Mixed market reactions to telecom nationalization plans in Venezuela

CANTV shares rise on reports Venezuela to compensate

[Reuters]

Shares of Venezuelan telephone company CANTV jumped on Wednesday on reports that the government would pay compensation to companies that are included in President Hugo Chavez's nationalization plans.

Venezuela will pay compensation to companies in the telecommunications, oil and power industries that may be subject to nationalization, Bloomberg News reported, citing the chairman of the National Assembly finance committee.

Chavez was sworn in Wednesday for a new six-year term that he vows to use to press a radical socialist revolution including nationalizations that have roiled financial markets earlier this week.

In composite trade before the market opened on Wednesday, New York-listed shares of CANTV rose to $14.10 from Tuesday's close of $12.20 on the New York Stock Exchange.

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Analysis: The negative impact of Cantv nationalization

[via Cellular-News]

Venezuelan President Hugo Chávez's plans announced Monday to nationalize the country's incumbent fixed line operator Cantv has cast a shadow over the future of the company, the telecoms market and foreign investment, analysts say.

Chávez said Monday he would seek to re-nationalize Cantv, as well as energy assets, and strip the country's central bank of its independence from the Venezuelan government in a bid to aggressively move the country towards a socialist system.

In a press statement on Monday, Cantv said it was aware of Chávez's announcement, but had not been contacted by any government official and had no other information to share.

For José Otero, president of telecoms consultancy Signals Telecoms Consulting, if one looks at the unsuccessful management of Venezuela's state-run telco, CVG Telecom, the potential nationalization of Cantv does not look promising.

A state-run telco can function quite well if in the right hands, for example, Antel in Uruguay. However, based on the track record of the Chávez administration in the telcoms market and specifically with CVG this is not the case in Venezuela, Otero told BNamericas.

"Nothing that [CVG] promised when first launched has been completed... they are a monument to failure," Otero added.

LACK OF TRANSPARENCY

What's more, the lack of transparency in how the government handles CVG's operations is a bad omen for how it might handle Cantv.

Chávez's government recently came under fire for politically charged regulatory decisions, involving the refusal to renew the broadcast license of Radio Caracas Televisión for supporting the failed 2002 coup against him.

In an analyst report, Carlos Constantini of Deutsch Bank also sees negative implications of nationalization.

"We believe the implications for VNT [Cantv] could be dramatic, depending on the nationalization model adopted," he said.

In the best case scenario, Constantini says Chávez may only demand more government voting rights within Cantv, and only partially nationalize the company, therefore allowing the proposed purchase of shares by Mexican mobile holdings group América Móvil to go ahead.

With a fully nationalized Cantv, the main risk for the telecoms market could come in the form of heavily subsidized services and equipment coming from the central government, something that would make it difficult for other private companies to compete, Otero said.

In this case, it would especially affect the level of investment in telecoms infrastructure, with private investors looking elsewhere in the face of such uncertainty. With a lack of investment, the telecoms market in Venezuela could fall behind the pace of growth of its neighbors, Otero added.

Venezuela has traditionally had one of the highest mobile telephony penetration rates in Latin America. In the third quarter of 2006 GSM industry association 3G Americas put it at 67%, joint second with Argentina, with Chile in first place with 77%.

Constantini also sees foreign investment as being negatively affected, but doubts that Chávez will simply take over all assets because employees and retirees own 5.3% of the company.

Guilherme Paiva, also an analyst with Deutsche Bank, considers it likely that Chávez will at least partially compensate Cantv's current ownership, to maintain his local popularity.

"Expropriation without compensation could have a negative impact on President Chávez's popularity. However, we expect Chávez's rhetoric will likely strengthen," Paiva said in a separate report.

VERIZON-AMX DEAL

América Móvil had been planning to jointly buy 28.5% of Cantv with its sister company Telmex from US telco Verizon, but now the future of AMX's plan in the country is unclear, as is the US$21.50 ADR tender offer, according to Deutsche Bank. When they announced the planned tender offer América Móvil/Telmex estimated they would pay US$676mn, or US$284.50 per subscriber.

The deadline for the deal was extended to February 28 just last week and other portions of América Móvil's planned buyout of Verizon assets throughout Latin America have already been completed. The sale of Verizon Dominicana was finalized in early December.

Some believe that Cantv's current stakeholders would get a fair deal from the government in the event of nationalization due to provisions in Venezuelan law.

"Venezuela's capital markets law says that shareholders should be paid a fair value for their shares in any buyout," Miguel Octavio Vegas, executive director for BBO Servicios brokerage in Venezuela, told Bloomberg News. BBO possesses Cantv shares in its mutual fund.

Cantv was privatized in several phases between 1991 and 1996. The government still holds about 20% of the company's capital in "golden" shares.

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