Compaia de Telfonos de Chile (CTC)

Muir Woods 2
Ashish Chugh Holly Cheung Gareth Lloyd-Owen Maja Trolle Moneer Kattan

Compaia de Key Issue de Chile There is One Telfonos

Can CTC Finance the Expansion?
Booming Need

telecoms market but Chiles infrastructure is poor

substantial capital to expand

Situation

Alan CTC

Bond (owner) has had to sell his 365.5 million shares is in a difficult financial situation Government

Unstable Garcia

must devise a strategy soon are uncertain about CTC

Complication

Investors Many It

financial complications exist

is unclear what competitors are going to do

Question

Can CTC Finance the Expansion?

2

Muir Woods Group 2

The Questions That Must Be Answered

Can the Compaia de Telfonos de Chile Finance An Expansion?
1.0
Is Chile Stable Enough to See Through The Expansion? 1.1 Does the Government Support CTC? 1.2 Does The Country Need This Level of Expansion? 2.1 Are Domestic Financial Barriers to Difficult to Overcome?

2.0
Is The Domestic Market Unable to Support The Expansion? 2.2 Is the Market to Small to Fund the Expansion? 3.1 Can They Convince Investors Into Emerging Markets?

3.0
Can They Attract International Investors? 3.2 Will Foreign Investment Avoid Affecting the Domestic Market? 3.3 Do Suitable Foreign Financing Options Exist?

1.0 Activities & Analysis

Identify domestic barriers Investigate domestic financing options Size of market? Capital requirements? Population demographics

2.0 Activities & Analysis

Identify issues (fears) Foreign view of Chile (including history) Forecasts on investments Implications for funding internationally

3.0 Activities & Analysis

Government History / ITT Governments ambition (what do they want?) GDP growth Telecommunication growth rate Technological advancements (infrastructures) Country benchmarking

Muir Woods Group 2

Our Analysis Work Flow

Module

Activities

Assigned

1 hr

2hr

3hr

4hr

1
1 1 1 1 2 2 2 2

Identify domestic barriers

Investigate domestic financing options Size of the market? Capital requirements? Population demographics Identify investor issues (fears) Foreign view of Chile (including history) Forecasts on investments Implications of funding the project internationally

Gaz
Gaz Holly Holly Holly Ashish Ashish Ashish Gaz

3
3

Government history / ITT

Governments ambition (what do they want?)

Maja
Maja

3
3 3 3

GDP growth
Telecommunication growth rate Technological advancements (infrastructure etc.) Country benchmarking

Moneer
Moneer Moneer Moneer

Muir Woods Group 2

The Financial Solution is to Seek International Funding Using ADRs

CTC Can Finance The Expansion:

Chile IS Stable Enough to See Through the Expansion

The Domestic Market Cant Support the Expansion CTC IS An Attractive Proposition for Foreign Investors
Muir Woods Group 2 5

1.0 Chile IS Stable Enough to See Through the Expansion

1.1 The Chilean Government DOES Support CTC

1.2 Chile DOES Need This Level of Expansion

Muir Woods Group 2

1.1 The Chilean Government DOES Support CTC

The Government will have to re-nationalize CTC if the financing fails Over 300,000 pending telephone lines Infrastructure falling behind other countries Negative effect on international investments could stagnate economic growth
Muir Woods Group 2 7

1.2 Chile DOES Need This Level of Expansion

Chiles GDP and population are growing Pending phone applications are increasing by 9.05% per year Chile is ranked 11th of 21 Latin American countries

Muir Woods Group 2

2.0 Unfortunately, The Domestic Market IS Unable to Support the Expansion

2.1 The domestic barriers are too difficult to overcome

2.2 The domestic market is too small to fund the expansion

Muir Woods Group 2

2.1 The domestic barriers are too difficult to overcome

Domestic Financing Possibilities:

Local Banks

Domestic pension funds

Chilean stock market

Cutting the dividend

Muir Woods Group 2

10

2.2 The domestic market is too small to fund the expansion

Chileanit more feasible toaffordfund Why is citizens couldnt raise to invest overseas?requirements Capital
Average household income = US $235
More provided from the case Disposable income = 5.38% Data developed markets

LongerMil. Peso = approximately $ 326 Mil. Paycheck only covers phone 97,267 trading hours
Higher daily transactions

Muir Woods Group 2

11

3.0 CTC Can Attract International Investors

3.1 Suitable foreign financing options do exist 3.2 Foreign investment will avoid affecting the domestic market 3.3 They can convince investors into emerging markets

Muir Woods Group 2

12

3.1 Suitable foreign financing options do exist

Three options for foreign investment exist

Directly into the local stock market

Exchange Traded Funds (ETFs)

American Depositary Receipts (ADRs)

Muir Woods Group 2

13/18

3.2 Foreign investment will avoid affecting the domestic market

Potential Effects on the Domestic Market

Order flow migration

Increased price volatility

Muir Woods Group 2

14/18

3.3 They can convince investors into emerging markets

Concerns facing foreign investors:

Increased price volatility
Political risk Exchange rate Inflation Resources Share Price
Muir Woods Group 2 15/18

The Financial Solution is to Seek International Funding Using ADRs

CTC Can Finance The Expansion:

Chile IS Stable Enough to See Through the Expansion

The Domestic Market Cant Support the Expansion CTC IS An Attractive Proposition for Foreign Investors
Muir Woods Group 2 16/18

What Actually Happened

CTC raised $92 million through Level 3 ADRs at $22.25 per share CTC was an innovator in the ADR space In April 1993, CTC issued 10-year convertible bonds internationally for $200 million

Muir Woods Group 2

17/18

Are There Any Questions?

Muir Woods Group 2

Final Slide

Appendix

Muir Woods Group 2

19

1.2.1 Chilean Population Growth Rate

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

Chile
Growth Rate

33.63

36.37

38.09

34.16

32.86

35.49

38.01

40.14

42.79

45.91

50.76

8.68%

8.15%

4.74%

-10.32% -3.79% 7.97% 7.12%

5.60%

6.59%

7.31%

10.56%

Muir Woods Group 2

20

1.2.2 Chilean Population Per Line

Country Bahamas Barbados Uruguay Population per telephone line 2.2 3.3 7.6 7.9 9.4 9.7 11 11.3 11.3 13 15.5 18.9 23 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13

Costa Rica
Panama Argentina Trinidad and Tobago Brazil Venezuela Colombia Chile

Cuba
Guyana Ecuador Peru El Salvador Paraguay Bolivia Guatemala Nicaragua Jamaica

27.4
32.8 38.1 41.1 41.4 62 63.4 205

14
15 16 17 18 19 20 21

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21

1.2.3 Chile vs Mexico Poverty

Muir Woods Group 2

22

2.2.1 Capital Requirements

CTC's Actual and projected capital expenditures (CP millions)

Actual
1988
For tariff regulated services For services not currently subject to tariff regulation For new services requiring new concessions TOTAL

Projected
1990 1991 1992 1993 1994 1995 1996

1989

41,719 79,325

100,602

95,042

77,458 60,934 60,934 60,934 60,934

4,377

11,520

4,963

4,380

3,413

2,720

2,720

2,720

2,720

6,422

15,187

15,441

8,468

3,665

3,665

3,665

3,665

46,096 97,267

120,752

114,863

89,339 67,318 67,318 67,318 67,318

Muir Woods Group 2

23

2.2.2 Population Demographics

1989 Annually POPULATION (M) Workforce (M) 12.88 5.8364432 Monthly

INCOME per household Income per individual (CP)

CLP 70,000.00 CLP 23,333.33 CLP 1,944.44

(Assume 3 working individual per household) Disposable Income (@ 5.38%)

Muir Woods Group 2

CLP 104.61
24

2.2.3 Market Capitalization

Market Capitalization (US VS South America)

3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000

$ in Million

South America
Muir Woods Group 2

US
25

3.3.1 Exchange Rates July 87 Jan 90

Muir Woods Group 2

26

3.3.2 Chile Inflation Rates Jan 85 Jan 90

Muir Woods Group 2

27