The first reactions in the face of the acquisition of 100% of Digitel’s stock, owned by the Italian TIM (for 450 million U$, according to Cantv) were opposite to one another.
Some reacted favorably, but others with dislike. And others, like the Venezuelan regulating institutions, are alert in the face of possible disloyal competition.

An analysis by Activalores, a stock brokerage firm, reveals the various points of view of the different Cantv shareholders, of which Verizon, is the strategic shareholder, with 28% of the capital share.
“The truth is that we suspected that the U.S. investors would not be too pleased with Cantv’s using part of its cash to buy Venezuelan assets, instead of preserving them to pay the greatest amount of cash profit possible” said the firm, as it analyzed described Cantv investors in the following way:

“The quick-profit man”. This category includes those who hoped that Cantv would repeat profits at 350 bolívares (Bs.), as in 2003; almost threefold of this year’s 120 Bs. . This kind of investor only sees about Cantv’s healthy cash flow with as little investment as possible.

"He does not care much for a growth report, especially when it comes to investing more resources in Venezuela. Under this analysis, we could expect poor profits for 2005, considering the size of the investment for the purchase. Therefore, he does not feel too happy with the acquisition of Digitel, and seems to be on the sellers side at this moment.”

“The Carlos Slim fan”. This ActiValores stereotype intends to describe those who assure that Telmex-America Móvil (both companies controlled by the Mexican media magnate Carlos Slim) will end up buying all or at least part of Cantv.

For “the fan”, the war that Telmex-America Movil is waging against Telefónica-Teléfonos Móviles in all fronts to control the Latin American Market and the Digitel transaction -which has 1.2 million clients- will attract more Mexicans to battle against their Spanish competitors in the only big Latin American market in which they are not present.

“It is likely that ‘the fan’ holds on fiercely to his positions, with the conviction that in a short time, the Mexicans will come to pay high prices for the Cantv assets, and that they could be viewing the current downward trend as an opportunity to increase their exposure to Cantv".

“The fundamentalist”. According to the ActiValores classification, this stereotype fits those who assess the Digitel negotiation in terms of whether it adds value to Cantv or not. This type of investor, who thinks that Cantv will control the market and block the entrance to any competitor, “probably won’t sell his positions, but doesn’t seem to us so enthusiastic as to increase his Cantv participation at the current prices”.

Finally, this investment firm adds that “there are all kinds of people involved in this, and it is too soon to know who will prevail. As far as we are concerned, we would like to see that the adjustment to the decrease consolidates in order to achieve a solid foothold, because the long term perspectives look promising”.

Three days following the announcement of the purchase of the Cantv stocks, they dropped sharply. On November 5th , before the announcement, the shares were at 8,550 Bs. per dollar. The following Monday, after the news, they dropped 1.75%; 4.23% on Tuesday; and 1.18% on Wednesday, for a final 7,950 Bs. per dollar.

The firm’s ADS, which represent seven shares of the company that are exchanged in New York, also dropped due to the effect of the sales by some foreign investors. Some operators are sure that as soon as the terms of the negotiations are clarified, the stock price will be stabilized.

Cantv is the leader in landline telephones and Internet lines, with over 2.9 million lines and 25,000 subscribers respectively. Additionally, it is the second cellular operator, through its branch company Movilnet, with 2.7 million users.

The regulators’ perceptions also have their nuances
“A red warning light is on for the competition, it means: we are going to keep close track of the negotiation”, said Jorge Szeplaki, superintendent of ProCompetencia (Pro-Competion), to the British news agency Reuters.

"The fact that a competitor disappears from the market as it is absorbed by a greater competitor, must be studied" he added.
For his part, the general director of the National Telecommunications Commission(Conatel), Alvin Lezama said to the same news agency that the case will be analyzed in depth.. "We look after the rights and interests of the users. Our policy seeks to promote the incorporation of competitors in the telecommunications services, and this situation seems to be contrtary to our purpose", he said.

Among the points to consider, are the direct competition between both companies in rural telephony, Cantv’s dominating position, a session of frequency allocation recently granted to Digitel, and other technical issues.

Published in Quantum N.40

Maitane Larrañaga