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Chile
The value of Latin internet subscribers is at the heart of a
controversy that is raging in Chile and further worsening relations
between this part of Latin America and Spain.
Minority shareholders in Chile's former telephone monopolist,
Telefónica CTC Chile, are complaining that the company's largest
shareholder, Spain's Telefónica, has not given them a fair deal.
Last month Mark Mobius, president of Templeton Emerging Markets,
which owns ADRs in Telefónica CTC Chile, threatened to sue
Telefónica for compensation. The minority shareholders are rumoured
to be seeking as much as $1 billion in compensation.
Early in 1999, Telefónica gathered together various of the
internet businesses run by itself and its affiliates into a new
company, Terra Networks. Among the internet assets transferred to
Terra was Telefónica.net, CTC's residential internet dial-up
business. Terra paid CTC $40 million for the business and took on
debts of $9.7 million. Following Terra's highly successful IPO in
November, in which the company's market capitalization soared to
over $8 billion, CTC's minority shareholders began to complain that
the value the company had put on Telefónica.net was too low.
CTC's biggest group of shareholders after Telefónica are the
local pension funds, known as AFPs. The AFPs are becoming a force
to be reckoned with. In 1997 they forced the resignation of the
chief executive of Enersis, who was trying to push through a merger
with Spain's Endesa. In March last year they forced Enersis to
increase its bid for Endesa's partly owned Chilean affiliate,
Endesa Chile. "It's a sign of the health and maturity of the
Chilean pension fund industry," says one senior Latin American
banker. "They are becoming more active US-style investors. The
pension funds brought in Mobius because of his great name
recognition. But they are the ones who are driving it."
According to some, the pension funds and their international
ally are simply trying their luck. "What the minorities really want
is to get a few more shares in Terra Networks," says one observer.
There is a big discrepancy between what Terra paid for the
Telefónica.net business and what CTC's minority shareholders say it
is worth. CTC received something like $500 or $600, depending on
how the figure is calculated, for each of Telefónica.net's 80,000
or so subscribers. The pension funds claim that Terra Network's
subscribers are in fact worth some $15,000 each based on Terra's
post-IPO market value.
But Steven Barnes, an equity analyst at Santander Investment
in Santiago, thinks it is hard to justify such a high valuation on
Telefónica.net's subscribers. "You can't assume that all Latin
American internet subscribers are worth the same," he points out.
Telefónica can hardly be accused of spiriting away assets
without having them independently valued. The price paid to CTC for
Telefónica.net was based on a valuation carried out by Bear
Stearns. A subsequent valuation by Ernst & Young confirmed that
the figure was in the right ballpark.
Telefónica's supporters believe that it is being unfairly
victimized. Spanish companies such as Telefónica, Endesa and BSCH
are the biggest foreign investors in Chile and face hostility at
the best of times. The Pinochet affair has stirred up further bad
feelings.
In some respects minority shareholders do get a rough deal in
Chile. At present an investor can't buy a majority stake in a
company without having to offer all shareholders the same terms. A
law currently before parliament would change that.
But in one respect the law puts minority shareholders in a
strong position. An acquirer needs to own three-quarters of a
company before it can absorb it. If Telefónica chooses to launch a
public offer for the remaining shares in CTC it would need to win
75% for the offer to succeed.
When the law makes it so difficult for large shareholders to
buy out minorities, it is little wonder that Chile's pension funds
are becoming so expert at leveraging minority stakes. If Telefónica
is forced to make a big pay-out to CTC's minority shareholders it
may make foreign companies think twice before buying assets and
harm values in the long run.
John Norton
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