People have underestimated the pent-up demand and the willingness of citizens to purchase telecommunications services.”
Portugal Telecom said it will seek partners for the Telesp property.
Other winners include: Telefonica Internacional Consortium led by Spanish power company Iberdrola, which won Tele Sudeste Celular ($1.15 billion) and Tele Leste Celular ($363 million); Canada’s TIW, which won Telemig Celular ($641 million) and Tele Norte Celular ($159 million); two consortia including Telecom Italia, which won Tele Celular Sul ($593 million) and Tele Nordeste Celular ($559 million); and a consortium led by Splice do Brasil, which won Tele Centro Oeste Celular ($373 million).
In all, four of the cellular properties sold for premiums of more than 200 percent, with the highest premium at 242 percent and the lowest at 91 percent.
“Given that Brazil has such poor landline service, companies can come in and offer basic telephone service using wireless networks,” said Fuenzalida, explaining why the bids may have come in so high. “Something like 4.5 million people are on waiting lists for a landline phone there.”
Now that the auction is over, though, the new winners face several challenges, said Fuenzalida. They all will have to begin significant modernization efforts in order to realize the value of their investment, he said.
“Few if any cellular markets have launched digital service, and so they are capacity constrained,” said Fuenzalida. “Many of the networks are poorly engineered. It’s almost as if they’ll have to start over.
All of the wireless spin-offs also are facing competitive situations as well, with the B-side auctions nearly finished and some winners already up and running.
“The interesting thing now is the potential for formidable competition in the form of a duopoly all over Brazil,” said Fuenzalida. “If they start beating each other down on price right away, they could get into trouble.
“But since they’re all in the same boat maybe they won’t start doing that right away,” he said.
The privatization of Telebras did not occur without its share of difficulties, including resistance from opposition parties and several legal challenges.
