Finance 456: Emerging Markets Corporate Finance Victor Abad Sami Caracand David Cummings Maria...

Finance 456: Emerging Markets Corporate Finance

Victor Abad Sami Caracand David Cummings Maria Ximena Roa Eric Warren

BellSouth International And Colombia

February 23rd 2003

February 23rd, 2004


Table of Contents

• Introduction – Case Goals– BellSouth– Colombia

• The Strategic Decision– Going into Colombia

• Valuation– Discount rate– DCF– Multiples– Transaction Comparables

• Conclusion- Findings- What Happened

Introduction

February 23rd, 2004


Case Goals

• Three Questions– Should BellSouth go into Colombia?

• Strategy Element

– How should BellSouth go into Colombia?• Strategy Element

– What should BellSouth pay?• Emerging Markets Finance Element

– Discount Rate & DCF

– Multiples Valuation

Introduction

February 23rd, 2004


BellSouth, Inc.

• 1984 - AT&T divests eight “Baby Bells”– Based in Atlanta, Georgia– 96,000 employees– USD 21.5 billion in assets

• 1984 – Commenced cellular operations• 1990 – First to reach 500,000 cell customers• 2000 April – BellSouth and SBC agree to combine

wireless operations to form Cingular– 19 million subscribers– Second largest US wireless company

• 2000 – “Adding a new customer somewhere in the world every 10 seconds”

Introduction

February 23rd, 2004


BellSouth International (BSI)

• Wholly owned BellSouth subsidiary– Created in 1985 to manage activities outside USA

• Expanded through partnerships with local communications companies

• In 2000, active in 14 countries– 10 in Latin America– China, Israel, Denmark, Germany

• Entered Latin America in 1988 in Argentina• Stated goal is to be full-service telecom provider

for entire region

Introduction

February 23rd, 2004


Colombia

• Gateway to South America– Coasts on both Atlantic and Pacific

• 41.5 million people• Turbulent history

– Civil wars– Drug Trafficking

• Key industries: Coffee and Oil

• New government in 1998– Pastrana elected– Engaging guerilla groups and factions– $1.3 billion from US to fight drug trade

Introduction

February 23rd, 2004


Going Into Colombia

• Emerging from worst recession since 1930s

• Unemployment climbing

• 1999 - Passed South Africa for world’s highest homicide rate

Homicide rate 1945-2000

Colombia Economic Trends

-

500

1,000

1,500

2,000

2,500

3,000

1970 1975 1980 1985 1990 1995 2000

Year

GD

P p

er c

apit

a

0%

5%

10%

15%

20%

25%

Une

mpl

oym

ent

Rat

e

GDP Per CapitaUnemployment

Strategic Decision

February 23rd, 2004


Going Into Colombia

• Three license regions, four players• No foreign ownership restrictions• Telecom accounted for 3% of GDP in 2000• Low penetration: 14% fixed line, 5% wireless

Strategic Decision

February 23rd, 2004


Going Into Colombia

• Celumovil, S.A.– Licenses in duopolies of

Atlantic and Eastern regions– 44% total market share– 1999 rev $213 million

• Cocelco, S.A.– License in Western Region

duopoly– 14% total market share

• Comcel & Occel– Recent consolidation

Strategic Decision

February 23rd, 2004


Going Into Colombia Strategic Decision

February 23rd, 2004


Going Into Colombia

• Consistent with goals to be full-service telecom provider in Latin America– Colombia is one of the last pieces

• Prior experience in Latin America• Opportunity to gain first national footprint

• Colombia Economic projections are positive• Large growth potential in wireless

Strategic Decision

Acquire Celumovil and Cocelco…

… but for how much?

February 23rd, 2004


Discount Rate (IICCR Based): Valuation

Value Variable Time Frame 5.99 U.S. Risk Free Rate April 2000 10 YR Treasury4.10 U.S. Risk Premium June 200092.90 U.S. IICCR March 200042.60 Colombia IICCR March 2000

Anchored Cost of Equity Capital for project of average risk in Colombia:

23.89

February 23rd, 2004


Nominal Discount Rate (IICCR): Valuation

23.89 (Anchored Cost of Equity) – 2.21 (Project Adjustments) = 21.68

Adjustments Input OutputIndustry 0.74 -1.08Currency 0.00 0.00Expropriation -1.00 0.21International Partners 7.00 -0.48Multilateral Agencies 0.00 0.00Sensitivity to Wars, Terrorism -1.00 0.07Sensitivity to Natural Disasters -1.00 0.07Resource risk 0.00 0.00Technology risk -1.00 0.03Probability of Default 10.00 -0.69Political Risk Insurance 10.00 -0.35

Total: -2.21

February 23rd, 2004


Discount Rate (Yield Spread Based) : Valuation

Value Variable5.99 U.S. Risk Free4.1 U.S. Risk Premium

92.9 U.S. IICCR716 Colombian Sovereign Yield Spread

35.22 Implied IICCR Based on Spread27.26 Anchored Cost of Equity Capital 23.89 Previous Anchored Cost of Capital3.37 Difference in Approaches

February 23rd, 2004


Colombia Sovereign Yield Spreads Valuation

0

100

200

300

400

500

600

700

800

900

1000

Mar

-98

May

-98

Jul-9

8

Sep-

98

Nov

-98

Jan-

99

Mar

-99

May

-99

Jul-9

9

Sep-

99

Nov

-99

Jan-

00

Mar

-00

May

-00

Jul-0

0

Sep-

00

Bas

is P

oin

ts

DEC 1999: 416

APR 2000: 716

February 23rd, 2004


DCF Requirements

• Monte Carlo Analysis– Exchange rate– Terminal growth rate– Local inflation rate

• Real Options– Abandonment if terminal value < 0

• Changing capital structure

Valuation

February 23rd, 2004


DCF - Assumptions

0

5

10

15

20

25

30

Su

bsc

rip

tion

s p

er 1

00 P

opu

lati

on

Colombia

Costa Rica

Ecuador

El Salvador

Peru

Valuation

February 23rd, 2004


DCF – Assumptions

Slope = 21.52Intercept = -23,956

R 2 = 0.9261

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

Pes

os p

er 1

US

Dol

lar

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Income Decile

Per

cen

tage

of

Pop

ula

tion

, Cu

mu

lati

ve

Valuation

February 23rd, 2004


DCF - Results Valuation

February 23rd, 2004


Monte Carlo Results Valuation

February 23rd, 2004


Multiples Valuation

• Challenging implementation in Emerging Markets– Many privately held companies so information is difficult to

obtain– Information on publicly traded companies not reliable

• Stock markets are inefficient, concentrated and prices can be manipulated

• Selection of comparables– Latin American companies– Purely wireless firms– Similar size

Valuation

February 23rd, 2004


Multiples Valuation

Comparables:

(Mil)

Company Country Subscriptions 2000E 2001E 2000E 2001E

Iusacell Mexico 1.5 58$ 68$ 22$ 27$ Tele Celular Sul Brazil 1.1 249$ 246$ 97$ 90$ Tele Centro Oeste Brazil 0.9 222$ 223$ 87$ 80$ Tele Leste Celular Brazil 0.5 128$ 130$ 24$ 37$ Tele Nordeste Celular Brazil 1.3 264$ 250$ 84$ 84$ Tele Norte Celular Brazil 0.4 104$ 95$ 32$ 32$ Telemig Celular Part. Brazil 0.8 197$ 198$ 66$ 68$ Average 0.9 174$ 173$ 59$ 60$

Revenue (US$ Mil) EBITDA (US$ Mil)

Valuation

February 23rd, 2004


Multiples Valuation

Multiples:

• EV/EBITDA not considered due to negative EBITDA’s for Celumovil and Cocelco and differences in accounting standards across countries.

EV/Revenue EV/EBITDA EV/Subscribers

Celumovil 2,599$ (2,234)$ 1,195$

Cocelco 1,466$ (1,340)$ 729$

Implied Price (US$ Mil) (2000E, 2001E)

Valuation

February 23rd, 2004


Multiples Valuation

Implied Prices:

EV calculation• Weighted average (50% EV/Revenue, 50% EV/Subscribers) • 25% discount due to earning losses

Adjusted Net Equity EV Debt Value

Celumovil 1,422$ 670$ 752$ Cocelco 823$ 200$ 623$

Valuation

February 23rd, 2004


Transaction Comparables

• Other transactions in mobile business in Latin America in 2000

Acquired Company Country Acquirer US$ / subscriber

Conecel Ecuador Telmex 1,160$

Smartcom Chile Endesa 3,850$

Baja Celular Mexico Motorola 1,283$

Propel Mexixo Mexico TEF 1,622$

Maxite n/a Telec. Italia 1,936$

Average 1,970$

Valuation

February 23rd, 2004


Transaction Comparables

Implied Prices:

• Provides rough estimate useful to validate DCF analysis– Assumes that on average acquisitions reflect the two targets– Ignores strategic issues

Valuation

Company# subscirbers

(M)Implied

Value (M) Net DebtImplied Equity

Value

Celumovil 0.87 1,708$ 670$ 1,038$ Cocelco 0.53 1,042$ 180$ 862$

February 23rd, 2004


Summary of Valuations Valuation

Implied Equity Value using different valuation methodologies

Company DCF Multiples ComparablesBellSouth's Valuation

Celumovil 1,922$ 752$ 1,038$ 630$ Cocelco N/A 623$ 862$ 370$

February 23rd, 2004


Findings

• Recommend purchase of two assets:- Size of Market Opportunity- Large capital inflows may help alleviate

political uncertainty (US & OPIC)- Price range $750M - $1,922M

• Questions?

Conclusion

February 23rd, 2004


What Happened? Conclusion

Prior toMay 2000 May 2000 June 2000 July 2000

CelumovilGrupo Empresarial Valores Bavaria 74.45% 40.65% 40.65% 34.00%Chase Manhattan Bank 9.00% 9.0% 9.00% --AT&T Wireless 13.55% 13.55% -- --Minor Associates 3.00% 3.00% -- --BellSouth -- 33.80% 50.35% 66.00%

CocelcoOrganizacion Sarmiento Angulo 100% --BellSouth -- 100%

• BSI Partners with VSBA • First Colombian nationwide mobile cellular operator• 41 million POPs• Paid $1041M for stake in Celumovil and outright purchase of Cocelco

February 23rd, 2004


Appendix - Multiples Valuation

(Mil)Company Country Subscriptions 2000E 2001E 2000E 2001E

Iusacell Mexico 1.5 58$ 68$ 22$ 27$ Tele Celular Sul Brazil 1.1 249$ 246$ 97$ 90$ Tele Centro Oeste Brazil 0.9 222$ 223$ 87$ 80$ Tele Leste Celular Brazil 0.5 128$ 130$ 24$ 37$ Tele Nordeste Celular Brazil 1.3 264$ 250$ 84$ 84$ Tele Norte Celular Brazil 0.4 104$ 95$ 32$ 32$ Telemig Celular Part. Brazil 0.8 197$ 198$ 66$ 68$ Average 0.9 174$ 173$ 59$ 60$

Celumovil Colombia 0.9 218$ 253$ (121)$ (25)$ Cocelco Colombia 0.5 134$ 131$ (75)$ (13)$

Revenue (US$ Mil) EBITDA (US$ Mil)

Appendix

February 23rd, 2004


Appendix – Cellular Standards

• Early Mobile Era – Single Central Tower– 1960s, 70s. Big old James Bond movie cell phones

• Cellular Era– Began in 1980s in US when FCC allocated frequencies– Many smaller transmission areas called “cells”– Original systems were analog– Greater mobility, smaller phones

• Digital Technology– Better quality, higher system capacity, improved security– TDMA (includes GSM and PCS), CDMA

Appendix

Finance 456: Emerging Markets Corporate Finance Victor Abad Sami Caracand David Cummings Maria...

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