Investment Cycle in the Telecommunications Industry A Venture

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

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

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.

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).

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

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) => $120 Bn 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.

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

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, . . . ).

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

PERIOD 1996 - 2000 : Role of Venture Capital Source : Venture. One

Period 1996 - 2000 : VC interest in the sector • Large market opportunity : Size of the US telecom industry of $260 Bn; • Optimism related to growth of new services / technologies (“Internet traffic growing at 100% per quarter in 1 H 97”); • VC “overfunding”; • Possibility to invest large $ amounts per transaction. Source : Venture Economics

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

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

Since 2000 : Sector Underperformance Source : Bloomberg, Banc. Boston Capital

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

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, . . .

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.

Thank You Very Much !