Embratel: rumors of sale drive rally

Embratel stock continues to rally, driven by rumors of a sale. The common stock (ON) gained 5.03% on Wednesday, November 20, and the preferred stock (PN) closed 4.51% higher, taking the gains in the last 30 days to 26.75% and 18.1% respectively. In most reports on a prospective deal the prime candidate is private equity fund Bassini, Playfair & Wright in an alliance with ILECs Brasil Telecom (BrT), Telemar and Telefonica, as well as JP Morgan Chase, Embratel?s largest creditor. The idea is reported to have been authored by Daniel Dantas (Opportunity/BrT) and Roger Wright, a former partner in CSFB Garantia. A well-informed source who claims to have been consulted on a deal told TELETIME News that ?as far as I can tell, all this is a hypothesis that doesn?t have the consent of WorldCom?. Embratel is a subsidiary of WorldCom. Seasoned observers note that Embratel isn?t strategic to Telemar or Telefonica, especially to the latter, which has succeeded in gaining market share in long distance using its own network. BrT has the strongest interest in a deal, in particular because it would devalue Intelig, Embratel?s competitor in the duopoly that has only just been broken. BrT has its eyes on Intelig, which National Grid, France Telecom and Sprint want to sell, but so far hasn?t found the price very much to its liking.

How much is Embratel worth?

Embratel?s market cap is currently 820 million Brazilian Reals, equivalent at the current exchange rate to about 233m US Dollars. Its book value is 4.6bn BRL or 1.31bn USD, and it has debts amounting to 2bn USD. According to debt restructuring experts, a deal wouldn?t be worthwhile unless the buyers obtained a discount of 40%-50% from lenders. This is considered unlikely and would be negative for JP Morgan Chase at a particularly delicate time for U.S. banks.

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