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Explore the privatization of Telgua in Guatemala, a unique case in Latin America, with insights on the transaction, company statistics, market comparables, and DCF analysis. Delve into the cost of capital, political risks, and real options for the telecom sector in the region. Understand the implications of leverage, revenues, expenses, and market dynamics on the valuation. Conclude with strategic recommendations and potential future scenarios for Telgua post-privatization.
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Telgua Luca’s Team
Introduction Transaction Company Statistics Latin America Telecom Market DCF Analysis Comparable Cost of Capital Discussion Conclusion Overview
Country: Guatemala Case: Privatization of Telecom Players: Guatemalan Government—seller LUCA—localinvestors TelMex—contractedoperator Investment Banks: J.P. Morgan—seller Salomon Smith Barney—buyer Introduction
Recently privatized—10/1/98 Unlike other Telecom privatization in Latin America: Auction—one sole bidder No involvement from International Telecom operators or foreign investors Highly leveraged acquisition No initial protection against competition Relevance
Political Uncertainty-Expropriation Income Inequality Closed Economy (Agrarian) Telecom open for competition Risks
Telgua in 1998 • Biggest firm in C.A. - real options. • Big restructuring in the past 2 years • 22% avg. annual lines growth • CAPEX > U$200M • So a good part of the restructuring costs have been spent.
Regional Comparables • Potential growth based on: • High levels of unmet demand • Improved macroeconomic environment • More efficient operators
Past Paid Values • Competition (Brazil, Ecuador, Puerto Rico) • Consolidation of the US market • Legal Uncertainty • Emerging Markets crisis
Main Sensitivity Variables: # lines revenues per line expenses per line We run Crystal Ball on this variables Found the mean and standard deviation DCF
Average Tenure Advertising Allowance doubtful accounts Interest rate Total Debt/EBITDA 15 years 4% sales 5% sales, then 3% 10-12% 2 - 1.8 - 1.4 Expenses
Cost of K • Three Models • Bain & Company • J.P. Morgan • IICCRC
Cost of K Bain & Company Beta ADRs US market Telmex-Mexico 0.93 Telecom-Argentina 1.16 Telephones de Venezuela 1.06 Telebras-Brazil 2.06 Telecom-Chile 1.17 Telefonica del Peru 0.90 Average 1.21
Cost of K, cont. Bain & Company Average Beta 1.21 Risk Free Rate 5.30 Market Premium 7.90 Equity Premium 14.38 Country Risk 2.70 Cost of Equity 17.80
Bain & Company Country Risk: borrowing rate of Guatemalan companies vs.. comparable US companies. Telgua debt rate in $: 10.50% US Telecom debt rate in $: 7.80% Country risk and small private company risk 2.70% { 1.4% Small private company risk 1.3% Country Risk* • *Citibank’s premium to loans in Guatemala to account for sovereign country risk.
J.P. Morgan Cost of equity = 16.27% 30-year T-Bond = 6.27% (-) liquidity premium = 1.25% Risk free rate = 5.02% Market premium = 5.00% Beta = 1.25 Country risk = 5.00% Cost of equity = 16.27% Cost of debt (after-tax) = 7.50% Cost of debt = 10.00% Tax shield = 2.50% After tax cost of debt = 7.50% Target capital structure Debt/total = 30% WACC = 13.6%
Cost of K ICCRC IICCR 26.6 (Sept. 98)
Different Perspectives J.P. Morgan $750-$950 MM Salomon Smith Barney $700 MM Emerging Markets Team $563 MM
Premium paid by Luca $170-$220 MM Discount Rate Inconsistency Real Options: Muscle Power, largest company in Central America Acquire Telecom in Honduras, Nicaragua, El Salvador IPO, lead the development of Capital Markets in Guatemala Conclusions
Luca’s Repayment of $500 MM Debt TelMex exercises option Dividend payments Additional leverage IPO Conclusions, cont.
