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Privatization deal of the quarter century: Telecomunicações Brasileiras

Sep 1, 2013

$19bn break-up and sale, 1998

In the 1980s and 1990s, privatizations markedly reshaped Latin America's corporate landscape. Not all of them were happy, however. In some cases deeply indebted sovereigns gave creditors shares in national companies in lieu of interest payments. In others, voluntary deals were marred by large-scale protests.

For telecoms, bringing in private cash allowed extensive investment in networks that cash-strapped governments could not provide - and consigned to history long waits for a new phone connection at home. Peru's $2 billion privatization of its phone company in 1994 improved the service and was an important marker of increasing confidence in a country that had been hammered by terrorism and poor economic management in previous years.

Mexico's privatization of Teléfonos de México - selling a 20.4% stake in 1990 for $1.76 billion, and raising $2.2 billion by floating 15.7% in 1991 - was the first large-scale deal of its kind. Yet the resulting monopolistic structure of Mexico's communications sector, only being addressed 22 years later, relegates the deal to second place in this category.

Brazil's $19 billion privatization stands out among these others not only for size, but for complexity of the execution. The privatization of Telebrás in 1998 came with a tough regulatory stance from the outset. The company was split into 12 "Baby Brás", each sold to different consortia. The sales came with strict instructions on the investment that was required by the purchasers.

The deal was not without controversy, however. Communications minister Sergio Motta led the process, but died before it was completed. His successor, Luiz Carlos Mendonça de Barros had to resign soon after the deal, on allegations he had favored one bidder - although that consortium did not win and Mendonça was later found not guilty of the charges. Still, led by Morgan Stanley Dean Witter, Patrimonio and Salomon Smith Barney, the deal was Latin America's largest privatization. It involved restructuring the institution into smaller companies, and was profitable for the government, raising 64% more than the base prices it had set. LF



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