From LatinFinance, Number 93
by Judith Evans
CEI Citicorp Holdings SA is a child of controversy. It was set up by Citicorp in 1990 to hold the assets the US bank hoped to acquire with the $850 million in distressed Argentine debt paper it held when—and if—state-owned companies were sold off. With that goal in view, Richard Handley, then head of Citibank in Argentina, lunged into the mid-1980s scrum to get government approval for debt/equity swaps.
Handley worked magic. The $850 million in debt that was worth roughly 10 cents on the dollar when President Carlos Menem gave the green light for debt/equity swaps in 1989 is now valued at $1.20, or 20% more than its original face value. Moreover, CEI earned $100.4 million for a 9.5% return on equity in 1996, a repeat performance of 1995. Telefónica de Argentina, the largest investment made with the debt, has earned Citicorp, through its share of CEI, a handsome return since 1991. Both operations contributed mightily to Citi’s post-1992 rebound. Other assets acquired through the swap mechanism also provided strong returns. For example, recent sales of a gas distribution company, a gas transportation company, an electricity distribution firm, a paper pulp operation and the Llao Llao Hotel added a total of $500 million to CEI’s balance sheets.
The unrelenting debt paper for something—anything—kept Citibank and Handley at the eye of more than one storm. As Handley and his team wined and dined political figures government officials, trade unionists and other Argentine debt holders, including many banks, the Argentine-born son of a British middle manager took to the conflict like a hungry puma. Which he was, metaphorically speaking.
Handley is known by a number of nicknames but his favorite is “El Gato,” or the Big Cat, which he earned as one of the best hookers of his era for the Pumas, the national Argentine rugby team he joined right out of high school and played with for nine years Known according to rugby fans as a player who was at his best in tight scrums, where he fought for every ball, Handley’s 30-year career at Citibank will probably be remembered for his role in unloading its bad Argentine debt for a huge stake in Telefónica, the privatized telecommunications company which serves the southern half of the country. A supremely risky play in 1991, it was a winning try if there ever was one.
Handley may soon try to beat his own lobbying record. Telefónica—the core of CEI’s enviable earnings record and its major source of asset appreciation—may suffer if Wall Street starts a sell-off as the battle to extend the telecom’s monopoly rights through November 2000 drags on. In early November, Argentine courts ruled that public hearings on the unpopular extension are necessary before the government can take any action.
Next Target Media
As of this year, CEI Citicorp Holdings, formerly called Citicorp Equity Investments, is worth $2.5 billion and its share price had risen from a split adjusted to $2.54 to $4.00. The company has gone from being an unfocused investor in an unrelated grab bag of privatized companies to targeting Argentina’s fast-growing telecommunications and media sectors. CEI is reportedly planning a $300 million stock issue on the New York and Buenos Aires stock exchanges in early 1998, and as CEI’s executives are currently under “silent period” constraints, they are not quoted in this article.
What CEI continues to be is the only entity of its kind in the vast Citicorp empire. While its intellectual paternity is disputed among many, there is no question that the sui generis firm owes its existence to Handley’s unique combination of scrappy rugby and political skills and to the willingness of John Reed and William Rhodes to override the doubtfulness of Citi’s executive corps. The two cabos were also critical in overcoming resistance to the use of the Citicorp name in CEI’s own moniker.
Controversy still engulfs CEI and Handley, however. The investor group’s media ambitions and its association with Raul Moneta, a supposed intimate of President Menem’s and a childhood schoolmate of Handley’s, are duplicating the rough-and-tumble scrums of the rugby field that gave Handley his first taste of fame.
It is that acquisition strategy that keeps controversy stirring around Handley. In an October report, SBC Warburg Dillon Read analyst Zain Manekia said: “The main problem we see with Telefónica is that it is trying to acquire, through CEI Citicorp, anything and everything that is involved in telecommunications and media, without necessarily worrying about the compatibility of the different assets.” But the dissonance goes beyond investor concerns.
CEI intimates recount that in 1995 internal discussions began on the investment group’s future strategy. Energy and communications were the two sectors that appeared most promising, but one insider told LatinFinance: “They elected to get out of energy where other firms had more advantages and to concentrate on communications, a poorly organized area in Argentina.”
That decision, which contributed to the defection of four top level managers, explains the buying spree that CEI embarked on beginning in February of this year. In the last nine months CEI paid $611 million to increase its stake in Telefónica’s majority stockholder, Cointel, to 50%; bought 33.3% of CableVision, Argentina’s second largest cable TV channel, for $380.6 million; took 16.7% of the sports channel Torneos y Competencia for $58 million; CEI, in association with Telefónica de España, through CableVision bought 50% of Fintelco Cable, owner of VCC, for $382.5 million; bought 100% of Mandeville cable for $265 million; bought 50% of several cable companies owned by UIH for $96 million; and signed a memorandum of understanding to take the controlling share of Editorial Atlantida, which publishes a number of magazines and owns Channel 13, the leading cable channel, radio channels and movie theaters. In addition, CEI had conversations with financial daily Ambito Financiero and several other publishing companies.
This is not to even mention the embattled—and at the moment paralyzed—bidding for a new generation cellular phone service, nor CEI’s failed bid in the privatization of the postal service. The scale of concentration, restructuring and wheeling and dealing in the sector is huge: There are now only several hundred cable operators in Argentina, compared to some 1,400 only fifteen years ago.
CEI’s telecommunications/media strategy was originally to have been a joint enterprise with Grupo Clarin, owner of Argentina’s most successful and powerful daily newspaper, a year-old sports paper which now ranks fourth in sales among all dailies, radio stations and Telefe, among other enterprises. Grupo Clarin is privately owned by the Noble family, founders of Clarin newspaper, and managed by Hector Magnetto.
Once the decision to focus on media was taken, Handley & Co. asked, ‘Who is the best positioned company to help us?’ They rapidly came to the conclusion that Clarin was the right partner. But not for long. The grounds for divorce: CEI and Telefónica wanted to be involved in programming. “As long as CEI was a passive investor, there was no problem,” reported Magnetto.
Both groups agree on the financial promise of the telecom and media sectors. Market penetration is over 55%, compared to 15% in Brazil, for example, and annual billing is over $2 billion. And that’s without all the jazzy new products that each competing investor group is promising—and counting on.
Smith Barney telecom analyst Peter Treadway says Telefónica’s cable strategy is a sure-fire money earner. “That’s the way the Spanish are getting around the restrictions in the privatization contract and how they are now ahead of Telecom and other competitors.”
Financial backers are also betting heavily on the two combined sectors. CableVision, majority owned by CEI and Telefónica Internacional, received a $1.1 billion syndicated loan from Société Générale at the end of October. ING Barings recently led a $300 million underwriting and will also lead a $200 million bridge loan for Grupo Uno, the owners of Supercanal, for their acquisition strategy.
But juicy earnings estimates do not satisfy CEI’s critics, who see sinister agendas behind the group’s entry into Argentina’s highly politicized and excruciatingly competitive media business, given that Handley & Co. are totally up front about their intention to be involved in programming.
According to CEI’s version, its first critics were US bank regulatory agencies who questioned Citicorp’s original sole ownership of an entity holding stock in industrial companies. Under pressure from the US Comptroller of the Currency, CEI claims it was forced to look for buyers of large chunks of its stock. The regulatory imperative was questioned in a 1994 New York Times article which quoted Washington officials saying that Citicorp had 10 years to divest its holdings and that the time table was self-imposed.
At the same time, Handley, arguing that the 1992 economic downturn in Argentina forced the actions, offered stock packages to two young lawyers, Gilberto Zavala and Marcelo Gowland, who had been brought in as managers of CEI, and to Moneta, a former schoolmate at St. George’s prep school.
The same argument—Argentina’s stumbling economy—was used to overcome objections at New York headquarters and convince Citicorp to agree to keep its holdings in CEI through the year 2002 as a means of shoring up the gravitas of the project and, if necessary, of persuading other investors to get on board.
The 12%, Citibank-financed purchase by the management group, which grew to four members with the addition of former Banco Rio executives Roberto Ruiz and Gonzalo Peres Moore, caused much grumbling within Citibank in Argentina, where more senior executives regarded the compensation/management buy-in arrangement as an unfair get-rich scheme for Handley’s junior acolytes. Some also made the point that it badly served the interests of Citi’s shareholders. A suit was brought against the bank in the US by a group of shareholders claiming that the low sale price prejudiced their interests. Citicorp officials said the suit was thrown out for lack of merit.
Whatever the facts of the case, by 1996 all four of the managers were out. According to a CEI Offering Memorandum of February 1997, the management group opposed increasing CEI’s medium-term note program from $200 million to $500 million “on the basis of a purported lack of information and conflicts of interests of certain shareholders and directors.” None of the former directors responded to interview requests as, according to a current associate of one of them, they agreed to remain silent when their compensation claims were settled.
These departures opened the way for the other two shareholders—the Wertheim family, which owns Banco Mercantil, and Banco República owner Raul Moneta—to increase their participation, Today the ownership breakdown is: CEI holds 40%, Moneta, through Banco República and the British Virgin Islands-based offshore United Finance Company, owns 36%, the Wertheim family through three of its financial entities owns 20% and the rest is held publicly on the Buenos Aires Stock Exchange.
Recent criticisms of CEI fall into two categories. One might be called “guilt by association” and is fed by public outrage over supposed corruption involving political insiders. The other and probably more significant charge, at least in the short run, is that CEI’s media investment strategy is motivated by its need to defend Telefónica’s monopoly through a set of captive outlets. At the outer fringes of the press and private opinion there are even more damaging and less provable accusations. One analyzes CEI’s setting up a media empire as a means to advance a Menem agenda for 1999. “Look at what is going on in the Spanish media if you want to figure it out,” said one competing media owner.
At the center of the “guilt by association” attack is Moneta. Born in the western province of Mendoza, Moneta began his banking career operating a small trading desk which became Banco República in 1984. Banking is not, however, what has made Moneta the subject of press speculation. One of Carlos Menem’s earliest supporters dating back to the Peronist primary election in 1987, Moneta has often offered his sprawling ranch for presidential soirees and garnered attention for his gifts of pure bred horses to visiting dignitaries.
Moneta, who declined to be interviewed for this article, is also known among a smaller group of Argentines for playing hard ball with those to whom he owes money or who beat him out of business opportunities. One frightened businessman who spoke on condition of anonymity told LatinFinance that he preferred to risk the bankruptcy of his firm rather than sue Moneta for a substantial payment because threats of harm to him and his family following his initiation of legal actions were so convincing. A similar story was repeated by another former Moneta associate. “He is the kind of businessman who operates on the very edge,” declared a worried Citibank executive.
The Moneta rumor mill is fed by the impression that Citicorp did some fancy financial footwork to make it possible for him to build such a large stake in CEI. This was publicly denied by Handley, who told the news magazine Noticias that Citi loaned money to Moneta “as it did to any other client.”
The second censorious take on CEI aims at partner Telefónica de España. This group of critics argue that the two have pursued a strategy of maximizing earnings while minimizing investments. Telefónica de Argentina has been fined twice for failing to meet the investment targets incorporated in the privatization contract. The region, including most of Buenos Aires where Telefónica is located has a higher level of concentration, making it possible to improve services with less expensive investments, according to telecommunications experts. This is a strength as long as it is a monopoly provider. When deregulation comes, this is the geographic area that is also likely to attract the most competition, giving Telefónica more of a scramble for profits than Telecom will face. Therefore, Telefónica is expected to be more combative in its fight for the extension of monopoly rights.
No one at CEI would address these accusations directly. However, the business strategy one source outlined to LatinFinance implicitly gives some answers. According to that analysis, the media strategy is fundamentally the “right business” given the investment firm’s position in Telefónica. “It would be impossible to have these kind of synergies between Telefónica and, say, Alto Paraná (a pulp and paper firm),” said the source. He gave as an example a hypothetical invitation by Telefónica to Julio Iglesias for a concert in the River Plate stadium. With the multiple outlets CEI will have, Iglesias’ hypothetical contract would also include radio interviews, special radio programming, articles in its magazines, TV shows, etc. That will be good for all: it will make it possible to pay the invitee much more money and for investors to make more money.
The menu CEI hopes to serve includes the Internet, paging, home banking, home shopping, and TV of all kinds. CEI’s leaders have said that the investment strategy is controversial only because “people make it controversial,” and argue that owning stock in cable TV is not essentially different than owning any other kind of product manufacturer.
What CEI wants, as Handley has told associates, is to be a kind of Time Warner of the Argentine media sector with a shareholding structure similar to YPF’s, in which a large percentage is held by the public at large. In fact, as one insider pointed out, the planned November share offering would have diluted the percentages held by the major shareholders and increased holdings by the public.
The planned ADR may very well reveal much more about the future of the bicho raro (odd animal) that is CEI. Ultimately, the shareholding structure is what will define and control CEI’s investments and determine how much heat it can stand in cooking up a winning media menu. CEI probably will live for a long time, but it would be a wise bet to expect its shareholder roster to change dramatically. LF