Brazil's Telesp Cel:Profits Depend On 'Crazy' Competitors

SAO PAULO -(Dow Jones)- Whether Brazilian mobile phone company Telesp Celular Participacoes SA (TCP) can end a long run of losses in 2005 depends on how crazy its competitors are, company executives told reporters Friday.

"It all depends on the level of craziness in the market," said Francisco Padinha, chief executive at Telesp Celular.

Brazil's fiercely competitive mobile market grew 41% in 2004, reaching 65.6 million customers, but the dash for clients cost companies heavily in handset subsidies, marketing costs and lower revenues per user.

This has pushed the earnings before interest, tax, depreciation and amortization, or EBITDA, margins to an average of around 20%, the lowest level in the world aside from Argentina, Padinha said.

In Mexico, by comparison, the market grew by about 23% but average EBITDA margins were 30%, he said.

Telesp Celular, part of the Vivo group of mobile operators, is pleased to have held its EBITDA margins in 2004 some 15 percentage points above the market average, Padinha said.

"Given that entry barriers decreased 60% in 2004 compared with 2003, we conclude that our efforts to keep our profits and EBITDA margins have obtained success," Padinha said.

On Friday, the firm reported a net loss of 490.2 million Brazilian reals ($1=BRL2.57) for 2004, down from a loss of BRL612.3 million in 2003.

Telesp Celular hasn't reported a profit since the fourth quarter of 2000, due to consolidation of the industry, rapid customer growth and the high financing cost of its heavy debt burden.

The intense competitiveness became "more realistic" in the last quarter of 2004, Padinha said, and Telesp Celular aims to improve the margin in 2005.

However, "irrational competitive moves" in 2005 could force Telesp and its sister companies to defend their market share, which would again drive up costs, he said.

He pointed to an offer by Brasil Telecom GSM, the latest market entrant in the south and center-west of Brazil, as unsustainable. Brasil Telecom is offering handsets for BRL99.00 spread over 12 monthly installments to contract customers.

Padinha said that at these levels, bad debt is likely to be high, and customers could be tempted to switch to cheaper prepaid contracts within just a few months.

Telesp's numbers may also suffer if Brazil's commercial interest rates remain sky high, as this could drive financing costs even higher, the firm's chief financial officer, Arcadio Martinez, said.

Brazil's Central Bank recently raised the benchmark Selic interest rate to 18.75% per year to tame inflation, and further hikes are expected, translating into some of the highest commercial rates in the world.

"We'd like another situation (for interest rates) but that's what we have for now," Martinez said.

The operator ended 2004 with net debt of BRL3.81 billion, including a BRL900 million bridge loan used to pay for shares acquired in its Tele Centro Oeste Celular Participacoes SA (TRO) unit.

That loan and some of the rest of the debt will be paid down from a BRL2 billion capital increase completed in early January.

Telesp Celular has a further BRL2.9 billion of debts expiring this year, and the firm will tap the capital markets for financing, though it won't have to seek as much as the nearly BRL5 billion raised in 2004, Martinez said.

Telesp already has a BRL2 billion debenture shelf registration as well as a $500 million medium-term notes program, Martinez said.

Meanwhile, Padinha said he expects Brazilian mobile operators to reach an agreement on interconnection fees with fixed line operators by the end of the month. He said he was "very confident about this process."

To encourage growth of mobile operators, fixed line firms pay higher prices for terminating their calls on mobile networks than they receive from their mobile counterparts.

These higher payments have been one of the main pillars for preventing mobile operators from falling into even deeper financial trouble.

From Feb. 6 this year, those interconnection fees are supposed to be negotiated freely by operators, and not set by telecoms regulator Anatel. However, the firms have been locked in negotiations for months without success.

"We will probably reach an interesting figure for mobile operators," Padinha said.

-By Matthew Cowley, Dow Jones Newswires; 5511 3145 1479; matthew.cowley@dowjones.com

(END) Dow Jones Newswires "

Posted to the site on 18th February 2005