RIO DE JANEIRO, Brazil -- Brazil's big state-owned-company pension funds are positioning themselves to bid for control of the assets of the state telecommunications monopoly when spinoff firms are sold July 29, according to market analysts and press reports.
The main reason: these firms are expected to provide safe and stable utility-type returns over time in a country where there is a huge repressed demand for phone lines.
The government has divided the Rio de Janeiro-based Telebras SA into four fixed-line firms (including international long-distance carrier Brazilian Tellecommunications Co., or Embratel) and eight "A-band" cellular firms, all of which will be sold off in three auctions scheduled for July 29. One auction will be for the fixed-line firms and Sao-Paulo-based Embratel and two auctions will sell off the cellular concessions, first those for the richer states and then those for the poorer ones. Buyers of rich-state cellular concessions will be allowed to bid for poor-state ones. Analysts believe that the total minimum price for these 12 firms -- of $11.64 billion -- is low enough to attract foreign consortiums offering healthy premiums.
The government has prohibited pension funds from taking more than 25% stakes in consortiums that will bid for the spinoff companies, hoping that foreign telephone operators that will provide technological and administrative know-how will head these consortiums and put up a large part of the capital. The government has, however, put no foreign-capital investment limit on the consortiums that bid for Telebras firms, a detail that has peaked the interest in operators such as Telecom Italia Mobile SpA, Rome; Portugal Telecom, Lisbon, Portugal; France Telecom SA, Paris; Telefonica de Espana SA, Madrid, Spain (interested in the fixed-line firms); and Sprint Corp., Westwood, Kan., which along with MCI Communications Corp., Washington, is eyeing Embratel.
Brazilian pension funds, mostly of state-owned companies -- which are big enough to have the assets needed to invest in telecom firms -- are likely to join consortiums that bid for both the cellular and fixed-line concessions.
An eight-member, mostly state-owned-company pension fund consortium led by the Caixa de Previdencia dos Funcionaries do Banco do Brasil (Previ), the $19 billion pension fund of the state-owned Brasilia-based Banco do Brasil SA, was a member of two consortiums led by Bell Canada International, Montreal, that bought two "B-band" cellular concessions.
The government kicked off telecom privatizations in mid-1997 by offering B-band concessions in 10 regions to compete with the A-band cellular firms run by Telebras subsidiaries. Two identical Previ-led pension fund groups had a 39.45% total stake in the Americel consortium, which in 1997 paid $350 million for the B-band concession for the region that encompasses the inland capital of Brasilia. The groups also had a 41.22% total stake in the Telet consortium that paid $292 million this year for the B-band concession for the southern state of Rio Grande do Sul.
While Previ refused to comment on whether it would bid for the Telebras spinoff firms, press reports said Previ was leading a six-member group of state-owned-company pension funds that were negotiating with Sprint to bid for Embratel.
Previ took part in the Americel and Telet consortiums because the telecom sector -- along with the electric sectors -- was an investment area where "due to good business opportunities, we've decided to put our money this year," said investment director Joao Basco Madeiro.
Eduardo Machado, the project director for ABRAPP, the national association of pension funds, said, "pension funds will take part in the Telebras privatization because the growth potential is so great for both fixed-line companies and cellular concessions."
The penetration rate for fixed lines in Brazil is 10 phones per 100 inhabitants, low even among leading countries in South America. Chile and Argentina, respectively, have 31 phones per 100 people and 23 phones per 100 people. Only 3% of Brazil's inhabitants have cellular phones.
When the B-band concession for Sao Paulo, Latin America's largest city, was sold off last year for a hefty $2.64 billion, unfulfilled cellular demand was estimated at 1 million customers.
Although pension funds could have waited to bid for the fixed-line concessions, they instead chose to bid for two B-band cellular concessions. Most telecom sector analysts agree that those pension funds will prefer bidding for fixed-line firms over A-band concessions.
"Fixed-line Telebras firms are safer investments than cellular ones because, for the time being, those firms -- unlike the A-band cellular ones -- won't have competitors," said Oliver Mizne, the telecom analyst with the Sao Paulo-based Banco Garantia investment bank. "That's why pension funds, who are more conservative investors, should target fixed-line firms. True, Previ-led pension funds took part in consortiums that bought B-band concessions, but that was because that was all that was available in the telecom sector at the time."
Alexandre Gartner, the telecom analyst for the Rio de Janeiro-based Banco Bozano, Simonsen SA agreed.
"While both fixed-line and cellular investments show great growth potential, pension funds will likely opt for bidding on the fixed-line ones because they represent less risk. It will be some time before fixed-line companies face stiff competition, due to the cable-laying physical time needed to establish a second fixed-line presence in Brazil. This isn't true for cellular, where there are already two competing services (Band A and Band B)," he said.
Most analysts also agree that both the $4 billion Fundacao Sistel de Seguridade Social (Sistel), the Telebras pension fund; and the $6.9 billion Fundacao Telos de Seguridade Social (Telos), the Embratel pension fund, will take part, if not lead, the pension fund groups that make up Telebras bidding consortiums. Both Sistel and Telos took part in the Previ-led pension fund groups that made up the B-band-buying Telet and Americel consortiums.
