1. Finance 456: Emerging Markets Corporate Finance Victor Abad Sami Caracand David Cummings Maria Ximena Roa Eric Warren BellSouth International And Colombia February 23 rd 2003

2. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Table of Contents Introduction –Case Goals –BellSouth –Colombia The Strategic Decision –Going into Colombia Valuation –Discount rate –DCF –Multiples –Transaction Comparables Conclusion -Findings -What Happened Introduction

3. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Case Goals Three Questions –Should BellSouth go into Colombia? Strategy Element –How should BellSouth go into Colombia? Strategy Element –What should BellSouth pay? Emerging Markets Finance Element –Discount Rate & DCF –Multiples Valuation Introduction

4. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› BellSouth, Inc. 1984 - AT&T divests eight “Baby Bells” –Based in Atlanta, Georgia –96,000 employees –USD 21.5 billion in assets 1984 – Commenced cellular operations 1990 – First to reach 500,000 cell customers 2000 April – BellSouth and SBC agree to combine wireless operations to form Cingular –19 million subscribers –Second largest US wireless company 2000 – “Adding a new customer somewhere in the world every 10 seconds” Introduction

5. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› BellSouth International (BSI) Wholly owned BellSouth subsidiary –Created in 1985 to manage activities outside USA Expanded through partnerships with local communications companies In 2000, active in 14 countries –10 in Latin America –China, Israel, Denmark, Germany Entered Latin America in 1988 in Argentina Stated goal is to be full-service telecom provider for entire region Introduction

6. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Colombia Gateway to South America –Coasts on both Atlantic and Pacific 41.5 million people Turbulent history –Civil wars –Drug Trafficking Key industries: Coffee and Oil New government in 1998 –Pastrana elected –Engaging guerilla groups and factions –$1.3 billion from US to fight drug trade Introduction

7. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Going Into Colombia Emerging from worst recession since 1930s Unemployment climbing 1999 - Passed South Africa for world’s highest homicide rate Homicide rate 1945-2000 Strategic Decision

8. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Going Into Colombia Three license regions, four players No foreign ownership restrictions Telecom accounted for 3% of GDP in 2000 Low penetration: 14% fixed line, 5% wireless Strategic Decision

9. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Going Into Colombia Celumovil, S.A. –Licenses in duopolies of Atlantic and Eastern regions –44% total market share –1999 rev $213 million Cocelco, S.A. –License in Western Region duopoly –14% total market share Comcel & Occel –Recent consolidation Strategic Decision

10. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Going Into Colombia Strategic Decision

11. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Going Into Colombia Consistent with goals to be full-service telecom provider in Latin America –Colombia is one of the last pieces Prior experience in Latin America Opportunity to gain first national footprint Colombia Economic projections are positive Large growth potential in wireless Strategic Decision Acquire Celumovil and Cocelco… … but for how much?

12. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Discount Rate (IICCR Based): Valuation Anchored Cost of Equity Capital for project of average risk in Colombia: 23.89

13. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Nominal Discount Rate (IICCR): Valuation 23.89 (Anchored Cost of Equity) – 2.21 (Project Adjustments) = 21.68

14. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Discount Rate (Yield Spread Based) : Valuation

15. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Colombia Sovereign Yield Spreads Valuation

16. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› DCF Requirements Monte Carlo Analysis –Exchange rate –Terminal growth rate –Local inflation rate Real Options –Abandonment if terminal value < 0 Changing capital structure Valuation

17. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› DCF - Assumptions Valuation

18. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› DCF – Assumptions Valuation

19. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› DCF - Results Valuation

20. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Monte Carlo Results Valuation

21. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Multiples Valuation Challenging implementation in Emerging Markets –Many privately held companies so information is difficult to obtain –Information on publicly traded companies not reliable Stock markets are inefficient, concentrated and prices can be manipulated Selection of comparables –Latin American companies –Purely wireless firms –Similar size Valuation

22. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Multiples Valuation Comparables: Valuation

23. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Multiples Valuation Multiples: EV/EBITDA not considered due to negative EBITDA’s for Celumovil and Cocelco and differences in accounting standards across countries. Valuation

24. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Multiples Valuation Implied Prices: EV calculation Weighted average (50% EV/Revenue, 50% EV/Subscribers) 25% discount due to earning losses Valuation

25. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Transaction Comparables Other transactions in mobile business in Latin America in 2000 Valuation

26. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Transaction Comparables Implied Prices: Provides rough estimate useful to validate DCF analysis –Assumes that on average acquisitions reflect the two targets –Ignores strategic issues Valuation

27. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Summary of Valuations Valuation Implied Equity Value using different valuation methodologies

28. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Findings Recommend purchase of two assets: - Size of Market Opportunity - Large capital inflows may help alleviate political uncertainty (US & OPIC) - Price range $750M - $1,922M Questions? Conclusion

29. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› What Happened? Conclusion BSI Partners with VSBA First Colombian nationwide mobile cellular operator 41 million POPs Paid $1041M for stake in Celumovil and outright purchase of Cocelco

30. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Appendix - Multiples Valuation Appendix

31. Finance 456: Emerging Markets Corporate Finance February 23 rd, 2004 Page ‹#› Appendix – Cellular Standards Early Mobile Era – Single Central Tower –1960s, 70s. Big old James Bond movie cell phones Cellular Era –Began in 1980s in US when FCC allocated frequencies –Many smaller transmission areas called “cells” –Original systems were analog –Greater mobility, smaller phones Digital Technology –Better quality, higher system capacity, improved security –TDMA (includes GSM and PCS), CDMA Appendix