Brazil hit the jackpot Wednesday, raking in US$19 billion from the sale of its national telephone company, Telebras, and paving the way for MCI, Telefónica de España, and other multinational carriers to develop the telecom market of South America's biggest country.
"It was a huge success," said Brazil's Communications Minister Luiz Carlos Mendonca de Barros. "The main reason is the fact that Brazil has a huge market for telecommunications."
Before Wednesday's deal, mammoth Telebras, which serves 160 million people, was split into 12 separate companies: three local landline carriers, eight cellular providers, and one long-distance company. All were auctioned off at the Rio de Janeiro stock exchange on Wednesday, despite protests outside from students, consumers, and nationalists. The auction earned the government a sweet 64 percent premium on its $11.7 billion initial asking price.
Several international phone companies bid furiously for the separate companies. The cellular companies sold particularly well, going for anywhere from double to more than triple the asking price.
MCI (MCIC) and Sprint (FON) went head-to-head for the long-distance carrier, Embratel. MCI won, bidding $2.3 billion, or 47 percent more than the opening asking price.
Spain's Telefónica (TEF) landed Telesp, the local phone company serving São Paulo's 16 million residents, for $4.97 billion, or 64 percent above the floor price. Telefonica, which already has substantial holdings in Argentina, Chile, and Peru, also bought two cellular companies, one of which serves Rio and its 10 million residents.
Telecom Italia (TI) got its hands on a cellular company in southern Brazil, whose boundaries adjoin the area covered by Telecom Argentina, a major telco owned by Telecom Italia and France Telecom.
Portugal Telecom nabbed Telesp Cellular. Other cellular companies were bought by Canada's Telesystems International. Telenordeste, a cellular company serving Northern Brazil, was won by a Brazilian consortium backed by the Inepar electric company and Andrade Gutierrez construction company. Analysts were concerned about Telenordeste's prospects because its new owners aren't telecom experts.
"The northern region will be a weaker link," said Brad Radulovacki, an analyst at Daiwa Securities.
Overall, however, the privatization was celebrated.
"It's a great result," Radulovacki said. Telebras (TBR) shareholders ought to benefit from the wealth of foreign telecom expertise that flooded into most Telebras companies, he said.
Telebras' American Depository Receipts -- American securities that represent foreign stocks -- jumped $4.94 to close Wednesday at $118.50 on the New York Stock Exchange. Telefónica ADRs rose $5.81 to close at $155.19, and shares in MCI gained $1.19 to close at $65. Sprint, which left the auction empty-handed, lost 63 cents to close at $71.50.
"I think Brazil is a big coup for MCI," said Beth Gage of TeleChoice, a telecom consulting firm. "It's going to be a big market."
And, like much of Latin America's $50 billion telecom industry, it will be in the hands of Americans and Europeans.
MCI and Telefónica both have substantial holdings in Latin America. In April 1997, they created Telefónica Panamericana-MCI to build a digital network in Latin America to carry voice, data, and Internet traffic. Earlier this year, it was broadened to include WorldCom (WCOM), which is merging with MCI, and Telecom Portugal.
The four companies are serious about cornering a substantial part of Latin America's Telecom business. With bases in Europe and the United States, the companies will then be able to connect three continents. Now they have five of the 12 new Brazilian telcos.
"This makes them the incontestable rulers of Latin American telephony," said Ilana Trestan, an analyst at Credit Suisse First Boston. "This is what they needed to prove to the world that they own this area."
At MCI the talk was more cautious. "We're still evaluating what will be our next move," said spokeswoman Jane Levene. "This certainly fits with our plan to enter high growth markets."
The buyers have five days to shell out 40 percent of their winning bid, with the remaining 60 percent due in installments over the next two years.
"The government has already decided to use the proceeds to redeem internal debt in Brazil ... and that will be very important to help the government in its task to balance the budget," Barros said.
Brazil's external debt for 1998 is estimated at $222 billion, or 29 percent of its $770 billion gross domestic product, according to Credit Suisse First Boston.
The minister added that the sale, which has been a major campaign issue in the country's presidential elections, would likely increase President Fernando Henrique Cardoso's popularity and help him win re-election in October.
"I think Mr. Cardoso, as polls show, now has the support of the majority of the population. Of course, the success of today's auction is part of the re-election picture of the president," Barros said. Cardoso's opponents had tried to prevent the sale, accusing the president of pushing for privatization so that he could use the funds for his campaign.
Instead, the sale's resounding success is likely to bolster Cardoso's campaign, and put Brazil on a fast track to telecom improvements like those seen in neighboring Argentina and Chile.
"It's a very strategic part of the world," said Daniel Brieve at TeleChoice.
Reuters contributed to this report.
