Brazil’s Phone System Sold at Auction

In a strong vote of confidence in Brazil that nonetheless sent thousands of protesters pouring into the streets, telephone companies from around the world anted up $19 billion on Wednesday to buy control of the nation’s antiquated phone system.

Police used tear gas to disperse demonstrators who marched on Rio de Janeiro’s stock exchange to protest the sale to foreigners and the massive job losses they fear will result from the largest auction ever held of Latin American state-owned assets. Up to 21 people were injured and at least 14 protesters were arrested.

Brazil sold its 19% interest in the state-controlled phone utility Telecomunicacoes Brasileiras, or Telebras, to improve and modernize service, encourage competition and raise badly needed cash to help balance the nation’s alarming fiscal deficit. Budgetary red ink this year is expected to exceed 6% of economic output.

Big winners in the auction included MCI Communications Corp., which edged out Sprint Corp. with a successful $2.28-billion bid for Embratel, Brazil’s long-distance carrier and one of 12 separate pieces that Telebras was split into for the auction. Also sold were three regional land-line telephone companies and eight cellular telephone franchises.

Telefonica of Spain, which has grandiose plans for South American expansion, won stakes in two Telebras pieces, including Telesp, the continent’s largest phone company serving 5.4 million customers in the Sao Paulo megalopolis. Telefonica and its partners agreed to pay just under $5 billion for Telesp in the largest of the 12 separate sales.

The sale resembled the 1984 breakup of AT&T;, the U.S. monolith that was broken up into regional Baby Bells.

The auction winners are expected to spend billions of dollars upgrading and expanding their new franchises in coming years, partly because of mandatory targets for added services set by the government. Brazil has grossly underdeveloped phone service with only nine phone lines per 100 population, compared with 60 or more in the United States and Europe.

“If Brazil hadn’t privatized the phone system, it would have been hard for the country to compete in the global environment. Telecom is a key part of productivity and they are very behind in most of the country,” said Jamila Xible, analyst at Yankee Group, a Boston-based telecom research and consulting firm.

The $19 billion that the government will collect represents a 64% premium over the $11.6-billion minimum bid the government set last month, and comfortably above the $14 billion to $15 billion it was hoping for.

“The prices paid were considerably above the consensus--of the market, the government, the media, everywhere. It’s a clear sign of the confidence that strategic investors have in the long-term prospects of the Brazilian economy,” said Sergio Goldman, head of research in Santander Investments’ Sao Paulo office.

The privatization is a cornerstone of President Fernando Henrique Cardoso’s effort to streamline Brazil’s economy and stimulate competition.

Brazil’s telephone system is the butt of jokes and legendary in its inefficiency. Installation of new phones takes up to a year in some cities, dial tones are not always available and cellular phones are often obtainable only on the black market for fees of $1,000 or more. Digital wireless services such as PCS are unavailable anywhere in Brazil.

The premium paid by bidders, which also include Italian, Canadian and Portuguese phone companies, showed how valuable the telecommunications franchise is in a nation that is South America’s largest in population and economic output and which is now opening up to outside investment.

Investors reacted positively, bidding up Telebras’ American depositary receipt shares to $118, up $4.94 on the New York Stock Exchange on Wednesday. The stock has seen much volatility in recent months--it’s been as high as $153.25 over the last year--as investors tried to guess the effect the privatization and breakup would have on the stock.

Investors will receive 12 separate issues for each Telebras share they own.

Some analysts said it was significant that three of the major players in the auction--MCI, Telefonica and Portugal Telecom--have previously formed a worldwide marketing alliance.

“Once Brazil [fully] deregulates its telecom industry in 2002, these companies will certainly have synergies, if not formal alliances,” said Paribas telecom analyst William Beavington in New York.

Not all the buyers were foreigners. Brazilian firms bought control of five of the 12 pieces on the block.

As the auction results were announced, groups of unionized telephone workers, students and members of Brazil’s increasingly powerful Landless Workers Movement crowded the downtown area and burned police barricades before being dispersed. There were reports of police gunfire but apparently no demonstrators were shot.

The demonstrators began assembling Tuesday night in Rio de Janeiro, but the police were prepared, having built wooden barricades in streets around the stock market. When the Telebras auction began at 10 a.m. local time, union workers, students and Landless Movement marchers began to throw sticks and rocks at about 3,000 military police in the streets.

Police reacted with tear gas.

Many of the protesters, estimated at about 2,000, wore masks and showed spent bullets they claimed police had fired in the air to disperse them.

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Times staff writer Kraul reported from San Diego and Times researcher Gobbi reported from Rio de Janeiro.

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What’s It Worth?

The New York Stock Exchange-traded shares of Telebras rallied $4.94 to $118 on Wednesday on news of the government’s successful sale of the phone giant--in 12 pieces--to private investors. But the share value of the 12 individual companies isn’t yet clear. Telebras monthly closing prices and latest:

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Wednesday: $118

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Source: Bloomberg News

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* A PLAY FOR LATIN AMERICA

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