RIO DE JANEIRO, Brazil -- Brazil's big state-owned-company pension funds bought major stakes in four of the 12 phone companies auctioned off July 29, when the government sold its controlling stake in the state telecom system for $18.9 billion.
A consortium of state pension funds bought major stakes in two of the three fixed-line Telebras firms sold: Tele Centro Sul and Tele Norte Leste.
The consortium also bought major stakes in two of eight "A-band" cellular Telebras firms up for sale: TeleMig Celular and Tele Norte Celular. Pension funds reportedly had a 24% stake in the consortium that bought TeleMig and a 19.9% stake in the consortium that bought Tele Norte.
The pension fund consortium involved in the purchase of the Tele Centro Sul fixed-line firm and the two cellular firms did so as part of a private equity fund set up by Opportunity, a Rio de Janeiro-based asset manager, as well as through direct investments in the consortiums that bought the telecom companies.
The pension funds that invested in the four telecom firms are: Previ, the pension fund of the state-owned Banco do Brasil, Brazil's biggest bank, with more than $20 billion in assets; Funcef, the pension fund of the federal savings bank; Sistel, the Telebras pension fund; Telos, the pension fund of Embratel, the Telebras international long-distance carrier; and Petros, the pension fund of the state oil monopoly.
A similar group of Previ-led pension funds took part in the consortium -- led by Andrade Gutierrez, a big Brazilian civil construction firm -- that bought Tele Norte Leste as part of a special-purpose company set up by the Rio de Janeiro-based Banco FonteCindam investment bank.
A Banco FonteCindam spokesman confirmed the investments of the Previ-led pension fund consortium in Tele Norte Leste. Previ officials confirmed the pension fund consortiums' investments in the other three telecom company purchases. Previ officials wouldn't otherwise comment on the Telebras acquisitions.
But Joao Basco Madeiro, Previ investment director, earlier this year said the telecom sector, along with the electric sector, was an investment area where "there are good business opportunities." He made the comment after a similar Previ-led pension fund group took part, through Opportunity investment vehicles, in two consortiums that bought two of eight "B Band" cellular concessions meant to compete with the just-sold "A Band" firms.
The Previ, Sistel, Funcef, Telos and Petros pension funds also, as part of an Opportunity-organized investment vehicle, took part in a consortium led by Sprint, the U.S. long distance carrier, which unsuccessfully bid on Embratel, the international long-distance carrier.
Analysts said the pension funds took part in these numerous consortiums because telecom-sector firms have tremendous growth potential. The penetration rate for fixed lines in Brazil is 10.8 phones per 100 inhabitants. This is low, even among leading countries in South America. The penetration rate in Chile is 31 phones per 100 people; and Argentina, 23 per 100. Also, only 3% of Brazil's inhabitants have cellular phones. There's already a waiting list for around 15 million fixed lines and service for 5 million to 6 million cellular phones.
"Local pension funds invested heavily in the Telebras firms because they rightly saw Brazilian telecom firms as having great growth potential, not only due to pent-up demand for phone lines, but because of the tremendous room these telecom firms have to cut costs through efficiency and economy-of-scale gains," said Tom Atkinson, telecom sector analyst for the Sao Paulo-based Banco Patrimonio investment bank, a Salomon Smith Barney affiliate.
Marcelo Molica, telecom analyst with the Rio de Janeiro-based Banco Icatu, added "pension funds are attracted to Telebras firms not only because of their high growth potential, and thus their high dividend-paying potential, but because they are low-risk investments, given the huge pent-up demands for phone lines in Brazil."
Mr. Molica gave another reason for Sistel and Telos having joined the pension fund consortiums that bid on the Telebras firms: "Sistel and Telos wanted to share in the control of the companies that fund them."
Analysts originally predicted pension funds would prefer joining consortiums that bid on the three fixed-line firms and Embratel, as opposed to the cellular firms. They believed the fixed-line firms would be more appealing because for the time being, those firms won't have competitors, while the A-band cellular firms will have B-band competitors.
Those analysts now say the Previ-led pension funds saw the A-band firms as having operational/administrative synergies, not only with the two B-band cellular concessions in which the pension funds previously had invested, but also in the fixed-line firms.
"Pension funds realized that because cellular firms use the infrastructure of the fixed-line system to make their operational connections, there were synergies between the two types of phone companies," said Ricardo Kobayashi, the head of research and former telecom-sector analyst for Rio de Janeiro-based Banco Pactual. "Given that fixed-line and cellular firms can maximize service quality by minimizing the problems between them, the pension funds probably figured that it didn't hurt to be shareholders in both fixed-line and cellular firms."