Finance 456: Emerging Markets Corporate Finance

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BellSouth International And Colombia
February 23rd 2003
Victor Abad Sami Caracand David Cummings Maria
Ximena Roa Eric Warren

• Finance 456 Emerging Markets Corporate Finance

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Table of Contents

• Introduction
• Case Goals
• BellSouth
• Colombia
• The Strategic Decision
• Going into Colombia
• Valuation
• Discount rate
• DCF
• Multiples
• Transaction Comparables
• Conclusion
• Findings
• What Happened

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Case Goals

• Three Questions
• Should BellSouth go into Colombia?
• Strategy Element
• How should BellSouth go into Colombia?
• Strategy Element
• What should BellSouth pay?
• Emerging Markets Finance Element
• Discount Rate DCF
• Multiples Valuation

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BellSouth, Inc.

• 1984 - ATT divests eight Baby Bells
• Based in Atlanta, Georgia
• 96,000 employees
• USD 21.5 billion in assets
• 1984 Commenced cellular operations
• 1990 First to reach 500,000 cell customers
• 2000 April BellSouth and SBC agree to combine
  wireless operations to form Cingular
• 19 million subscribers
• Second largest US wireless company
• 2000 Adding a new customer somewhere in the
  world every 10 seconds

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BellSouth International (BSI)

• Wholly owned BellSouth subsidiary
• Created in 1985 to manage activities outside USA
• Expanded through partnerships with local
  communications companies
• In 2000, active in 14 countries
• 10 in Latin America
• China, Israel, Denmark, Germany
• Entered Latin America in 1988 in Argentina
• Stated goal is to be full-service telecom
  provider for entire region

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Colombia

• Gateway to South America
• Coasts on both Atlantic and Pacific
• 41.5 million people
• Turbulent history
• Civil wars
• Drug Trafficking
• Key industries Coffee and Oil
• New government in 1998
• Pastrana elected
• Engaging guerilla groups and factions
• 1.3 billion from US to fight drug trade

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Going Into Colombia

• Emerging from worst recession since 1930s
• Unemployment climbing
• 1999 - Passed South Africa for worlds highest
  homicide rate

Homicide rate 1945-2000
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Going Into Colombia

• Three license regions, four players
• No foreign ownership restrictions
• Telecom accounted for 3 of GDP in 2000
• Low penetration 14 fixed line, 5 wireless

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Going Into Colombia

• Celumovil, S.A.
• Licenses in duopolies of Atlantic and Eastern
  regions
• 44 total market share
• 1999 rev 213 million
• Cocelco, S.A.
• License in Western Region duopoly
• 14 total market share
• Comcel Occel
• Recent consolidation

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Going Into Colombia
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Going Into Colombia

• Consistent with goals to be full-service telecom
  provider in Latin America
• Colombia is one of the last pieces
• Prior experience in Latin America
• Opportunity to gain first national footprint
• Colombia Economic projections are positive
• Large growth potential in wireless

Acquire Celumovil and Cocelco but for how
much?
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Discount Rate (IICCR Based)
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Nominal Discount Rate (IICCR)
23.89 (Anchored Cost of Equity) 2.21 (Project
Adjustments) 21.68
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Discount Rate (Yield Spread Based)
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Colombia Sovereign Yield Spreads
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DCF Requirements

• Monte Carlo Analysis
• Exchange rate
• Terminal growth rate
• Local inflation rate
• Real Options
• Abandonment if terminal value lt 0
• Changing capital structure

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DCF - Assumptions
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DCF Assumptions
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DCF - Results
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Monte Carlo Results
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Multiples Valuation

• Challenging implementation in Emerging Markets
• Many privately held companies so information is
  difficult to obtain
• Information on publicly traded companies not
  reliable
• Stock markets are inefficient, concentrated and
  prices can be manipulated
• Selection of comparables
• Latin American companies
• Purely wireless firms
• Similar size

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Multiples Valuation

• Comparables

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Multiples Valuation

• Multiples
• EV/EBITDA not considered due to negative EBITDAs
  for Celumovil and Cocelco and differences in
  accounting standards across countries.

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Multiples Valuation

• Implied Prices
• EV calculation
• Weighted average (50 EV/Revenue, 50
  EV/Subscribers)
• 25 discount due to earning losses

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Transaction Comparables

• Other transactions in mobile business in Latin
  America in 2000

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Transaction Comparables

• Implied Prices
• Provides rough estimate useful to validate DCF
  analysis
• Assumes that on average acquisitions reflect the
  two targets
• Ignores strategic issues

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Summary of Valuations
Implied Equity Value using different valuation
methodologies
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Findings

• Recommend purchase of two assets
• - Size of Market Opportunity
• - Large capital inflows may help alleviate
• political uncertainty (US OPIC)
• - Price range 750M - 1,922M
• Questions?

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What Happened?

• BSI Partners with VSBA
• First Colombian nationwide mobile cellular
  operator
• 41 million POPs
• Paid 1041M for stake in Celumovil and outright
  purchase
• of Cocelco

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Appendix - Multiples Valuation
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Appendix Cellular Standards

• Early Mobile Era Single Central Tower
• 1960s, 70s. Big old James Bond movie cell phones
• Cellular Era
• Began in 1980s in US when FCC allocated
  frequencies
• Many smaller transmission areas called cells
• Original systems were analog
• Greater mobility, smaller phones
• Digital Technology
• Better quality, higher system capacity, improved
  security
• TDMA (includes GSM and PCS), CDMA