ANALYSIS: Telefónica's Investment in Telecom Not All It Seems

Spain's Telefónica recently announced plans to invest US$670mn in its new property, Colombia Telecomunicaciones (Telecom). But upon closer examination, the investment may not be all that it seems. In fact, technically there may be no foreign financing at all.

GOLD DOUBLOONS OR WOODEN NICKELS?

Despite the fanfare accompanying the announcement, as well as abundant public expressions of gratitude by Colombian president Álvaro Uribe, in the best case scenario the US$670mn investment promised by Telefónica Internacional executive president José María Álvarez-Pallete will not entirely be an injection of Spanish cash in the Colombian economy, as is commonly assumed.

A Telecom source told BNamericas that his company would be putting up US$292mn from its cash flow as part of the US$670mn Álvarez-Pallete pledged to invest in Colombia. In consequence, only US$378mn would come from Telefónica.

Coincidentally, this is almost precisely what the company paid for 50% plus one share of Telecom - 854bn pesos; worth US$380mn on the day of the auction, April 8.

Is Telefónica counting the money it has already paid for Telecom's shares twice - once as part of the stock purchase, and once as part of the US$670mn investment?

To further confuse matters, Telefónica's alleged investment would not come in the form of a lump sum, but would rather be spread out over three years, presumably to give Telecom time to generate sufficient cash to make good on Álvarez-Pallete's promise.

THE US$378MN WORD

While the rest of the world has generally referred to the Telecom partner assimilation process as a privatization, inside Colombia this word is assiduously avoided. Everyone from the country's president to the local press speaks of Telefónica as a "strategic partner" of Telecom, not as the controlling shareholder or effective owner of a now privatized company.

If we follow the thinking in Colombia to its logical conclusion, then Telecom is still an independent firm and Telefónica merely spent US$378mn to acquire a number of Telecom's shares. This means that those US$378mn now belong to the Colombian state and are not Telefónica's to invest.

If this is the case, then the Colombian government could allocate the funds to any number of projects, from urban renewal to crime prevention. By implying it is going to invest those US$378mn back into Telecom, does this mean Telefónica has the power to make decisions on the Colombian treasury's behalf?

AN EMPTY GALLEON CROSSING THE ATLANTIC

That is the best-case scenario regarding the Telefónica investment. The worst-case scenario is infinitely more drastic - Telefónica's investment in Colombia will be precisely zero.

"Telefónica is only going to put up the money for the purchase of the Telecom shares. Absolutely everything else will come from Telecom's cash flow. And you can quote me on that," Signals Consulting analyst José Otero said emphatically.

LET THEM EAT DIAL-UP

Whatever the source of the money for the investment, the amount in question is far from what is needed to get Telecom into shape in technological and competitive terms, Otero believes.

"What they're going to do with the US$670mn is improve Telecom's infrastructure in upper-middle and upper class urban centers as well as in the corporate sector."

While contractually obligated to continue providing service in all the municipalities served by Telecom before it was privatized, Telefónica is not required to bring the latest technology nor invest in cutting-edge infrastructure except where it sees fit. And this would appear to be limited to densely populated, high-ROI areas with well-off populations.

The Telefónica investment is not going to save consumers money either, according to the analyst. "This is obviously going to make the [broadband] market more dynamic, but rather than resulting in lower prices it is more likely to lead to a doubling of the bandwidth being offered."

As a result, Telefónica's strategy can be expected to improve the quality of the broadband already enjoyed by a sector of Colombia's upper classes, but not to increase the country's broadband penetration.

BNamericas.com"

Posted to the site on 23rd April 2006