1. Investment Cycle in the Telecommunications Industry A Venture Capital Perspective Thierry Van Nieuwenhove BancBoston Capital (55-11 3167-4611 / vnthierry@bkb.com.br)

2. CONTENT Before 1996 : The Natural Monopoly era 1996 - 2000 : The Golden era Since 2000 : The Restructuring

3. BEFORE 1996 : OVERVIEW The telecommunications industry was seen as a boring, natural monopoly, similar to water, electricity and gas companies (“POTS”); Companies were generally state-owned (except US); Cash-flows were stable and predictable, growing in line with the installed base of phone lines; Although technological innovations were introduced (i.e analog to digital, wireless), these did not structurally transform the industry’s structure.

4. BEFORE 1996 : EARLY SIGNS OF CHANGES Creation of MCI in 1970; Privatization of British Telecom, creation of a duopoly structure and development of cable telephony industry in the U.K. in the 80’s; Privatization of state-owned monopolies in Western Europe, Asia and Latam in the early 90’s; Introduction of multi-carriers systems for long-distance calls in Chile in 1994; Creation of a dynamic, competitive wireless industry (first VC funding).

5. Before 1996 : PRIVATIZATIONS Telecoms privatization 1984 - 96 Total : $ 159Bn Number of privatizations 1990 - 96 Total : 61 Source : ITU

6. Period 1996 - 2000 : Background Combination of three factors led to an unprecedented investment boom in the telecom sector : Liberalization / deregulation (Telecom Act of 96, EU’s directive for a single market for telecoms services by 98, introduction of WTO rules in 98) => $120Bn US local telecom market open to new entrants; Technological innovation (Internet/Data, LMDS, CDMA, DSL,...) => Opportunity to offer new services at more attractive prices; Strong economic growth in the US and Western Europe => Availability of capital +Optimism about telecom market growth.

7. PERIOD 1996 - 2000 : Investment Boom Source : JP Morgan; Pegasus

8. Period 1996 - 2000 : Types of investors The opening of the market was seen as an opportunity by 3 different classes of equity investors : Telecommunications companies (geographical expansion or product extension); Large conglomerates diversifying into the telecommunications industry (Mannesman, Hutchison, Andrade Gutierrez, Impsa,...); VC’s backing “emerging telcos” using novel technologies to leap into new markets (Colt, Covad, Winstar, Diveo, Metrored, Vesper, Optiglobe,...).

9. PERIOD 1996 - 2000 : Emerging Telcos Source : Thomson Financial, DBAB

10. PERIOD 1996 - 2000 : Emerging telcos Source : Thomson Financial, DBAB

11. PERIOD 1996 - 2000 : Role of Venture Capital Source : VentureOne

12. Period 1996 - 2000 : VC interest in the sector Large market opportunity : Size of the US telecom industry of $260Bn; Optimism related to growth of new services / technologies (“Internet traffic growing at 100% per quarter in 1H97”); VC “overfunding”; Possibility to invest large $ amounts per transaction. Source : Venture Economics

13. PERIOD 1996 - 2000 : Role of Venture Capital Source : VentureOne, Natl. Venture Capital Association

14. Turning Point : European 3G Licences 3G auctions in Europe marked the peak of the telecom bubble and the reversal of investors’ perception; More than US$100Bn were committed without any clear understanding of financial returns, market potential, customer needs, services / products, technology availability,...

15. Since 2000 : Sector Underperformance Source : Bloomberg, BancBoston Capital

16. Since 2000 : Downward Spiral Plunge in market values of listed telecommunications companies; Liquidation or debt restructuring of most emerging telcos; Credit rating downgrades of several incumbent companies reflecting a worsening of the fundamentals even among blue chip telecom companies. Source : Bloomberg, S&P

17. Since 2000 : Emerging Telcos’ Woes? Overexpansion : Geographic, Product and Customer; Overcapacity : Number of US CLEC’s jumped from 50 to 500 between 1995 and 2000; Debt overload : Dismal operating performance : Industry ROE plunged from 20% in 1996 to 5% in 2000, while most emerging telcos are still EBITDA negative; Regulatory issues : Incumbent’s “obstructive” behavior; Economic downturn : Impact on take-up of new services, pricing, churn,...

18. Current Trends : Emerging Telcos Concentration / Consolidation More bankruptcies (PSINet, Winstar,...); Sale of troubled companies’ assets (Exodus, Global Crossing,...); Limited Mergers and Acquisitions activity (Digex, Pegaso,...). Restructuring of balance sheet Capital injection by existing or new shareholders (Vesper, Globo Cabo,...); Renegotiation of existing liabilities (Covad, Impsat, Vesper, Pagenet,...). Focus on operating performance / cash flows Cost reductions; Narrowing of companies’ focus; Capex cutbacks and infrastructure sharing. Best companies will survive and prosper in the medium term.

19. Thank You Very Much !