1. Telgua Luca’s Team

2. n Introduction n Transaction n Company Statistics n Latin America Telecom Market n DCF Analysis n Comparable n Cost of Capital n Discussion n Conclusion Overview

3. n Country: Guatemala n Case: Privatization of Telecom n Players: –Guatemalan Government—seller –LUCA—local investors –TelMex—contracted operator –Investment Banks: J.P. Morgan—seller Salomon Smith Barney—buyer Introduction

4. n Recently privatized—10/1/98 n Unlike other Telecom privatization in Latin America: –Auction—one sole bidder –No involvement from International Telecom operators or foreign investors –Highly leveraged acquisition –No initial protection against competition Relevance

5. n Political Uncertainty- Expropriation n Income Inequality n Closed Economy (Agrarian) n Telecom open for competition Risks

6. The Transaction

7. Transaction, cont.

8. Telgua in 1998 n Biggest firm in C.A. - real options. n Big restructuring in the past 2 years –22% avg. annual lines growth –CAPEX > U$200M n So a good part of the restructuring costs have been spent.

9. n Potential growth based on: »High levels of unmet demand »Improved macroeconomic environment »More efficient operators Regional Comparables

10. n Competition (Brazil, Ecuador, Puerto Rico) n Consolidation of the US market n Legal Uncertainty n Emerging Markets crisis Past Paid Values

11. DCF n Main Sensitivity Variables: –# lines –revenues per line –expenses per line n We run Crystal Ball on this variables –Found the mean and standard deviation

12. Revenues: # of Lines

13. Revenues: $$

14. Expenses

15. Efficiency

16. Expenses n Average Tenure n Advertising n Allowance doubtful accounts n Interest rate n Total Debt/EBITDA n 15 years n 4% sales n 5% sales, then 3% n 10-12% n 2 - 1.8 - 1.4

17. Leverage

18. Comparables

19. Tariffs

20. Correlation with Markets

21. Cost of K n Three Models –Bain & Company –J.P. Morgan –IICCRC

22. Beta ADRs US market Telmex-Mexico 0.93 Telecom-Argentina 1.16 Telephones de Venezuela 1.06 Telebras-Brazil 2.06 Telecom-Chile 1.17 Telefonica del Peru 0.90 Average 1.21 Bain & Company Cost of K

23. Average Beta 1.21 Risk Free Rate 5.30 Market Premium 7.90 Equity Premium 14.38 Country Risk 2.70 Cost of Equity 17.80 Bain & Company Cost of K, cont.

24. Country Risk: borrowing rate of Guatemalan companies vs.. comparable US companies. Telgua debt rate in $: 10.50% US Telecom debt rate in $: 7.80% Country risk and small private company risk 2.70% { 1.4% Small private company risk 1.3% Country Risk* *Citibank’s premium to loans in Guatemala to account for sovereign country risk. Bain & Company

25. J.P. Morgan Cost of equity = 16.27% 30-year T-Bond= 6.27% (-) liquidity premium= 1.25% Risk free rate= 5.02% Market premium= 5.00% Beta= 1.25 Country risk= 5.00% Cost of equity= 16.27% Cost of debt (after-tax) = 7.50%Cost of debt= 10.00% Tax shield= 2.50% After tax cost of debt= 7.50% Target capital structureDebt/total= 30% WACC= 13.6%

26. ICCRC Cost of K IICCR 26.6 (Sept. 98)

27. J.P. Morgan$750-$950 MM Salomon Smith Barney$700 MM Emerging Markets Team$563 MM Different Perspectives

28. Open for Discussion

29. n Premium paid by Luca $170-$220 MM n Discount Rate Inconsistency n Real Options: –Muscle Power, largest company in Central America –Acquire Telecom in Honduras, Nicaragua, El Salvador –IPO, lead the development of Capital Markets in Guatemala Conclusions

30. n Luca’s Repayment of $500 MM Debt –TelMex exercises option –Dividend payments –Additional leverage –IPO Conclusions, cont.