$2 billion gone south: BellSouth's losses in Latin America soared in 2002

From the March 28, 2003 print edition Atlanta Business Chronicle Mary Jane Credeur   Staff Writer

After years of worsening political and economic conditions in Latin America, Atlanta-based BellSouth Corp.'s escalating losses in the region reached a staggering $2.1 billion in 2002.

That's a five-fold increase from the $396 million net loss BellSouth posted for its Latin American unit in 2001.

During the past year, the overall value of BellSouth's assets in Latin America has plunged from $6.6 billion to $3.7 billion because of accounting changes, currency devaluations and write-downs associated with the economic collapse of several Latin American countries where BellSouth is heavily invested, namely Argentina, Brazil, Venezuela and Uruguay.

Currencies for each of these countries have dropped 30 percent to 40 percent against the U.S. dollar in the past year, with the Argentine peso losing 71 percent of its value.

The financial situation for some of BellSouth's Latin American holdings has gotten so bad in recent years that affiliates in Argentina and Brazil — of which BellSouth owns 65 percent and 45 percent, respectively — have defaulted on some $1.8 billion in U.S. dollar-denominated debt. Although BellSouth is not on the hook for all of that debt, the defaults are another indication of the grave situation faced by companies with sizable investments in Latin America.

"We have our hand in a very rough part of the international marketplace," BellSouth Chairman and CEO F. Duane Ackerman said during a recent talk before business leaders as part of the University of Georgia's Terry Third Thursday speaker series. BellSouth spokesperson Maria Schnabel declined to make executives with the Latin American unit available for interviews, saying those executives were traveling for several days and could not be reached for comment.

"BellSouth still believes there are significant opportunities for growth in Latin America," Schnabel said. "The region is important for BellSouth because it represents an additional market for us."

About 10 percent of BellSouth's annual revenue of $22.4 billion comes from its Latin American holdings, which consist of prepaid cellular service provided through joint ventures with other Latin American companies.

Neither of BellSouth's Baby Bell peers have such high exposure in Latin America. New York-based Verizon Communications Inc. and Texas-based SBC Communications Inc. each get less than 1 percent of their revenue from Latin America.

Other telecom and data companies had greater Latin American exposure in recent years.

Reston, Va.-based Nextel Communications Inc.'s international unit had racked up $2.7 billion in debt (much of which came from Latin American holdings) before filing for bankruptcy protection a year ago, restructuring its debt and emerging under the new name NII Holdings Inc.

Data services firm Genuity Inc. had invested hundreds of millions in Latin American and European networks before filing Chapter 11 bankruptcy and getting bought by Colorado-based Level 3 Communications Inc. recently for $137 million in cash and vendor payments.

"American telecoms keep on making these investments that are far more risky than trying to grab market share in the U.S., where they have to fight to pick up more services with their [domestic] customers," said Phil Jacobson, founder of Network Conceptions LLC, an independent telecom research firm based in Virginia. "It's like they think it's better to go outside the country and try to create another monopoly than compete domestically."

Until recent years, Latin America proved to be a tremendous growth market for BellSouth.

The company first entered Argentina in the mid-1980s. At that time, foreign trade policies made Latin America a difficult market to enter, so most of the other American telecom giants shied away from South America.

But BellSouth executives wanted to expand the company's presence throughout Latin America, where many of the region's 400 million people did not have access to basic land-line telephone service.

BellSouth poured hundreds of millions of dollars annually into Latin America during the next 15 years, reaching a peak of 13.5 million subscribers in Latin America at the start of this decade (a substantial figure compared with the 25 million access lines it controlled in the United States at the time).

The Latin American unit nearly broke even during the economic boom of the late 1990s, when BellSouth was getting an average of $40 in revenue per customer each month and adding more than 1 million new customers each year in Latin America.

Company officials boasted in a 1999 annual report that BellSouth's expertise in technical, operating and marketing activities made the company a "highly desired participant" in international joint ventures and that BellSouth's experience could be a "significant factor" in the success of regulatory license applications.

By 2000, however, political unrest and currency devaluations sent the Latin American economy spiraling.

BellSouth's customer base in Latin America eroded from 13.5 million two years ago to 11.5 million today, and the company's average monthly revenue per customer has dropped by half from $40 a couple of years ago to just $19 last year, though monthly minute usage has continued to climb.

"The Latin American opportunity that looked so hot just a few short years ago has iced over," said local telecom analyst Jeff Kagan. "It turned very quickly."

When the Latin American economy began to falter in 2000, BellSouth officials thought it was a temporary setback and announced plans for a Latin American tracking stock that would raise as much as $1 billion in capital and trade on the New York Stock Exchange. BellSouth terminated those plans last fall.

BellSouth is not the only Atlanta company affected by the turmoil in Latin America.

The Home Depot Inc. opened nine stores in Chile and Argentina in the late 1990s but sold them a couple of years later. However, Home Depot still owns more than a dozen stores in Mexico and Puerto Rico.

Consumer credit reporting firm Equifax Inc. has seen revenue from its Latin American operations shrink by nearly 25 percent during the past year, and The Coca-Cola Co. has taken hundreds of millions of dollars in impairment charges related to company-owned Brazilian bottlers' franchise rights.

One local investment adviser with Smith & Howard Financial Group LLC said more companies with sizable international operations are now faced with taking larger write-downs to clear up balance sheets while the global economy remains weak and the value of foreign assets shrinks.

"This is a trend you're seeing across corporate America," said Frederick S. Wright IV, chief investment officer with Smith & Howard. "BellSouth is pulling away from the notion of gaining market share at all costs and doing more to clean up its balance sheet, and you'll see more of that this year and next."

Some Atlanta companies have actually benefited from their recently expanded business operations in Latin America.

Although Latin passenger revenue for Delta Air Lines Inc. remained flat in 2002, the carrier credits recent Latin American expansions with helping prop up capacity figures last year.

And United Parcel Service Inc. recently added overnight delivery to some Latin American hubs in an effort to tap into additional markets there.

Despite the fact that about 10 percent of BellSouth's entire business comes from Latin America, the company may reach a point where it simply cannot afford to continue covering the debts and losses of its affiliates, industry watchers said.

BellSouth in early March sold its entire stake in Brazilian venture BSE to a subsidiary of America Movil after BellSouth disclosed that BSE's operating cash flows weren't enough to meet its debt obligations.

BellSouth still has a 45 percent interest in another Brazilian venture, BCP Telecomunicacoes, which had defaulted on $1.4 billion in loans in early 2002, though BellSouth's Schnabel said it is "not likely that BellSouth will retain its equity interest in BCP."

Some industry observers suggest that the sale of BSE may be a sign of things to come for BellSouth, or that Wall Street may be pressuring the third-largest telecom in the country to write off some impairments.

BellSouth's stock (NYSE: BLS) was trading in the low $20s on March 26, down from $35 per share a year ago.

"The Latin American economy is one of the worst right now and [BellSouth] wasted a lot of stockholders' money down there," said Jacobson, the researcher from Virginia. "They're getting their butts handed back to them."

BellSouth has slashed its Latin operating expenses by nearly $1 billion during the past couple of years to just under $2 billion for 2002, and the company is offering new services in Latin America, such as mobile Internet, public telephony and fixed wireless over its existing Latin networks to prop up revenue. BellSouth also has reduced its head count and slashed capital expenditures in Latin America from $820 million in 2000 to $250 million last year in an effort to offset other losses.

There may be a silver lining in BellSouth's Latin strategy. Four of BellSouth's Latin holdings — affiliates in Ecuador, Chile, Colombia and Peru — had double-digit revenue growth between 2001 and 2002.

"In light of the current economic situation in Latin America, we have taken a strategic approach of restricting investment and focusing on profitability," Schnabel said. "We'll continue to do the right things that drive organic growth in countries where it makes sense and we'll continue our focus on profitability."