Brasil Telecom?s announcement that it will meet its regulatory targets as an ILEC by the end of February was followed by a 6% drop in the price of its stock (BRTP) on the São Paulo Stock Exchange (Bovespa) on Wednesday, January 22. Analysts are scratching their heads to work out why the market responded negatively to the news that BrT will be free to operate wireline services outside its concession area as well as entering the wireless market at long last.
It?s true that BrT stands to gain a good deal in business scope by achieving its targets as an ILEC. The PCS licenses acquired in November cover the three Southern states, the Center-West (Federal District, Goiás, Mato Grosso, Mato Grosso do Sul) and much of the North (Tocantins, Acre, Rondônia). In December it announced the formation of a future consortium called Brasil Celular with Telemig Celular and Amazônia Celular, both controlled by the same shareholders as BrT. The outlook surely looks promising.
Analysts note, however, that BrT must now embark on a long process of investment and indebtedness which will erode its profits and cashflow. Debt currently corresponds to around 45% of equity, compared with 95% for Telemar and 96% for Embratel. It can issue debt and/or increase capital to fund entry into the wireless market. On the other hand, its EBITDA margin is lower than those of the other ILECs and falling.
Fear of competition
When it acquired the D-band and E-band leftovers, BrT?s strategy was initially more modest, say analysts and professionals interviewed by TELETIME News. Instead of investing heavily in early target fulfillment, it planned to mark time until interest rates and the exchange rate fell, entering the wireless market only in mid-2004. It expected economic expansion to be in full flood by then. At that time wireless was an opportunity to offer BrT?s customers complementary services rather than an offensive in its own right. Events have moved faster than foreseen, however. Fear of losing space to the competition now seems to be uppermost and the partnership with Telemig Celular and Amazônia Celular evidences a more aggressive approach.
