Telefónica de Argentina S.A.

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Telefónica de Argentina S.A.

Tucumán 1
Buenos Aires, C.F. 1049
Argentina
Telephone: (54) (11) 4332-2066
Fax: (54) (11) 4334-1995
Web site: http://www.telefonica.com.ar

Subsidiary of Telefónica S.A.
Incorporated: 1990
Employees: 8,998
Sales: 3.04 billion pesos ($902.08 million) (2002)
Stock Exchanges: Buenos Aires New York
Ticker Symbols: TEAR; TAR
NAIC: 511140 Database and Directory Publishers; 513310 Wired Telecommunications Carriers; 518111 Internet Service Providers

Telefónica de Argentina S.A. offers local, domestic longdistance, and international fixed-line telephone services in Argentina, access to the Internet and related services, telephone accessories and equipment, and, through a subsidiary, selfpublished telephone guides. The company is indirectly owned by Telefónica, S.A., the Spanish-based telecommunications leader in the Spanish-speaking world; it also manages Telefónica de Argentina. Telefónica de Argentina is one of the biggest companies in Argentina and vies with Telecom Argentina Stet-France Telecom S.A. for the position of telecommunications leader in Argentina.

The Road to Privatization: 1946–90

Telephone service in Argentina began in 1881 by means of a Belgian company and a U.S. company, which were acquired by an English company the following year to form Union Telefónica del Rίo de la Plata, Ltd. An English rival merged with this company's successor, Compania Union Telefónica, in 1886. This became, in 1929, the Compania Union Telefónica del Rίo de Plata Ltd., an indirect subsidiary of the U.S.-based International Telephone & Telegraph Corporation (ITT). Union Telefónica remained by far the largest telephone company in Argentina. It was acquired by the Argentine government in 1946. Most smaller telephone companies had been added by the end of 1951, leaving only two private ones. This government quasi-monopoly was renamed Empresa Nacional de Telecomunicaciones (ENTel) in 1956.

ENTel experienced 26 changes of administration in the next 32 years. Unsatisfied demand reached such a level that people waited as long as 14 years to have a telephone line installed in their homes. Connection costs rose as high as $1,500. Of the three million lines in the late 1980s, two million were business lines. In terms of quality, over 60 percent of the network was obsolete or out of order. Each telephone was, on average, out of service and repaired several times per year. More than half of all local calls and 60 percent of international calls failed to go through. Because the cost of calls was kept low for political reasons, proper maintenance was impossible, and the company's deficit rose to $1.48 billion. In addition, ENTel was the most corrupt telephone company in the world, according to one journalist. After President Carlos Menem announced his intention in 1990 to sell 60 percent of the company to outside investors and 10 percent to its employees, a 24-hour work stoppage isolated Argentina from the rest of the world and even kept Menem from reaching his economic adviser in Washington.

For purposes of sale, ENTel was divided into two concessions, one for the northern half of Argentina and one for the southern half. The successful bid for the southern half, which included the downtown business district of Buenos Aires and more than half the surrounding province of Buenos Aires, was made by Compañia Internacional de Telecomunicaciones S.A. (Cointel), a company owned by Madrid-based Telefónica de Espana S.A., Citicorp Equity Investments S.A., and Organización Techint, a large Argentine family-controlled holding company. Cointel paid $114 million in cash and $2.7 billion in debt instruments for 60 percent of what became Telefónica de Argentina.-In return, Telefónica de Argentina received a sevenyear-monopoly on telecommunications in the southern half of the nation, plus the right to an additional three-year concession if it fulfilled various conditions and targets intended to improve and expand service. Telefónica de Espana became the managing and operating partner. To finance the acquisition, Cointel issued $588 million worth of debt and company shares to outside investors. As a result Citicorp Equity Investments (later CEI Citicorp Holdings S.A.) emerged as the main shareholder, with 20 percent, followed by Banco Rίo de la Plata, Telefónica de Espana (later Telefónica S.A.), Techint, the Bank of Tokyo, and the Bank of New York.

Highly Profitable in the 1990s

Telefónica de Argentina was an immediate success, earning $53.3 million on revenue of $878 million in its first 11 months of existence and paying a dividend after its first year of operation. When the government put its 30 percent stake up for sale in 1992, it collected $848.7 million for its shares—far in excess of its own expectations. The highest bidder, a Banco Rίo de la Plata consortium that included Merrill Lynch & Co., Inc. and CEI, took 51 percent of these shares One-quarter of the shares were reserved at a discount for small investors, and an estimated 70,000—including Menem himself—sent in bids. Telefónica de Argentina's gains were achieved although some former ENTel employees, collaborating with accomplices within Telefónica, were engaged in sabotage, "hijacking" lines from paying customers or putting them out of service and then demanding bribes to have them "repaired."

Telefónica de Argentina not only cracked down on this practice but—along with Telecom Argentina—was able to cut costs by taking a hard line with the employees retained after privatization. They lost the right to guaranteed employment, promotion by seniority, automatic wage adjustments, and special privileges like free installation of telephones and reduced rates. The workday was raised from 7 to 81/4 hours. Unions could no longer determine who would be hired, favoring the relatives and acquaintances of existing workers, and they lost a decisive say over working conditions. There was a drastic fall in employee absenteeism, to roughly one-third of the former level.

Telefónica de Argentina spent $5.4 billion between 1990 and 1996 to modernize and expand its system. The number of public phones quadrupled. The percentage of the network that was digitalized increased sixfold. The number of lines per 100 people nearly doubled, becoming the highest for a private telecommunicationsoperator in Latin America. Telefónica earned a profit margin of at least 10 percent on sales in each year of the 1990s. Annual revenue doubled between 1992 and 1997. Between 1990 and 1996 the company paid $3.2 billion in taxes, levies, and social security contributions. These achievements did not come without social costs. Opponents of privatization felt that ENTel had been undervalued and sold at a bargain price that shortchanged the public. The number of employees in Telefónica's area of operation fell from 23,000 to 11,000, of which almost 5,000 were new hires. The cost of making calls soared, far outstripping what customers in Western Europe and the United States were paying in relation to the average industrial wage.

Telefónica de Argentina, through an associated company, began offering mobile cellular service in 1993 first under the trade name Miniphone, later under the trade name Unifón. Its dial-up Internet service was later supplemented by a broadband offering named Speedy. Value-added telecommunications services included data transmission, telex, digital paging, toll-free numbers, universal numbers, shared telephone expenses, calling cards, prepaid cards, call waiting, call forwarding, voice messaging, telepolling, telemarketing, private virtual networks, point-to-point digital networks, telephone access by commercial customers to digital trunk lines, telephone access for audiotext providers, three-way conference calls, hot lines, wake-up calls, collect calls, speed dialing, and itemized billing. Competition was limited in cellular services, but any company was free to offer data-transmission and Internet services in competition with Telefónica de Argentina and Telecom Argentina. Until 1999 international telephone service was provided by Telintar S.A., a company that Telefónica de Argentina owned jointly with Telecom Argentina, but this arrangement was ended by government decree. Shortly after, Telefónica de Argentina also assumed Telintar's function of selling telephone equipment and accessories, partly through a network of retail stores.

Telefónica de Argentina became associated with the cable television network Cablevisión S.A.—ending earlier ties with Cablevision's rival Multicanal S.A. and its owner, Grupo Clarin S.A.—through the majority stake taken in this company by parent Telefónica. By the end of 1997 Techint had sold its stake in Telefónica de Argentina to Telefo purchased the shares of Telefónica. In 2000 Telefónicánica de Argentina held by U.S. venture capital firm Hicks, Muse, Tate & Furst, Inc. (through CEI Citicorp Holdings) for a 30 percent premium over the market price.

Telefónica de Argentina was a member of two joint ventures of telecommunications companies that constructed in 1999 and 2000, and then continued to operate, two submarine cable systems providing new, alternative routes to the United States and other parts of the world. In 1999 the company formed E-Commerce Latina S.A. as a joint venture with Alto Palermo S.A. to sell via the Internet a variety of goods, including music compact discs, books, computer hardware and software, and electrical appliances.

Key Dates:

1990:: The company is founded to provide telecommunications service in southern Argentina.
1992:: The government sells its remaining 30 percent stake in Telefónica de Argentina.
1997:: The company's annual revenue doubled since 1992.
1999:: Telefónica de Argentina earned a double-digit profit margin in each year of the decade.
2000:: Telefónica S.A. buys out its consortium partners as its subsidiary's monopoly ends.
2001:: Telefónica de Argentina spins off its cellular, data transmission, and special services.
2002:: Telefónica de Argentina loses almost $1 billion amid an economic crisis but avoids default.

Tougher Going in the Early 21st Century

Telefónica de Argentina enjoyed, in 1997, an edge over rival Telecom Argentina, with 56 percent of all basic telephone service and about 52 percent of the cellular market. However, the Telefónica-Telecom telecommunications monopoly expired in November 2000, and each began competing in the other's territory. They were joined by 24 licensed competitors vying for a portion of the market. Analysts predicted that domestic and long-distance rates would fall sharply. Telefónica ranked second in revenue among Argentine companies in 2000 but slipped behind Telecom in 2001.

The 23 percent drop in Telefónica de Argentina's 2001 revenues was the result of a company reorganization engineered by parent Telefónica. Telefónica Moviles Argentina S.A. (later Telefónica Comunicaciones Personales S.A.) was spun off as a separate company to provide cellular service and other personal communications systems. Telefónica Data Argentina S.A. was spun off to offer data transmission and Internet services, except that Telefónica de Argentina remained the Internet service provider for noncorporate customers. Like Telefónica de Argentina, the spun-off companies were listed on the Buenos Aires stock exchange but remained controlled by Telefónica.

Telefónica de Argentina was, in 2003, offering fixed-line telephone service both within Argentina and internationally. At the end of 2002, 4.89 million lines were installed, and 4.42 million were in service. About 86 percent of the lines in service were residential, and 54 percent were in the greater Buenos Aires metropolitan area. A network of access lines, exchanges, trunk lines, and long-distance transmission equipment connected telephone customers. Residential access to the Internet was being offered under the name Advance, and there were about 119,000 subscribers at the end of the year. The company was also selling telephone equipment and accessories. Telephone books were being published by a subsidiary, Telinver S.A.

The collapse of the Argentine peso at the end of 2001 worsened the existing economic crisis and resulted in a fall of about 20 percent in the nation's income in 2002. Telefónica de Argentina was affected not only by the loss in purchasing power of its customers but also by legislation barring it from raising its rates even though the consumer price index rose by 41 percent during the year. The crisis forced it to put on hold plans to expand into northern Argentina and challenge Telecom Argentina there. The value of its assets fell from $6 billion to $1.67 billion. Unlike many other Argentine enterprises, Telefónica de Argentina avoided default on its debts, but the parent company had to shoulder 81 percent of its $898 million in short-term debt as of mid-2002.

For the year 2002, Telefónica de Argentina reported revenue (in terms of constant pesos at the end of 2001) of 3.04 billion pesos ($902.08 million), with an operating loss of 53 million pesos ($15.73 million) and a net loss of 3.24 billion pesos ($961.42 million). The latter figure was due mainly to the fall of the Argentina peso from parity with the U.S. dollar to about 30 cents, which meant that the company's dollar debt more than tripled, as did the amount of its interest payments on that debt. Its long-term debt at the end of the year came to 3.26 billion pesos ($967.36 million). Of Telefónica de Argentina's revenue in 2002, basic local and domestic telephone service, including monthly basic charges, accounted for 57 percent; special services, 12 percent; Internet access, 8 percent; public telephones, 7 percent; international long-distance service, 3 percent; directory publishing, 2 percent; and installation charges and telephone equipment, 1 percent each. In terms of constant pesos, the total revenue was only a little more than half the 2001 figure.

Despite the crisis, the company announced in November 2002 a plan to invest 2 billion pesos (about $600 million) over the next four years, including some 700 million pesos for mobile cellular telephones and 400 million pesos for high-speed Internet access. Aided by an appreciation of the Argentine peso against the dollar, Telefónica de Argentina rebounded during the first half of 2003, reporting $290 million in net income.

At the end of 2002 Cointel owned 62.5 percent of the Class A shares of Telefónica de Argentina common stock. Cointel was 100 percent owned by three affiliates of Telefónica S.A. at this time. One of these affiliates, Telefónica Internacional S.A., held 32.25 percent of the Class B (publicly traded) shares.