Muir Woods 2Ashish ChughHolly CheungGareth Lloyd-OwenMaja TrolleMoneer Kattan

Compañia de Teléfonos de Chile (CTC)

There is One Key Issue

Muir Woods Group 2 2

Booming telecoms market but Chile’s infrastructure is poor

Need substantial capital to expand

Alan Bond (owner) has had to sell his 365.5 million shares

CTC is in a difficult financial situation

Unstable Government

Booming telecoms market but Chile’s infrastructure is poor

Need substantial capital to expand

Alan Bond (owner) has had to sell his 365.5 million shares

CTC is in a difficult financial situation

Unstable Government

SituationSituation

ComplicationComplication

QuestionQuestion

Garcia must devise a strategy soon

Investors are uncertain about CTC

Many financial complications exist

It is unclear what competitors are going to do

Garcia must devise a strategy soon

Investors are uncertain about CTC

Many financial complications exist

It is unclear what competitors are going to do

Can CTC Finance the Expansion?

Can CTC Finance the Expansion?

Compañia de Teléfonos de Chile

The Questions That Must Be Answered

Muir Woods Group 2 3

1.0 2.0 3.0

3.12.1

Do Suitable Foreign

Financing Options Exist?

Do Suitable Foreign

Financing Options Exist?

Can They Convince Investors

Into Emerging Markets?

Can They Convince Investors

Into Emerging Markets?

Is Chile Stable Enough to See Through The Expansion?

Is Chile Stable Enough to See Through The Expansion?

Is The Domestic Market Unable to Support The

Expansion?

Is The Domestic Market Unable to Support The

Expansion?

Can the Compañia de Teléfonos de Chile Finance An Expansion?

Can the Compañia de Teléfonos de Chile Finance An Expansion?

Can They Attract International Investors?

Can They Attract International Investors?

1.2

Are Domestic Financial

Barriers to Difficult to Overcome?

Are Domestic Financial

Barriers to Difficult to Overcome?

1.1

Does the Government Support

CTC?

Does the Government Support

CTC?

Is the Market to Small to Fund the

Expansion?

Is the Market to Small to Fund the

Expansion?

2.2 Will Foreign

Investment Avoid

Affecting the

Domestic Market?

Will Foreign Investment

Avoid Affecting

the Domestic Market?

3.33.2

Does The Country

Need This Level of

Expansion?

Does The Country

Need This Level of

Expansion?

1.0 Activities & Analysis

•Identify domestic barriers

•Investigate domestic financing options

•Size of market?

•Capital requirements?

•Population demographics

2.0 Activities & Analysis

•Identify issues (fears)

•Foreign view of Chile (including history)

•Forecasts on investments

•Implications for funding internationally

3.0 Activities & Analysis

•Government History / ITT

•Government’s ambition (what do they want?)

•GDP growth

•Telecommunication growth rate

•Technological advancements (infrastructures)

•Country benchmarking

Our Analysis Work Flow

Muir Woods Group 2 4

The Financial Solution is to Seek International Funding Using ADRs

CTC Can Finance The Expansion:

Muir Woods Group 2 5

Chile IS Stable Enough to See Through the Expansion

The Domestic Market Can’t Support the Expansion

CTC IS An Attractive Proposition for Foreign Investors

1.0 Chile IS Stable Enough to See Through the Expansion

Muir Woods Group 2 6

1.1 The Chilean Government DOES Support CTC

1.2 Chile DOES Need This Level of Expansion

Muir Woods Group 2 7

The Government will have to re-nationalize CTC if the financing fails

Over 300,000 pending telephone lines

Infrastructure falling behind other countries

Negative effect on international investments could stagnate economic growth

1.1 The Chilean Government DOES Support CTC

Muir Woods Group 2 8

Chile’s GDP and population are growing

Pending phone applications are increasing by 9.05% per year

Chile is ranked 11th of 21 Latin American countries

1.2 Chile DOES Need This Level of Expansion

2.0 Unfortunately, The Domestic Market IS Unable to Support the Expansion

Muir Woods Group 2 9

2.1 The domestic barriers are too difficult to overcome

2.2 The domestic market is too small to fund the expansion

Muir Woods Group 2 10

Domestic Financing Possibilities:

Local Banks

Domestic pension funds

Chilean stock market

Cutting the dividend

2.1 The domestic barriers are too difficult to overcome

Why is it more feasible to raise fund overseas?

More developed markets

Longer trading hours

Higher daily transactions

Muir Woods Group 2 11

2.2 The domestic market is too small to fund the expansion

Chilean citizens couldn’t afford to invest

Average household income = US $235

Disposable income = 5.38%

Paycheck only covers phone

Capital requirements

Data provided from the case

97,267 Mil. Peso = approximately $ 326 Mil.

3.0 CTC Can Attract International Investors

Muir Woods Group 2 12

3.1 Suitable foreign financing options do exist

3.2 Foreign investment will avoid affecting the domestic market

3.3 They can convince investors into emerging markets

Muir Woods Group 2 13/18

Three options for foreign investment exist

Directly into the local stock market

Exchange Traded Funds (ETFs)

American Depositary Receipts (ADRs)

3.1 Suitable foreign financing options do exist

Muir Woods Group 2 14/18

Potential Effects on the Domestic Market

Order flow migration

Increased price volatility

3.2 Foreign investment will avoid affecting the domestic market

Concerns facing foreign investors:

Increased price volatility

Political risk

Exchange rate

Inflation

Resources

Share Price

Muir Woods Group 2 15/18

3.3 They can convince investors into emerging markets

The Financial Solution is to Seek International Funding Using ADRs

CTC Can Finance The Expansion:

Muir Woods Group 2 16/18

Chile IS Stable Enough to See Through the Expansion

The Domestic Market Can’t Support the Expansion

CTC IS An Attractive Proposition for Foreign Investors

Muir Woods Group 2 17/18

CTC raised $92 million through Level 3 ADRs at $22.25 per share

CTC was an innovator in the ADR space

In April 1993, CTC issued 10-year convertible bonds internationally for $200 million

What Actually Happened

Muir Woods Group 2 Final Slide

Are There Any Questions?

Appendix

Muir Woods Group 2 19

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Chile 33.63 36.37 38.09 34.16 32.8635.4

938.0

140.14 42.79 45.91 50.76

Growth Rate

8.68%

8.15%

4.74%

-10.32

%

-3.79%

7.97%

7.12%

5.60%

6.59%

7.31%

10.56%

Muir Woods Group 2 20

1.2.1 Chilean Population Growth Rate

Country Population per telephone line Rank

Bahamas 2.2 1

Barbados 3.3 2

Uruguay 7.6 3

Costa Rica 7.9 4

Panama 9.4 5

Argentina 9.7 6

Trinidad and Tobago 11 7

Brazil 11.3 8

Venezuela 11.3 9

Colombia 13 10

Chile 15.5 11

Cuba 18.9 12

Guyana 23 13

Ecuador 27.4 14

Peru 32.8 15

El Salvador 38.1 16

Paraguay 41.1 17

Bolivia 41.4 18

Guatemala 62 19

Nicaragua 63.4 20

Jamaica 205 21

Muir Woods Group 2 21

1.2.2 Chilean Population Per Line

Muir Woods Group 2 22

1.2.3 Chile vs Mexico Poverty

2.2.1 Capital Requirements

Muir Woods Group 2 23

2.2.2 Population Demographics

Muir Woods Group 2 24

2.2.3 Market Capitalization

Muir Woods Group 2 25

3.3.1 Exchange Rates July ‘87 → Jan ‘90

Muir Woods Group 2 26

Muir Woods Group 2 27

3.3.2 Chile Inflation Rates Jan ‘85 → Jan ‘90