2 - Agência National de Telecomunicações – Anatel, The Brazilian government´s telecom regulatory agency.
3 - Region 1, being the North, North-East, Region 2 being the South and West, and Region 3 being the State of São Paulo. Please see map above.
The status of those operators' willingness and capacity to participate in the upcoming PCS bids is discussed below.
Europe - 3G
Mobile wireless 3G technology will provide the ability to access the internet from mobile handsets at rapid data transmission speeds. The current status of technological development suggests that existing capabilities can provide access at 64kbps, which is not much faster than some networks that currently are capable of 56kbps. The expected rate of 384 kbps is not commercially available, nor will it be for some time. The theoretical speed of 2Mbps is still a fantasy.
Handsets are a major issue because they are not yet commercially available. When they become available they could cost as much as US$ 1,000 each.
While they were bidding for licenses in Europe, mobile communications operators were obliged to address the cost/ benefit relationship for an unproven technology, and market demand that may never exist. While it is true that enormous amounts were spent on the 3G licenses and spectrum, it was clear early on in the 3G bidding process that operators made distinctions between strategic markets.
The chart below shows the enormous discrepancies between the key strategic markets of the United Kingdom and Germany, and the less key markets of Italy and the Netherlands. In addition to the competitions listed above, Poland cancelled its 3G auction and awarded three licenses (it had hoped to sell five) to three incumbent mobile operators for US$ 550 million each.
|
3G License Auctions
|
Country
|
Date Awarded
|
Amount Paid (000's)
|
Price per POP
|
United Kingdom
|
April 27th 2000
|
US$ 33,716,100
|
US$ 570
|
Netherlands
|
July 25th 2000
|
US$ 2,349,000
|
US$ 148
|
Germany
|
August 17th 2000
|
US$ 39,570,000
|
US$ 480
|
Italy
|
October 24th 2000
|
US$ 10,700,000
|
US$ 189
|
Switzerland
|
December 5th 2000
|
US$ 120,000
|
US$ 20
|
Italy's auction was a major disappointment to the government, which considered canceling the auction and starting again. They had expected US$ 10 billion more than the US$ 10.7 billion they received. The Italian government was suffering from inflated expectations as Italy has a predominantly pre-paid, low ARPU mobile cellular profile, which could not attract the premiums that were paid in the UK and Germany. The fact that the UK and Germany auctions happened prior to the Italian competition probably discouraged operators from further major spending. The following were among the winning companies in 3G:
|
Winners of 3G Licenses4
|
|
U.K.
|
Germany
|
Neth'lnds
|
Italy
|
|
Vodafone
|
X
|
X
|
X
|
X
|
|
France Telecom
|
X
|
X
|
X
|
X
|
|
BT
|
X
|
X
|
X
|
|
|
Deutsche Telekom
|
X
|
X
|
X
|
|
|
Telefonica
|
|
X
|
|
X
|
|
TIM
|
|
|
|
X
|
|
KPN
|
|
X
|
X
|
|
|
Sonera
|
|
X
|
|
X
|
|
Hutchison
|
X
|
|
|
X
|
4 - This chart does not reflect the fact that the winners were occasionally members of consortia i.e., in Italy, Sonera and Telefonica were consortium associates.
The companies listed in the chart above paid at least 95% of the US$ 86 billion paid for the licenses in these four countries. Of these nine companies, seven have shown some degree of interest in the Brazilian PCS bids5. Two of the companies, Telefonica and Telecom Itália Mobile ("TIM") are already both fixed wire line and mobile cellular operators in Brazil. France Telecom has a 25% investment in the Brazilian long distance mirror operator, Intelig. Anatel was hoping to attract to Brazil at least BT, Vodafone, Deutsche Telekom and Hutchison.
5 - Neither the Netherland's KPN, nor Finland's Sonera appear to have shown interest in Brazil.
Debt Burden
In the second week of December, for the second time in six months, the Bank of England warned "the rising debt of European and US telecommunications companies increases the risk of a financial crisis in world equity and credit markets". This comment concerns the banks and other financial institutions that lend to telecommunications operators6.
Similarly, on December 26th the Banque de France issued a warning saying that it was paying particular attention to the financing of the mobile telecommunications sector, and particularly 3G, and that "a specific issue is, and will be related to the need for lenders to take care of the quality of their borrowers and maintain a policy of moderate commitments". Standard & Poors has downgraded many telecommunications companies in the last six months, including BT, Deutsche Telekom7 and France Telecom. The sale of the PCS licenses in Brazil, which will require significant, incremental commitments of
capital, come at a time when the European operators have not fully dealt with unexpected debt they have already incurred.
6 - In 2000 BT organized a "back-up facility" of £16 billion [US$ 24 billion] that will be available in the event that BT's asset sales and liquidations are unsuccessful.
7 - In late December Deutsche Telekom?s US$ 46 billion acquisition of the USA?s Voice Stream was prejudiced by its falling stock price. Voice Stream has the right to renegotiate the price if the value of Deutsche Telekom shares are lower than
33 pershare. On December 20th its shares fell to ? 22.85.
The chart below shows the Standard and Poors debt ratings8 for the major 3G players. (TIM, KPN and Sonera are not rated.) BT, France Telecom and Deutsche Telekom have all been downgraded since the UK and German 3G bids. Indeed, BT has been downgraded from "AA+" to "A", and France Telecom and Deutsche Telekom have also fallen to "A". The practical result of a lower debt rating is an increase in interest costs. Vodafone appears to have improved its rating, but it was downgraded early in 2000 to "A-" from "A" prior to consummating the sale of Orange to France Telecom. Once this sale was accomplished its "A" rating was restored. Hutchison and Telefonica remain unchanged.
8 - Although some of these telecommunications companies have clearly suffered a lowering of credit quality, in order to maintain a perspective it should be understood that a decline from ?AA? to ?A? reflects a change from a ?very strong? to a ?strong? ability to meet financial commitments.
|
S&P Debt Ratings for Significant 3G Players
|
|
Company
|
Pre-3G
|
Post 3G
|
BT
|
"AA+"
|
"A"
|
France Telecom
|
"AA-"
|
"A"
|
Deutsche Telekom
|
"AA-"
|
"A-"
|
Telefonica
|
"A+"
|
"A+"
|
Vodafone
|
"A-"
|
"A"
|
Hutchison
|
"A"
|
"A"
|
The USA - Merger and Re-Organization
Economic growth, and the technology/ internet boom in the USA fueled significant increases in the value of corporate stocks in recent years and encouraged mergers in the telecommunications sector. Of the seven (eight including GTE) Baby Bells at the time of the break-up of AT&T in 1982, there now remain only four, Bell South, Qwest, SBC Communications and Verizon. However, with lower USA economic growth, a decline in corporate earnings, and a decline in stock values from their highs early in 2000, particularly for technology stocks, the values of telecommunications companies are under pressure. The following chart tells the story:
Stock Performance in 2000
|
Company
|
Current9
|
Low
|
High
|
% Decline High/ Current
|
Verizon
|
49.75
|
39.06
|
67.25
|
-29.00%
|
Qwest
|
39.94
|
32.12
|
69.43
|
-42.48%
|
SBC
|
47.44
|
34.81
|
59.00
|
-19.60%
|
Bell South
|
40.62
|
34.93
|
53.50
|
-24.08%
|
AT&T
|
16.69
|
16.50
|
60.81
|
-62.65%
|
Worldcom
|
14.12
|
13.50
|
56.08
|
-74.82%
|
Sprint (LD)
|
20.12
|
19.62
|
71.50
|
-71.86%
|
Sprint (PCS)
|
19.62
|
19.62
|
66.93
|
-70.69%
|
9 - December 28th 2000.
The three baby bells, SBC, Verizon and Bell South have contained their decline to 19%-30% through having the still largely uncompetitive local phone service as their core business. Those companies with long distance and wireless services as their core businesses have fared worse. Qwest is a fiber backbone and long distance company that became a baby bell through the acquisition of USWest. Thus, it has a different profile from the other baby bells and its stock has suffered accordingly. AT&T is down 62.65% from its high. Costly investments, poor current earnings and poor expected future earnings are depressing the stock value in addition to its unexciting mix of services. Worldcom, is in the broadband data and internet access business also bought MCI two years ago, thereby adding the long distance and wireless businesses. This product mix has spelled disaster in recent months with the Worldcom stock declining nearly 75%. Sprint is in both the long distance and mobile communications businesses (PCS), and has two independently quoted stocks representing the different businesses. The past few months have seen an almost equal decline in both.
AT&T
AT&T is known as the bellwether of telecommunications in the USA. From time to time AT&T has shown an active interest in Brazil, bidding unsuccessfully for several B-Band licenses in 1997, and acquiring, in 1999, the fiber-based limited service provider Netstream from Brazilian engineering and infrastructure company, Promon. The information provided here on AT&T is a specific example of the problems and issues confronting telecommunications companies in the USA at present.
AT&T is in a number of businesses as shown below:
Stock Performance in 2000
|
Sector
|
Services
|
Assets
|
Revenues
|
EBIT
|
|
Business
|
LD, local, data, IP, and wholesale.
|
33,360
|
21,391
|
4,870
|
|
Consumer
|
LD, local toll, residential internet access, prepaid calling card
|
4,945
|
14,751
|
5,425
|
|
Wireless
|
Voice and data services on 850 and 1900 MHz bands.
|
33,045
|
7,474
|
551
|
|
Broadband
|
Analog and Digital TV, high-speed data and telephony.
|
117,289
|
5,69110
|
(717)
|
Total11
|
|
188,639
|
49,307
|
10,129
|
10 - If the MediaOne and TCI mergers had occurred as of January 1st 1999, the revenues for the first nine months of 2000 would have been US$ 8.65 billion.
11 - hese totals reflect Assets, Revenues and EBIT attributable to the four major business segments and do not reflect the actual totals of these four categories for AT&T as a whole.
AT&T has total capital of US$ 110.1 billion, and a market capitalization of US$ 64.7 billion (based on the year-end 2000 stock price of US$ 17.25 per share). The company carries US$ 33 billion of goodwill on its balance sheet. AT&T's problems include:
- Over 50% of AT&T's revenues are provided by long distance, the most competitive telecommunications service. (Since deregulation in the USA it has been easier for local service companies to provide long distance service than vice versa.) Revenues in this sector are down 14% in 2000, and are predicted to decline by 5% p.a. in each succeeding year.
- AT&T paid US$ 108 billion for cable TV operatrs TCI and Media One in order to develop residential internet access, high speed data and local telephony at a time when stock market valuations were stratospheric. In the first nine months of 2000 these investments provided only US$ 5.7 billion in gross revenues.
- AT&T's wireless activity is highly competitive, and notwithstanding a growth rate of 36.2% in revenues in 2000 (29.7% after adjusting for acquisitions), its margins have eroded due to increased customer acquisition costs, customer care and higher network costs attributable to subscriber growth, and their minutes of use12.
- At September 30th 2000, AT&T had US$ 61 billion in bank and investor debt of which US$ 32 billion matures within a year.
- AT&T's debt rating declined in 2000 from "AA" to "A", and is currently on negative watch.
12 - One of AT&T's competitors, Sprint PCS is currently offering 1,500 minutes per month for US$ 34.99. Verizon Wireless is offering 1,700 minutes per month for 29.99.
AT&T has recently announced plans to reorganize to set-up individual companies, each separately capitalized to manage, individually, the businesses of Business Services, Consumer Services, Wireless and Broadband. The investment community views this as a defensive move to provide opportunities for additional access to the equity markets. Worldcom, and BT have announced similar functional reorganizations.
Brazil
As stated earlier, Brazil has accepted foreign operators as the key strategic investors in telecommunications, and to this end Anatel organized a road show that visited London and New York to encourage strategic investors to participate in the PCS bids.
Further, the choice of GSM 1800 MHz as the protocol, was designed specifically to encourage the participation of European operators.
In early draft regulations, Anatel indicated that all nine licenses would each be sold for a minimum price of R$ 600 million. Given the diversity of the Regions, the differences in population and GDP, this approach did not seem to make much sense to interestedparties. Therefore, Anatel's decision to discriminate between the Regions and between the "C" and "D" & "E" bands was not a surprise. The following table provides an analysis of the minimum prices for the "C" band as compared with the B-Band.
|
B-Band Minimum Prices
|
|
Region
|
Minimum
|
US$ Value – April 1997
|
|
Region 113
|
R$ 1,360,000,000
|
$ 1,281,809,614
|
|
Region 2
|
R$ 930,000,000
|
$ 876,531,574
|
|
Region 3
|
R$ 1,200,000,000
|
$ 1,131,008,483
|
|
PCS Minimum Prices ("C" Band)
|
|
|
US$ Value – December 2000
|
|
Region 1
|
R$ 1,010,000,000
|
$ 517,948,718
|
|
Region 2
|
R$ 580,000,000
|
$ 297,435,897
|
|
Region 3
|
R$ 760,000,000
|
$ 389,743,590
|
13 - The value shown for Region 8, is the minimum value of R$ 60 million that was current at the time the concession was sold rather than the initial value of R$ 200 million.
For Region 1, the US$ value of the minimum price today, for Band "C", is 40.4% of the minimum price of the US$ value of Band B in April 1997. A similar calculation for Region 2 yields 34%, and for Region 3 is 34.5%.
The chart below compares the B-band minimum prices with those of "C" band minimums adjusted for inflation.
|
Comparison of B-Band Minimum Prices and Inflation Adjusted PCS Minimum Prices
|
Region
|
B-Band Minimum
|
Adjusted14 "C" Band Min.
|
%
|
Region 1
|
R$ 1,360,000,000
|
R$ 646,400,000
|
47.5%
|
Region 2
|
R$ 930,000,000
|
R$ 371,200,000
|
39.9%
|
Region 3
|
R$ 1,200,000,000
|
R$ 486,400,000
|
40.5%
|
14 - In order to compare Reais, the ?C? band minimums have been deflated by IGP-DI between April 1997 and December 2000 i.e. 36%.
These comparisons show that the Regions' minimums are between 34% and 50% of the B-band values, but that Region 1 is clearly seen as the region of greatest value.
Minimum prices tell us something about Anatel's view of the world, but the prices to be paid by participants may bear little relation to the minimums. The chart below shows the prices paid for B-Band concessions as a percentage of the minimum prices.
|
B-Band Prices as a % of Minimum Prices
|
|
Region 1
|
Region 2
|
Region3
|
|
213%
|
156%
|
331%
|
The expectations are that the "C", "D" and "E" bands are worth less than the "B" band, due to timing, market maturity, waiting lists, and the fact that three new competitors are being licensed simultaneously. Therefore, the minimum prices are lower, and the prices proposed, as a percentage of minimum price, are also expected to be lower.
Bidding Process
The bidding rules have a novel addition compared with privatization and sale of the Mirror licenses. In the event that other bids are within 20% of a first placed bid, then the participants may submit additional bids until only one of the surviving participants wishes to bid further. Under the privatization and the mirror bids the price had to be within 5% of the winning bid15. With PCS, if there are no proposals within 20% of the first placed bid, then the second placed bidder may submit a bid, no matter what the percentage difference.
15 - When the sale of long distance operator Embratel went to open outcry during the privatization auctions, Sprint had submitted a higher bid than MCI, but MCI bid a premium of 6% over Sprint´s price and won. The premium paid by Splice to win Tele Centro Oeste during open outcry, over the highest enveloppe price offered by France Telecom was also 6%.
Potential Players
The difficulties with global telecommunications companies may result in the number of potential bidders being significantly fewer than originally anticipated. Already AT&T, Deutsche Telekom, France Telecom, Sonae and BT have officially withdrawn from the process. BT has stated that Europe will be its strategic focus for the foreseeable future.
The good news for Brazil is that at least three of the USA companies may have future investment plans in Brazil, which could include participation in the PCS bids. SBC Communications, which already holds a significant stake in ATL in Rio de Janeiro, may participate through its joint venture with Bell Canada International and Telmex, Americas Telecom. Worldcom, the controller of Embratel, the long distance public service fixed wire line operator, may bid, through Embratel, for the "D" and "E" band licenses. Bell South, which owns BCP in metropolitan São Paulo, and BSE in the North East, may expand its network through acquisition. Bell South may also take a minority participation in a consortium.
Other potential participants include (i) Hutchison, the operator from Hong Kong that participated unsuccessfully in both the B-band and privatization, (ii) Vodafone16, the British/ American operator seeking a global wireless footprint, (iii) Tele Centro-Oeste and (iv) Portugal Telecom/ Telesp Celular that operate existing mobile cellular concessions, and (v) fixed wire line operators Telemar, Embratel, Brasil Telecom, and Telefonica
16 - During the week of January 8th it was announced that Vodafone had acquired 34.5% of the Mexican cellular operator Grupo Iusacell, for $ 973.4. This was interpreted as demonstrating Vodafone´s commitment to Latin America, of which PCS in Brazil would be the next step
The above list of operators provides only a few names that currently do not have operations in Brazil. This is the unfortunate result of current difficulties in global telecom.
|
