Case Study

  

Telecommunications

January 1991, Telebras, Brazil
Legatum Capital

The story of Telebras, Brazil's national telephone monopoly, which had a 40% weighting in the Brazilian stock market index, encapsulated that of the nation. Despite its monopoly status and increasing consumer demand, in 1990 the company could not finance its capital expenditure. There was a two-year waiting list for a new phone line and a requirement to buy preference shares in the company to pay for the installation.

Supporting a National Champion

It was in the midst of a capital starved climate that Sovereign worked with leading equity houses to gain permission to invest in Brazil's publicly traded companies. Sovereign then invested in Telebras, acquiring 1.5% of the company in 1991.

Over the five years following Sovereign's investment, as reform gathered pace, Telebras was able to tap international capital markets to develop its fixed line and cellular services. The company expanded dramatically and prior to its eventual break-up into many 'Baby Bras' in 1998, Telebras was one of the world's largest telecommunications companies, serving 21 million customers and generating more than USD 14 billion in annual revenues.

Capital and Investment Create Prosperity

In the final phase of its privatisation in 1998, the government sold its remaining 21.4% stake in the company for USD 19 billion - valuing South America's biggest telecom firm at almost USD 90 billion - 45 times its valuation of 1990.

Background

Telebrás was the Brazilian state-owned monopoly telephone system. It was broken up in July 1998 into twelve separate companies, nicknamed the 'Baby Bras' companies, that were auctioned to private bidders. The new companies were the long distance operator Embratel, three fixed line regional telephony companies and eight cellular companies.

Attempts at privatization began during Fernando Collor de Mello's administration in 1990, as part of an economic reform dubbed National Privatization Program (Portuguese: Programa Nacional de Desestatização), within the Plano Collor, which was conducted by then-finance minister Zélia Cardoso de Mello. The privatization was carried out some 8 years later during the administration of Fernando Henrique Cardoso, on July 29, 1998.

According to Carlos Henrique Moreira (President of Embratel), in the eight years after the privatization, from 1998 to 2006, the fixed and mobile telephone subscriber base increased by 27.4 million to 139 million. With an annual growth rate of 20%, an annual increase of income of 18%, from R$ 31 billion to R$ 121 billion) was generated. The government's tax revenue grew from R$ 9.3 billion to R$ 33.1 billion at an annual growth rate of 17%. The telecommunication services' penetration grew from 24% to 72%, or 17% annually. The number of direct jobs for the "Baby Brás" companies increased from 180,000 to 305,000, an annual increase of 7%.