THE B-BAND BIDS - A REVIEW Vieira Ceneviva Advogados Associados and J. Paul Groom April 14th 1998 saw the opening of the envelope for Region 6, Rio Grande do Sul, which brought to a close the allocation of B-band regions for the bids that were submitted to the Ministry of Communications ( "Minicom" ) on April 4th 1997. It should be noted that no bids were received for Region 8, a five State area based upon Amazonia, and that certain legal issues remain to be resolved in connection with Region 2 that could result in the cancellation or forfeit of the concession. However, the time is right to take stock, and see what can be learned. THE BASIC FACTS Aggregate Minimum Values R$ 3,490,000,000 Amount Paid for Concessions R$ 8,255,917,498 Number of Consortia1 12 Number of Bids Submitted 62 Number of Envelopes Opened 33 Aggregate Maximum Basket Value R$ 797.77 Aggregate Winning Basket Value R$ 548.20 1 In counting the number of consortia, the test of significant difference in economic ownership was used. Thus, TT2 was considered separate from Vicunha Telecomunicações, but Telet was not considered as different from Americel, Algar was not considered different from Lightel, and BCP was not considered different from BSE. The aggregate minimum values prescribed in the RFP were R$ 3.49 billion. The value paid2 was 136% higher than the aggregate minimums. This was an impressive showing considering that the lowest premium was only 1.37% over the minimum price ( Telet in Region 6 ), and another was 8.70% over the minimum ( Vicunha in Region 9 ). 2 This analysis does not take into account the inflation plus 1% per month that the consortia winning Regions 5 and 6 were obliged to pay on their first installment as their proposals were opened after the anniversary of their delivery. Sixty-two bids were submitted for the nine Regions. Only thirty-three bid envelopes were opened due to seventeen not being renewed prior to the opening of bids. Thirteen were withdrawn due to the consortium already having won a Region in the group and, therefore, were ineligible to win another. Adroit mathematicians will have already worked-out that the total number of envelopes is not the sum of its parts. This is because Avantel's Region 2 bid is considered as one that was opened and one that was withdrawn. Bids were evaluated against a maximum tariff basket as well as a minimum price, and the aggregate winning basket value was a 31.28% discount to the aggregate maximum value. The Price PRICE PER POP./PRICE PAID BCP 1 R$ 147.08 R$ 2.647.500,000 ALGAR 3 R$ 88.76 R$ 1.508.999.999 TESS 2 R$ 78.06 R$ 1.326.943.944 GLOBAL 5 R$ 53.37 R$ 773.918.000 TELET 6 R$ 33.45 R$ 334.500.000 VICUNHA 4 R$ 30.59 R$ 520.000.000 AMERICEL 7 R$ 28.21 R$ 338.500.000 BSE 10 R$ 22.22 R$ 555.555.555 VICUNHA 9 R$ 17.24 R$ 250.000.000 The above table shows the price paid per unit of population ("pop") per region in declining order of value. By almost any standard the value paid by BCP, the consortium comprising Bell South and the Safra Group, is a record. However, Algar's R$1.5 billion for Region 3, the States of Rio de Janeiro and Espirito Santo produced a per pop value of nearly R$ 90. The Tess consortium, the winners of the interior of the State of São Paulo bid close to R$ 80 per pop. At the other end of the list is Vicunha which paid only R$ 17.24 per pop for the states of Bahia and Sergipe. The average per pop price nationwide was R$ 58.97. Left on the Table! MINIMUM PRICE WINNING PRICE SECOND PLACE Region 1 600,000,000 R$ 2,647,500,000 R$ 1,632,000,000 Region 2 600,000,000 R$ 1,326,943,944 R$ 1,224,116,000 Region 3 500,000,000 R$ 1,508,999,999 R$ 1,328,500,000 Region 4 400,000,000 R$ 520,000,000 R$ 450,010,000 Region 5 330,000,000 R$ 773,918,000 R$ 685,500,000 Region 6 330.000.000 R$ 334,500,000 Region 7 270.000.000 R$ 338,500,000 Region 9 230,000,000 R$ 250,000,000 R$ 243,570,000 Region 10 230,000,000 R$ 555,555,555 R$ 351,705,951 The standard by which B-band bids have been judged has been in comparison with the minimum price. We do not know the methodology by which the Minicom arrived at the minimum prices. But the market has clearly not understood why the minimum price of Region 8, R$ 200 million, for which no one bid, was one-third the price of metropolitan São Paulo that sold for R$ 2.64 billion. Therefore, this chart looks at the difference in all of the Regions between the winning and the second placed bids. The analysis is inappropriate for Regions 6 and 7, which were won by the consortium of Bell Canada, Telesystems International Wireless, both of Canada, and Citibank, in addition to their Brazilian partners, as there was only one bidder. BCP left R$ 1, 015,500,000, or 62% higher than the second placed bid on the table. The second placed bidder was the TT2 consortium led by AT&T. The fact that BCP bid so high may well have been a part of their strategy to keep the service basket prices, as defined in their response to the maximum service basket, as high as possible. BCP discounted their basket by only 2%. By contrast Region 2, the interior of the State of São Paulo, was the closest contest. The difference in price was R$ 102,827,944, but the contest was closer due to the winner, Tess, led by the Swedish operator Telia, having discounted their service basket by significantly less than Avantel, the consortium led by AirTouch Communications. Region 3 gave Algar a comfortable win with a bid R$ 180 million more than Telet the second placed consortium. Algar is a consortium 51% owned by the Brazilian Grupo Algar the owner of the only existing privately owned wire line operator in Brazil, CTBC. Algar also had a more competitive service basket than Telet. In Region 4, Vicunha, led by the Italian operator Telecom Italia, bid nearly R$ 70 million more than Brascom, the consortium with SBC Communications and Mannesmann as the international operators. Global Telecom, led by the Japanese operator DDI and Motorola left R$ 88.4 million on the table in Region 5, and bid a more aggressive service basket. This was the region with the most bids, ten in total, the attraction being due to the low minimum price for a region with high income levels. Vicunha won region 9 with less than R$ 7 million left on the table. With their characteristic style BSE, the Bell South/ Safra consortium bid R$ 203.8 million or, 58% more than Tess. BSE also bid the lowest winning service basket. The Service Baskets MAXIMUM TARIFF TARIFF BID DISCOUNT Region 10 78.38 50.21 35.93% Region 3 87.15 56.79 34.84% Region 5 74.35 51.45 30.80% Region 7 73.23 54.39 25.73% Region 6 78.80 59.44 24.57% Region 9 83.09 66.31 20.19% Region 4 71.78 57.36 20.09% Region 2 81.90 69.82 14.75% Region 1 84.43 82.43 2.37% Interestingly, the Bell South consortia are in both first and last positions. In the North-East, Region 10, they bid nearly a 36% discount, whereas in metropolitan São Paulo they bid by far the lowest discount of 2.37%. Emphasizing the aggressiveness of their bids, in four Regions, 3, 4, 9 and 10 the highest price bid was made by the consortium with the lowest basket. In Region 5, Global Telecom with a 30.80% discount was out-discounted by GFTT whose basket was R$ 2.35 below. In Regions 1 and 2, where a large number of envelopes were opened, BCP had the lowest discount, and Tess had the second lowest. The Index Above are the components of the winning bids, but, in fact, the winners of B-band licenses were actually determined by an index. The index was computed based upon a price that was given a weight of 60%, and a basket of tariffs that had a 40% weighting. However, there was a factor that encouraged the price rather than the basket. Price was based upon a minimum defined by Minicom. The basket was a discount to a maximum. This meant that securing a high index was possible through the payment of a high price. A price that was 166% higher than the minimum price would receive an index of 1.0 when the 60% weight was applied. The highest index that could be gained from the tariff basket was 0.4 after the 40% weighting. This could only be achieved if the service was provided free of charge. CONSORTIUM PRICE INDEX BASKET INDEX TOTAL INDEX BCP 2.04750 0.00952 2.05702 Algar 1.21080 0.13935 1.35015 BSE 0.84927 0.14376 0.99303 Global Telecom 0.80712 0.12320 0.93032 Tess 0.72694 0.05900 0.78594 Vicunha 0.18000 0.08036 0.26036 Americel 0.15222 0.10295 0.25517 Vicunha 0.05217 0.08078 0.13295 Telet 0.00818 0.09827 0.10645 The highlight of this chart is that BCP was the only bidder to achieve an index of more than 2.0. Algar was the only other consortium to obtain an index over 1.0. Only two consortia managed to obtain more points with the basket than with the price index. These were the two that bid the lowest price premiums, Telet in Region 6 and Vicunha in Region 9. There is a big difference in points between the top five winners and the other four. The winner with the lowest points of the top five, Global Telecom, gained more than 0.78 points. Vicunha, the highest of the four others gained only 0.26 points. The difference is that the price premium of the top five were over 100% of the minimum price, guaranteeing at least a 0.6 basis before the addition of the tariff basket points. CONCLUSIONS The A-band A large number of factors will affect the valuations and the capital structures of the A-band companies when they are privatized later this year. However, the strategies and process will be dominated by the B-band experiences. Participants in Winning Consortia: The market, as seen through the bidding process reflected Brazil?s diversity that resulted in an enormous disparity between the Regions. On the date when bids were submitted, over a year ago, most observers would have bet that the four operators from the USA, AT&T, SBC Communications, AirTouch Communications and Bell South would dominate the process. Of these operators only Bell South won. The three US operators that lost allied themselves with some of the largest and most powerful Brazilian companies, Andrade Guiterrez, Monteiro Aranha, Odebrecht, Camargo Corrêa, Unibanco, Bradesco and Globo. None of these companies won concessions with the exception of the Globo/ Bradesco partnership that won as part of the Vicunha consortium. The foreign operators for the winning concessions showed a considerable diversity originating from, the USA, Sweden, Korea, Italy, Japan, and Canada. Many large and powerful Brazilian groups did win concessions, such as Safra, Suzano, Banco do Brasil and Algar. However, some small and medium-sized companies also won participations, such as Eriline, Inepar, Grupo La Fonte and Queiroz Galvão. Media companies, initially thought to essential to a winning bid, did not fare well, with the OESP and RBS having single digit participations in BCP/BSE. The Folha de São Paulo, SBT, Journal do Brasil and Bandeirates either failed to get into a consortium, associated with a consortium that did not participate or associated with a consortium that withdrew. Bidding Strategies The following conclusions may be drawn from the B-band bids: Bid high if the envelopes for your Region of interest are opened early. To ensure victory bid a high price and a large basket discount, or bid extremely high to compensate for a small discount. Take the time to know and understand the different Regions. Experience has shown that enormous pent-up demand is far from universal in Brazil even at discounted prices. With marginal Regions be sure you want to win if you bid. More than one consortium won properties about which they are equivocal. There were eight proposal for Rio Grande do Sul, but by the time of envelope four consortia had lost interest and withdrawn, and three withdrew due to wins in other regions. That left only one. It may pay to be the last standing, as you may be alone. The government raised 48% of the B-band revenues from the sale of concessions in the State of São Paulo alone. This compares with São Paulo's 36% of GDP, and 22% of the population. BCP/BSE No conclusion to the B-band bids would be adequate without a mention of BCP/BSE the operating entities of the Bell South/ Safra consortium. No participant to these bids knew better what they wanted than BCP/BSE. No participant had a more clearly defined strategy. No participant used the bidding rules to their benefit better than BCP/BSE. They may have paid a great deal of money, and they may have left a large value on the table, but they won what they wanted to win. The B-band was the first involvement of the private sector in telecommunications. Notwithstanding the delays, the legal actions, the disputes, and the one Region that was not bid, the process was an enormous success not only in the value of money paid for the concessions, but for the democracy of the bidding process, and diversity of its results. The integrity and transparency of the process resulted in a group of winners that are dedicated to the development of market driven, private sector, telecommunications industry in Brazil

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