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Telgua

Telgua. Luca’s Team. Introduction Transaction Company Statistics Latin America Telecom Market DCF Analysis Comparable Cost of Capital Discussion Conclusion. Overview. Country: Guatemala Case: Privatization of Telecom Players: Guatemalan Government— seller LUCA— local investors

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Telgua

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  1. Telgua Luca’s Team

  2. Introduction Transaction Company Statistics Latin America Telecom Market DCF Analysis Comparable Cost of Capital Discussion Conclusion Overview

  3. Country: Guatemala Case: Privatization of Telecom Players: Guatemalan Government—seller LUCA—localinvestors TelMex—contractedoperator Investment Banks: J.P. Morgan—seller Salomon Smith Barney—buyer Introduction

  4. Recently privatized—10/1/98 Unlike other Telecom privatization in Latin America: Auction—one sole bidder No involvement from International Telecom operators or foreign investors Highly leveraged acquisition No initial protection against competition Relevance

  5. Political Uncertainty-Expropriation Income Inequality Closed Economy (Agrarian) Telecom open for competition Risks

  6. The Transaction

  7. Transaction, cont.

  8. Telgua in 1998 • Biggest firm in C.A. - real options. • Big restructuring in the past 2 years • 22% avg. annual lines growth • CAPEX > U$200M • So a good part of the restructuring costs have been spent.

  9. Regional Comparables • Potential growth based on: • High levels of unmet demand • Improved macroeconomic environment • More efficient operators

  10. Past Paid Values • Competition (Brazil, Ecuador, Puerto Rico) • Consolidation of the US market • Legal Uncertainty • Emerging Markets crisis

  11. Main Sensitivity Variables: # lines revenues per line expenses per line We run Crystal Ball on this variables Found the mean and standard deviation DCF

  12. Revenues: # of Lines

  13. Revenues: $$

  14. Expenses

  15. Efficiency

  16. Average Tenure Advertising Allowance doubtful accounts Interest rate Total Debt/EBITDA 15 years 4% sales 5% sales, then 3% 10-12% 2 - 1.8 - 1.4 Expenses

  17. Leverage

  18. Comparables

  19. Tariffs

  20. Correlation with Markets

  21. Cost of K • Three Models • Bain & Company • J.P. Morgan • IICCRC

  22. Cost of K Bain & Company Beta ADRs US market Telmex-Mexico 0.93 Telecom-Argentina 1.16 Telephones de Venezuela 1.06 Telebras-Brazil 2.06 Telecom-Chile 1.17 Telefonica del Peru 0.90 Average 1.21

  23. Cost of K, cont. Bain & Company Average Beta 1.21 Risk Free Rate 5.30 Market Premium 7.90 Equity Premium 14.38 Country Risk 2.70 Cost of Equity 17.80

  24. Bain & Company Country Risk: borrowing rate of Guatemalan companies vs.. comparable US companies. Telgua debt rate in $: 10.50% US Telecom debt rate in $: 7.80% Country risk and small private company risk 2.70% { 1.4% Small private company risk 1.3% Country Risk* • *Citibank’s premium to loans in Guatemala to account for sovereign country risk.

  25. J.P. Morgan Cost of equity = 16.27% 30-year T-Bond = 6.27% (-) liquidity premium = 1.25% Risk free rate = 5.02% Market premium = 5.00% Beta = 1.25 Country risk = 5.00% Cost of equity = 16.27% Cost of debt (after-tax) = 7.50% Cost of debt = 10.00% Tax shield = 2.50% After tax cost of debt = 7.50% Target capital structure Debt/total = 30% WACC = 13.6%

  26. Cost of K ICCRC IICCR 26.6 (Sept. 98)

  27. Different Perspectives J.P. Morgan $750-$950 MM Salomon Smith Barney $700 MM Emerging Markets Team $563 MM

  28. Open for Discussion

  29. Premium paid by Luca $170-$220 MM Discount Rate Inconsistency Real Options: Muscle Power, largest company in Central America Acquire Telecom in Honduras, Nicaragua, El Salvador IPO, lead the development of Capital Markets in Guatemala Conclusions

  30. Luca’s Repayment of $500 MM Debt TelMex exercises option Dividend payments Additional leverage IPO Conclusions, cont.

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