TELEBRÁS - POST MORTEM Vieira Cenevica Advogados Associados and J. Paul Groom Against significant odds, and with many potential participants begging for additional time to prepare bids, the Brazilian Government succeeded in selling its controlling interest in Telebrás on Wednesday July 29th. The original date for the sale of the government's 64.4 billion shares of Telebrás had been scheduled for July 15th and the post ponement of only two weeks is seen as a significant achievement for the government and its advisors. The government had waged an " expectation management " campaign with respect to the prices that would be paid for the twelve holding companies into which Telebrás had been divided, suggesting that R$ 16 billion would be acceptable. In fact, the bidders paid R$ 22.057 billion, a premium of 63.7% over minimum prices defined by the government in the " Edital ". This has been interpreted as a success for the government. The value paid was R$ 342 per 1.000 ordinary shares. This category of shares traded at the R$ 115 level after the auction, but is currently trading at R$ 87 per 1.000 shares.* * Telebrás voting ( ordinary ) shares did not trade as ADR's on the New York Stock Exchange. Four of the twelve holding companies, deemed by the government to be Group A in the privatization auction, represent the three regional fixed wire line companies and the long distance carrier, Embratel The sale of these four companies produced R$ 13.9 billion, or 63.2% of the total value paid. The eight other properties were mobile cellular holdings that sold for R$ 8.12 billion. Of this value R$ 3.588 billion was paid for the São Paulo mobile cellular concession alone. The sale of the São Paulo wire line and cellular properties realized R$ 9.37 billion or 42% of all revenues. In terms of prices agreed to be paid by the winning operating entities, the results are: OPERATOR AMOUNTH % OF TOTAL PROPERTIES Telefónica R$ 7.571 34.3 3 Portugal Telecom R$ 3.588 16.3 1 Andrade Gutierrez R$ 3.434 15.6 1 Telecom Italia R$ 3.430 15.5 3 MCI R$ 2.650 12.0 1 Telesystems R$ 944 4.3 2 Splice R$ 440 2.0 1 TOTAL R$ 22.057 100.0 12 THE FIXED PROPERTIES TELESP TELE CENTRO SUL TELE NORTE LESTE Population 34 million 26 million 85 million GDP per Capita R$ 8100 R$ 4.970 R$ 3.671 Terminals Installed 5.359.000 3.587.798 7.477.453 Terminals Connected to Digital Switches 2.969.000 2.433.585 4.688.365 Fiber Optic Cable Installed ( Km ) 171.377 9.343 294.659 Fixed Terminals per 100 Pop 16.4 11.4 7.53 Minimum Price per Installed Line R$ 4.776,44 R$ 3.555,45 R$ 3.339,21 Winning Price per Installed Line R$ 7.853,78 R$ 3.774,24 R$ 3.372,61 1. Telesp Fixed The winner, Telefónica, paid R$ 5.783 million or 64.28% over the minimum price of R$ 3.520 million, R$ 7.853,78 per line installed. In the past we have analyzed bids by comparing the winning bid to the second placed bid. Despite some reports that bidders withdrew their envelopes after hearing the Telefónica bid, we believe that this did not happen as such envelopes would have been part of the public record. Thus, the only envelope that was opened in addition to Telefónica's was that of the Telecom Italia consortium which bid R$ 3.965 million, a premium of 12.6% over the minimum price, which represents R$ 5.384,78 per installed line. The winning price represented a premium for the waiting lists, the higher income levels, and the consequent growth potential of Brazil's business and agricultural center. The State of São Paulo also has the beginnings of a statewide fiber optic network. 2. Tele Centro Sul Telecom Italia, the winner in this region and the only bid to be opened, paid R$ 2.070 million being a 6.15% premium over the minimum price of R$ 1.950 million. This was R$ 3.778 per terminal installed. Given this region's proximity to the Mercosur and the potential to take over the CRT concession when Telefónica is obliged to sell, it is surprising that only one bid was received. 3. Tele Norte Leste Fixed A Brazilian group led by Andrade Gutierrez was the only bidder for this region. The price bid, R$ 3.434 million was 1% over the minimum price. This represented R$ 3.376 per installed terminal. This region is enormous in land area and population and includes the State and City of Rio de Janeiro. However, income levels are the lowest in the country with low penetration rates. 4. Embratel Embratel has the nationwide concession to provide domestic and international long distance. Vital statistics are as follows: EMBRATEL Domestic L. D. ( billions of minutes ) 28.7 International L.D. ( millions of minutes ) 477 Fiber Optic Cable Installed ( Km ) 415,761 International Submarine Fiber Optic Cables 3 Internet Backbone - Cities Served 80 Digitalization of Network 92% When envelopes were opened, Sprint, the third largest long distance operator in the USA, was in first place with a bid of R$ 2.499.3 million. However, MCI was only 1.063% behind Sprint. As the two bids were within 5% of each other the second stage of the bid, " open outcry " commenced. Sprint made six further voice bids, their last one being R$ 2.630 million. However, MCI made seven further bids with their last one of R$ 2.650 million being the winner. The process took five minutes between 10.25 AM and 10.30 AM. Sprint and MCI were the only bidders. The premium for Embratel was 47% above the minimum price and was limited due to Embratel?s perceived vulnerability to competition from the mirror company, regional operators with much greater long distance capabilities than previously, and cellular operators. COMMENTARY There was some concern, prior to the privatization auction, that there would not be enough bidders to create a significant competition for the fixed wire line companies. Fears were to some extent allayed with the 39 registrations for the Group A data rooms, and the eight foreign operators that were among those registrants. At the auction, however, there was a competition for Telesp fixed, there was a two-horse race for Embratel, but the two other properties drew one envelope each and premiums of 6% and 1%. In fact, all four companies were sold with the opening of only six envelopes. Premiums for the fixed wire line companies were all less than the premiums for the cellular properties. The highest premium, of 64.28%, for a fixed wire line company was paid for Telesp, and the lowest premium for a cellular company, 91.3%, was paid for Tele Centro Oeste. As all of these properties were valued by two investment consortia on the Brazilian government?s behalf, and standard methodologies were used to arrive at valuations, it is suggested that the reason for the higher premiums for the cellular companies was the higher level of competition. Bell South, despite being registered for six data rooms, and despite being the behemoth of the B-band bids, apparently played no role at all in these bids. It is possibly true that the specter of a Bell South bid for Telesp Fixed bid led Telefónica to make its aggressive bid of R$ 5.78 billion. Neither Portugal Telecom, which may take a participation in Telesp Fixed, nor France Telecom, made a bid for a fixed wire line company. The auction for the long distance operator, Embratel, was a two-horse race despite there being eleven data room registrants. This shows the importance of Embratel " right of way " and interconnection information, for companies that might participate in the sale of the mirror licenses scheduled for October 1998. The real surprise was that Tele Centro Sul Fixed and Tele Norte Leste Fixed attracted only one bidder each. This, due to there being too few interested parties, although the minimum prices were thought to be high by some potential bidders. Both Tele Norte Leste and Tele Centro Sul have orbital rights associated with the provision of rural telephony. In the privatization as a whole there were only two victories for Brazilian groups that were, at that time, unaccompanied by foreign partners. One of these was the Tele Norte Leste region where Andrade Gutierrez led a consortium of funds and investors to victory. THE CELLULAR PROPERTIES Group B TELESP TELE SUL TELEMIG TELE SUDESTE Population 34 million 14 million 17 million 16 million GDP per Capita R$ 8.100 R$ 5.221 R$ 4.458 R$ 6.275 Subscribers 1.282.011 454.502 427.815 546.880 Annual Subscriber Growth 91.60% 54% 84% 147% Average Monthly Bill R$ 109.10 R$ 98 R$ 122 R$ 135 Subscribers per 100 Pop. 3.8 3.2 2.84 3.34 Minimum Price per Subscriber R$ 6.239 R$ 3.609 R$ 3.367 R$ 7.478 Winning Price per Subscriber R$ 20.533 R$ 10.986 R$ 11.068 R$ 17.842 Telesp Cellular Telesp cellular was sold for R$ 3.588 million to Portugal Telecom, a premium over the minimum price of R$ 1.100 million of 226.18 %. Two other envelopes were opened. One was a bid of R$ 2.682 million by Telecom Italia representing a premium of 143.81% over the minimum price, and the Canadian operator, Telesystems International Wireless ( " TIW ") bid R$ 1,688 million, being a 53.45% premium. The Portugal Telecom winning price represented an investment of R$ 20.373.11 per subscriber. Telemig Cellular Telemig Cellular has the reputation of being one of Telebrás' best-managed cellular properties. Telemig was bought for R$ 756 million, being a premium of 228% over the minimum price of R$ 230 million. The winning bidder was TIW, paying R$ 11.078,89 per subscriber. There were ten bidders for Telemig, but Telesystems bid R$ 276 million more than Splice, the second placed bidder. TIW's partner in the B-band operating companies, BCI, came in third place with a bid of R$ 466.575.222. Tele Sul Cellular Nine envelopes were opened for the Tele Sul cellular property. Telecom Italia, which had won the fixed wire line entity that operates in this area also won the cellular concession. The minimum price was R$ 230 million, and the winner paid R$ 700 million representing a premium of 204.34%. The American wireless equipment manufacturer, Qualcomm, was in second place with a bid of R$ 548 million. The winning price represents R$ 10.997 per subscriber. Tele Sudeste Cellular Tele Sudeste services the city and State of Rio de Janeiro, regarded as one of the regions of most potential. The minimum price was R$ 570 million, and was won by Telefónica with a bid of R$ 1.360 million being a premium of 138.6%. The cost per subscriber was R$ 17.860. Four envelopes were opened for this region with TIW in second place with a bid of R$ 1.102 million, Telecom Italia was third with a bid of R$ 1.084 million, and France Telecom was fourth with a bid of R$ 805 million. Group C TELE CENTRO OESTE TELE NORDESTE TELE NORTE TELE LESTE Population 13 million 25 million 14 million 14 million GDP per Capita R$ 4.694 R$ 2.256 R$ 2.865 R$ 3.072 Subscribers 378.272 464.997 207.392 206.598 Annual Subscriber Growth 27% 39% 31% 14% Average Monthly Bill R$ 101 R$ 103 R$ 99.9 R$ 87.7 Subscribers per 100 Pop. 2.79 1.78 1.5 1.4 Minimum Price per Subscriber R$ 3.661 R$ 3.255 R$ 3.113 R$ 3.580 Winning Price per Subscriber R$ 7.005 R$ 9.547 R$ 6.503 R$ 12.282 Tele Centro Oeste The Centre West region serves the capital city, Brasilia. The minimum price for Centre West was fixed by the government at R$ 230 million. Other than Embratel this was the only other region that went to " open outcry ". France Telecom won the initial bidding with a price of R$ 415 million. Grupo Beldi, of which the Brazilian equipment manufacturer Splice is the principal partner, bid R$ 401 million or 96.6% of France Telecom's bid, leaving the way clear for a second phase voice bid. France Telecom made three other bids of which the last was R$ 436 million. Splice trumped that price with a R$ 440 million bid. This represents a premium of 91.3% over the minimum, and R$ 7.011,89 per subscriber. Tele Nordeste The North-East region comprises six states with 25 million people and the lowest GDP of any region in Brazil. The region was won by Telecom Italia with a bid of R$ 660 million, or a premium of 193.8% over the minimum price of R$ 225 million. The cost per subscriber was R$ 9.557,13. Second place was taken by Cowan, a construction company from Minas Gerais with a bid of R$ 475 million. TIW was in third place with a bid of R$ 312 million. Tele Norte Only two envelopes were opened for Tele Norte, which includes Amazonas in its five states. One of the major attractions for these bidders was no doubt the inability of the government to sell the B-band license. Therefore, the operator in this region, TIW, will have a year before competition is introduced. TIW bid R$ 188 million for this concession that represents a premium over the R$ 90 million minimum price of 108.9%. The price per subscriber was R$ 6.509,40. The only other bidder was Andrade Gutierrez offering R$ 160 million, or a premium of 77.8% over the minimum price Tele Leste This region comprises the States of Bahia and Sergipe, and has the lowest average bill, the lowest cellular growth rate, the smallest number of subscribers and the lowest subscriber per inhabitant rate in all of Brazil. This could lead the objective analyst to conclude that this region might receive little attention and low bids. In fact, the price per subscriber, being R$ 12.294,92 that was paid by Telefónica and its partners was the third highest, placing after only Telesp and the Rio de Janeiro region. The price paid was R$ 428.8 million which was the highest premium, 242%, paid over the minimum price. There were eight envelopes opened. Qualcomm placed second with a bid of R$ 405 million, just R$ 2.3 million which was too low to force "open outcry". COMMENTARY The highest minimum price per subscriber was the Rio de Janeiro and Espirito Santo region, Tele Sudeste. The cause of this may have been the higher average monthly bills in Rio compared to São Paulo ( R$ 135 compared with R$ 109.10 ), and the higher growth rates of 147% compared to 91.6%. The market, however, saw São Paulo as the better opportunity, paying R$ 20.533 per subscriber as opposed to R$ 17.842 in Rio. In contrast to the six envelopes that were opened with the Group A auction, Group B necessitated the opening of thirty-six envelopes, and the seventeen envelopes resolved the Group C auction. The average premium over the minimum prices was R$ 179.3% with a 58.3% standard deviation. The winners of the A-band mobile cellular concessions were somewhat less diverse than the B-band. There were five winners, with three, Telefónica, Telecom Italia and Telesystems with two each, Portugal Telecom and Grupo Beldi/ Splice with one. Grupo Beldi is the only Brazilian consortium to have won an A-band cellular concession. As mentioned previously, Tele Leste, with a minimum price of R$ 125 million, having been relatively uncontested in the B-band ( Vicunha Telecominicações won with an 8% premium ) bids, was sold with the highest premium, 242%, of all the cellular companies. The attraction remains a mystery!

volta