Embratel stock continues to post impressive gains in response to rumors of a sale by WorldCom. In New York the ADR rose 8% on Wednesday, November 27, and is up more than 40% since November 13. However, some analysts are warning that minority shareholders stand to lose badly, depending on the shape taken by any future deal.
Bassini, Playfair
Minority shareholders might be forgiven for disagreeing. For example, in the event of acquisition by Bassini, Playfair & Wright (BPW) in conjunction with Brazil?s three incumbent local exchange carriers Embratel?s stock price would presumably continue rising. Moreover, if the deal is based on book value, WorldCom?s 19.26% stake would be worth 888 million Brazilian Reals (aside from a premium for control), or 13.88 BRL per 1,000 shares. That?s almost four times Wednesday?s closing price for Embratel common stock (EBTP3 ON) on the São Paulo Stock Exchange (Bovespa).
Public offering
In the event of a public offering, minority shareholders would be entitled to sell for 80% of the price paid to controlling shareholders. In that case any sellers would receive 11.10 BRL, more than three times the current market price for common stock. Even holders of preferred stock should benefit, not from the public offering but from Embratel?s potential rehabilitation and return to profitability.
Dilution warning
Jacqueline Lison, an analyst at Fator Doria Atherino, is one of those warning minority shareholders to take care. A deal engineered by BPW, with Brasil Telecom, Telemar and Telefonica taking over Embratel, would probably involve a debt-for-equity swap rather than an outright purchase of stock. That would mean dilution for minority shareholders, Ms Lison says. Embratel has debts of 4.4 billion BRL (now about 1.2bn USD). Additionally, a takeover by the three ILECs would jeopardize Embratel?s position in the corporate segment, one of its strengths and hence coveted by competitors. Another analyst points to the risk that Embratel?s book value could be subject to revaluation if provisions for litigation and customer delinquencies are deemed insufficient.
Will WorldCom sell?
For some time Embratel?s stock price has been fluctuating in response to news of takeover bids and denials by its U.S.-based parent company, WorldCom, which owns 19.26% of the long-distance carrier?s total equity and 51.79% of its common stock. WorldCom stands to gain most if the Brazilian Government simply cancels Embratel?s license and renationalizes it: in that case every dollar invested in networks, systems and other fixed assets would have to be reimbursed. Another obstacle is regulatory: Anatel would have to say no to a takeover by the three ILECs because the General Telecommunications Act bans excessive concentration as a hindrance to competition. A variety of sources in the private sector and government, however, believe moves could be afoot to circumvent the regulatory obstacle: under this hypothesis BPW sets up a fund similar to CVC/Opportunity and the ILECs don?t acquire formal control of Embratel. Analysts are curious to know whether the Workers Party (PT) would give such a solution its blessing. Telecoms experts are intrigued by recent indications that President-Elect Luís Inácio Lula da Silva, at least, might back a deal of this kind. Lula is the PT?s senior founding member. No one has so far mentioned the possibility of a rescue package from BNDES, the national development bank.
