Post on 18-Jan-2018
description
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—local investors– TelMex—contracted operator– 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
Government
Workers
LUCA
TELGUA
Telgua Shares
95%
5%
$100 MM
Government Liability
$100 MM
LUCA Exchange Note
$700 MM (i)
The Transaction
LUCA's Payment
100
5
500
114
96
Cash
5% Telgua Note(Workers)
GovernmentNotes
New Hamilton
Old Telgua'sNet Debt
Transaction, cont.
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.
Potential growth based on:» High levels of unmet demand» Improved macroeconomic environment» More efficient operators
0
5
10
15
20
25
1991 1992 1993 1994 1995 1996 1997 1998
Line
s pe
r 100
ARG
CHI
VEN
BRA
MEX
PER
GUA
Regional Comparables
FV / LIS
CHI ARG ARG MEX
VEN
PER
PER
CHI
BRA
GUA0
2,000
4,000
6,000
8,000
10,000
USD
Competition (Brazil, Ecuador, Puerto Rico) Consolidation of the US market Legal Uncertainty Emerging Markets crisis
Past Paid Values
DCF
Main Sensitivity Variables:– # lines– revenues per line– expenses per line
We run Crystal Ball on this variables– Found the mean and standard deviation
Revenues: # of LinesLowest Average Highest Standard Dev. n
Salomon proyections 7% 11% 18% 4% 9Telefonica Argentina 3% 11% 17% 5% 7Telefonica Peru 13% 23% 38% 12% 4Telmex -2% 4% 10% 6% 4
Telgua's Basic Service Main Assumptions
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Teledencity
Revenues: $$Lowest Average Highest Standard Dev. n
Salomon proyections -8% -1% 4% 4% 9Telefonica Argentina -11% -5% 2% 6% 5Telecom Argentina -11% -3% 10% 8% 5Telefonica Peru -34% -13% 2% 16% 4Telmex -136% -37% 17% 68% 4
Telgua's Main Assumptions
$-
$100
$200
$300
$400
$500
$600
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009$-
$100,000$200,000
$300,000
$400,000
$500,000$600,000
$700,000
$800,000$900,000
$1,000,000
Rev. Per line
Revenues
Expenses
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Number of employees
Time
Number of Employees
TOTAL CAPEX
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Dolla
rds
(000
)
Efficiency
60
115
159
204226
250277
301328
354374 385
397
0
50
100
150
200
250
300
350
400
Dol
lard
s
Lines per employee
Time
Lines per employee
Expenses
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
Leverage
858
863
881
926
1021
1132
1264
1427
1614
1822
2049
2288
257
304
399
452
509
481
546
488
543
593
527
550
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total Debt
Firm Value
P / E (E) 1999
17.313.5
8.811.6 10.0
12.37.8
05
10
152025
TELGUA CTC VNT TEO TAR TMX TDP
Mul
tiple
FIRM VALUE / EBITDA
7.5 7.4
2.44.4 4.1
5.74.6
0
5
10
TELGUA CTC VNT TEO TAR TMX TDP
EBITDA CAGR 5 YEARS (E)
5.2%7.6%
6.1% 6.7% 6.9%
11.1%
7.4%
0.0%
5.0%
10.0%
15.0%
TELGUA CTC VNT TEO TAR TMX TDP
FIRM VALUE / LIS
$1,620
$2,846
$869
$2,348$2,032
$2,555 $2,465
$0
$1,000
$2,000
$3,000
$4,000
TELGUA CTC VNT TEO TAR TMX TDP
Comparables
INSTALATION CHARGE
0250500750
1,000
GUA MEX BRA ARG CHI PER VEN
US$
MONTHLY CHARGE
05
101520
GUA MEX BRA ARG CHI PER VEN
US$
RELATIVE PRICES: LD INT / LOCAL
050
100150200250
GUA MEX BRA ARG CHI PER VEN
Mul
tiple
RELATIVE PRICES: LD INT / LD DOM
01020304050
GUA MEX BRA ARG CHI PER VEN
Mul
tiple
Tariffs
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
TEO TAR CTC TMX TDP VNT
1998Average 5 Yrs
Correlation with Markets
Cost of K
Three Models– Bain & Company– J.P. Morgan– IICCRC
BetaADRs US marketTelmex-Mexico 0.93Telecom-Argentina 1.16Telephones de Venezuela 1.06Telebras-Brazil 2.06 Telecom-Chile 1.17 Telefonica del Peru 0.90
Average 1.21
Bain & CompanyCost of K
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 & CompanyCost of K, cont.
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 privatecompany 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.
Bain & Company
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 = 1.25Country 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%
Inputs:
Risk free rate 5.22%Risk premium 7.95%Cost of Equity (ICCRC) 36.70%Tax rate 25.00%
Debt to Equity Ratio 27.0% 40.0% 60.0%Cost of Debt 10.5% 11.5% 12.5%WACC 28.92% 25.47% 20.31%
ICCRCCost of KIICCR 26.6 (Sept. 98)
J.P. Morgan $750-$950 MM
Salomon Smith Barney $700 MM
Emerging Markets Team $563 MM
Different Perspectives
Open for Discussion
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.