Telefonica Acquires Bell South La

Telephones from Toledo to Tierra del Fuego

Dec 10th 1998

From The Economist print edition

Juan Villalonga, chairman of Spain's Telefonica, is one of the few people still prepared to

bet his company on emerging markets. Is it a good bet?

IN A world more linked by language than divided by distance, a recent decision by Juan Villalonga

is as symbolic as Hernan Cortes's to burn his boats and thereby prevent a return from the land he

had claimed for Spain. Telefonica, Mr Villalonga decreed, would drop "de Espaсa" from its name.

The logic? No longer does Telefonica see Peru, Chile, Brazil and the rest of Latin America as

emerging markets; they are part of its "domestic market".

Mr Villalonga has a dream: to rebase Spain's privatised former telephone monopoly in the new

world. He has even suspended Telefonica's dividend, replacing it with a share issue, so as to

conserve cash for more investment in Latin America. He is pitting his dream against the collapse

of many emerging economies and a 20% fall in Telefonica's net profits from Latin America in the

first nine months of 1998.

Such a grand scheme was not planned when Mr Villalonga was made chairman of Telefonica in

June 1996. A cigar-puffing financial technocrat and a school chum of Jose Maria Aznar, Spain's

prime minister, his appointment was seen in Madrid as a typical piece of cronyism. But he set to

work immediately, replacing ageing bureaucrats with a small team of cosmopolitan investment

bankers who have sharpened up the headquarters of the once dowdy utility (one pinstriped visitor

compares lunch at Telefonica to Annabel's nightclub in London in the 1980s). True to his dealmaking

roots, Mr Villalonga leads from the front, mobile phone at hand.

Mr Villalonga, like other telecoms bosses, has had to cut costs (9,300 jobs will go this year) as

leaner companies have invaded his turf. But his main hunt has been for new markets. Telefonica

has moved into Spain's television industry--a move that, not coincidentally, has helped Mr Aznar.

However, his biggest aim has been to redefine Telefonica's market from the 40m people who live

in Spain to the 400m or so who speak either Spanish or Portuguese.

This year Telefonica will spend around $12 billion (about seven times its net profits) on different

investment projects, mostly in Latin America. During the massive privatisation of Telebras, Mr

Villalonga dispatched 100 managers to Brazil; his was the only company to pay for the financial

particulars on all 12 parts that were sold. In the end, the consortia that Telefonica headed spent

$5.3 billion on Sao Paulo's main fixed-line company and on two Brazilian cellular firms. By next

year, it hopes to have a presence in 17 Latin American countries.

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To get the maximum bang for its cash and also to satisfy local ownership rules, Telefonica has

built its Latin American empire mostly through consortia that it leads but only partly owns. In its

accounts, international operations make up around a quarter of its revenues (and only an eighth

of its profits). But adding in the sales of all the operations it manages, they already exceed the

domestic figure. It now has 23.5m telephone customers in Latin America--against 21.6m in Spain.

Until this summer, Mr Villalonga's expansionism seemed to have paid off: Telefonica's market

capitalisation