Latin America's largest privatization turns a stodgy Brazilian giant into a dozen would-be dynamos

By JACK EPSTEIN /RIO DE JANEIRO

n the basement of the Rio Stock Exchange, sleek-suited executives hugged in celebration. On the streets outside, union protesters hurled rocks and shouted insults at lines of riot police. Tear gas filled the air as demonstrators were carted off in police vans. For a time, blood flowed in a kind of brutal civic sacrifice to herald the long-awaited auction of the Brazilian government's controlling stake in Telecomunicacoes Brasileiras S.A. (Telebras), Latin America's biggest telecommunications firm. But after more than 400 government lawyers fought off a welter of legal challenges, the largest privatization in Latin America's history was carried off without a commercial hitch--and for $19 billion, well over the minimum asking price.

The Telebras privatization was a major victory for President Fernando Henrique Cardoso, who had vowed to modernize Brazil's antiquated telecommunications system. The auction also gave foreign investors a strong signal that Brazil is determined to stay on Cardoso's free-marketeering course. "It's a crucial signal that the government is sincere in continuing its reform policies," said Armando Castelar Pinheiro, chief economist at the Brazilian National Development Bank.

The sell-off was the capstone of a privatization program that Cardoso began not long after his 1994 election. As a result, tens of billions of dollars of foreign direct investment have poured into Brazil in the past four years. Another flood is likely to follow the Telebras buyout in order to upgrade the country's outdated phone technology.

Telebras was a $14.7 billion-a-year state enterprise with 87,282 employees that serviced some 21.4 million customers across the country. It was also undercapitalized, inefficient and unresponsive to consumers. Brazil, with its population of 162 million, has about 15 million people on waiting lists for ordinary phones, with 5 million more queued up for cellular service. Only half of Brazil's commercial enterprises have telephone access. Many Brazilians pay $1,000 to $7,000 under the table for a line.

For its sale, Telebras was broken into 12 components--three regular telecoms, one long-distance carrier and eight cellular companies. Foreign firms from Spain, Portugal, Italy, Canada and the U.S. coughed up 70% of the total purchase price. The jewels in the crown--Sao Paulo State's fixed- and cellular-phone companies--went to groups led by Spain's Telefonica and Portugal Telecom, which paid $8.1 billion for the companies. "We made a royal straight flush," said an elated Miguel Horta, vice president of Portugal Telecom.

Other foreign buyers included Telecom Italia, which paid $608 million and $573 million, respectively, for cellular-phone companies in the south and northeastern regions, and Canada's Telesystem International Wireless, which bid $657 million for the Minas Gerais State cellular company. MCI, the only U.S. firm to win a piece of the action, paid $2.3 billion for Embratel, the long-distance carrier. Much of Telerj, the clunky Rio de Janeiro State company, went to a consortium headed by Andrade Gutierrez, a Brazilian construction firm, for $2.9 billion.

The new owners are expected to offer services that Telebras could only dream about. By the end of next year, for example, the companies are expected to answer 95% of all client-repair calls within 24 hours. The number of fixed lines in Brazil should double by 2001 to 33 million, and subscribers will enjoy such locally unknown services as call waiting, call forwarding and toll-free 800 numbers. The government plans to create further competition by selling off concessions for three new fixed-line phone companies and one international carrier by the end of the year.

Were the prizes worth the price? Some experts believe the buyers--especially those who purchased cellular-phone companies--may have miscalculated Brazil's potential by failing to consider its vast income gaps, which the World Bank has called the worst on the planet. "These companies will have to go after less affluent consumers to grow, and there is a good possibility that many Brazilians won't be able to pay for a cellular phone," says Oliver Mizne, an analyst for Sao Paulo's Banco Garantia. But for President Cardoso, up for re-election in October, the Telebras privatization was a terrific deal. Among other things, he is counting on telecommunications investment to create 1.5 million new jobs, alleviating the highest unemployment rate in 14 years.

--With reporting by Michael Kepp /Rio de Janeiro

TELEBRAS DESCENDANTS
$ Price Paid $
Purchaser

TELE SUDESTE CELULAR
$1.2 billion
Telefonica de Espana, Iberdrola

TELE LESTE CELULAR
$373 million
Iberdrola, Telefonica de Espana

TELE NORDESTE CELULAR
$573 million
Telecom Italia, Globo, Bradesco Bank

TELE CELULAR SUL
$608 million
Telecom Italia, Globo, Bradesco Bank

TELESP CELULAR
$3.1 billion
Portugal Telecom

TELESP
$5 billion
Telefonica de Espana

EMBRATEL
$2.3 billion
MCI

TELEMIG CELULAR
$657 million
Telesystem Int'l

TELE CENTRO OESTE CELULAR
$382 million
Splice do Brasil

TELE CENTRO SUL
$1.7 billion
Banco Opportunity, Telecom Italia

TELE NORTE LESTE
$2.9 billion
Andrade Gutierrez

TELE NORTE CELULAR
$163 million
Telesystem International