Brazil attached a minimum price tag of $11.7 billion to its piece of the national phone company Wednesday, setting the stage for a mega-auction that has the rapt attention of jumpy investors, eager international bidders, frazzled Brazilian consumers and a cash-hungry government.
Brazil's expectations from the sale of Telecomunicacoes Brasileiras, or Telebras, have waned steadily since the Asian crisis began last year. But the transaction still stands to be South America's largest privatization to date and could exceed the 1996 sale of Germany's Deutsche Telekom as the largest telecommunications sale ever.
The government sees the sale as a badly needed windfall that will help reduce a yawning budget deficit, part of an $80-billion sell-off of state-owned assets this year and next. The government also hopes that the privatization ushers in a long-overdue modernization of its outdated and inefficient telecommunications system, one of the worst in any major country.
Although critics say that the sale is being rushed and that it will bring a lower-than-expected price, President Fernando Henrique Cardoso wants desperately to complete it before October presidential elections for both fiscal and political reasons.
Winners of the auction could be announced July 29, the day bidding closes. The government said it expects to reap at least $14 billion from the sale for its controlling 19% interest. The balance is held by owners of shares traded in Brazil and on the New York Stock Exchange.
That's only half what the government was hoping for last summer, before the Asian crisis caused investors to back away from emerging market stocks and before a brief October currency crisis sent Brazil into a recession from which it is only now emerging.
Even so, that would surpass the $13.3 billion collected in the privatization of Deutsche Telekom in 1996 when the German government spun off its 26% interest. That's the previous record for a telecommunications privatization.
Reminiscent of the AT&T; dissolution in 1984, the Brazilian breakup will consist of 12 separate sales of Telebras entities to the highest bidders: three regional companies, one long-distance company and eight wireless operators.
Several U.S. companies have expressed interest in bidding, including Sprint Corp., MCI Communications Corp., Southwestern Bell, AirTouch Communications Inc. and Qualcomm Inc.
If the past is any guide, services should improve and rates fall for Brazil's 160 million citizens. World Bank studies indicate that the telecom privatizations in Argentina and Chile boosted economic growth and productivity. Those nations now have nearly double the telephone penetration of Brazil.
To assure that result, the Brazilian government is stipulating that bidders expand coverage and introduce new technology by predetermined deadlines.
There is certainly room for growth. There are only nine telephone lines per 100 people in Brazil, or 9% penetration, far below the more than 64% telephone line penetration in the United States and the 50% average in European countries, according to the International Telecommunication Union.
The poor phone service has been a major drag on Latin America's biggest economy.
A lack of digital communications hardware limits the "business offerings you could have if there was a fully digitalized network that gave you added capacity and cleaner links," said Jorge Torrico, general manager of IBM's Santiago, Chile-based Latin America telecommunications and media operation.
There is no guarantee that the Telebras auction will bring in the expected dollars. Some bidders may have been scared off by what some say is Brazil's hasty approach to the sale, noting that the regulatory framework for Brazil's soon-to-be-open telecom market is incomplete.
Others may be worried about competition. The Brazilian government decided last year that, rather than grant monopolies to winning bidders, it will guarantee other competitors access to the basic infrastructure now up for auction, said Jamila Xible, a Latin America analyst with Yankee Group in Boston. Bidders still have little idea how those concessions will be structured, she said.
"The whole idea of introducing competition right after privatization is very unique and very daring. But I don't think the bidders are giving themselves enough time," Xible said.
But others say foreign telecom giants can't afford to pass up an opportunity to enter once-closed Brazil, a nation attracting billions of dollars of foreign investment in other sectors and which seems destined to join the world's industrial elite.
Isaac Cohen, an economist and director of the Economic Commission for Latin America and the Caribbean, a United Nations agency in Washington, said the Telebras privatization may work to boost today's surprisingly anemic U.S.-Brazil trade if they include successful bids by U.S. companies.
"U.S. and Brazil trade is at shamefully low levels, amounting to $20 billion a year, compared with $300 billion with Canada and $160 billion with Mexico, even though Brazil is much larger than either. Something like this could make the links much stronger and enhance the chances of a hemispheric free-trade zone by 2005," Cohen said, referring to the proposed Free Trade Area of the Americas.
Exasperated Brazilian consumers are also impatient for the progress that privatization may bring. The waiting list for wireless phones in the Sao Paulo market that Bell South inaugurated last week is more than 1 million. Disgust with the inadequate land line phone system has created a black market for cellular phones, which fetch more than $1,000 apiece in Rio de Janeiro.
"The main problem in Brazil is that customers are unsatisfied with the level of service. You have to wait months or years to get a phone. The hope of getting more service and better quality is the main driver" of the privatization, IBM's Torrico said.
Judging from wild swings and high trading volume in Telebras' American depositary receipts traded over the New York Stock Exchange, investors are trying furiously to figure out how the privatization and split-up will affect the stock's value. The company's shares were the 11th most actively traded NYSE issue in 1997.
Telebras shares, which closed Wednesday at $108.75, down $6.25 and off its 52-week high of $169. Telebras shares have also caused frequent whipsawing in the Bovespa stock exchange in Sao Paulo, Brazil's largest, where the shares' aggregate value makes up 40% of the exchange's total equity and on some days two-thirds of its trading volume.
All 12 "Baby Telebras" issues will be traded on either the New York Stock Exchange or the Nasdaq, which are competing furiously for the listings.
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As the privatization of Brazil's state-owned telephone company nears completion, South America's biggest economy suffers from inadequate phone service. Number of main telephone lines in selected countries per 100 inhabitants in 1997:
United States: 64.26
Source: International Telecommunications Union