COMPARABLE ANALYSIS



Telgua—Telecomunicaciones de Guatemala

In late December 1998, Ricardo Bueso, President and CEO of the recently privatized Guatemalan Telephone Company (Telgua) was thinking about the future of his company. Telgua was acquired for $700 million by Mr. Bueso and a group of 16 local Guatemalan investors on October 1, 1998. Bueso paid $250 million more than what TelMex bid for Telgua back in December 1997. No one else bid for the company at the October 1998 auction[1]. Sixteen local investors led by Mr. Ricardo Bueso were the sole bidders for Telgua, and acquired the largest company in Central America for $700 million.

Did Mr. Bueso overpay for the acquisition of Central America’s largest company? Did Bueso get a “great bargain”[2]?

Presidential elections are just a few months ahead, and the privatization of Telgua is being used as a political issue to get the current government out of power. Political candidates claim that the privatization of Telgua is unconstitutional, and say that if they get elected to the Presidency, they will revert the process of privatization. In addition, the labor sector, which has been historically opposed to any sort of privatization, is also strongly opposed to the process, and is lobbying in congress, declaring that the process of privatization was corrupt and unconstitutional. Most importantly, the privatization of Telgua has drastically changed the traditional economic structure of Guatemala. Historically, three economic groups have controlled most of Guatemala’s wealth through protection against local and foreign competition and legal tax benefits. The dominance of these three economic groups is now being challenged by the emergence of new economic groups, which will naturally help in bringing down the monopolistic and protective environment of the country. However, the well-entrenched power of the dominant groups will fight the emergence of new players, like that of Ricardo Bueso. (See EXHIBIT 12 for Systematic Risk Valuation by Moody’s, Standard & Poors, and IICC)

These real risks do not bother Bueso. As he claimed, “…the privatization process in our economy is irreversible…it is the only way to integrate our market into the world economy. And the process doesn’t stop here in Guatemala, I’m going for the other telephone businesses in Central America.”[3] Having already acquired the telephone business in Guatemala, Central America’s largest market, Bueso’s future investment plan is to bid for the Telephone company in Honduras, and then for the Telephone Company in Nicaragua. Bueso’s interest is in managing the entire telephone business in Central America. Sure, there are operational investments to be made in Guatemala with Telgua, but he is going to leave those operational issues in the hands of TelMex, the contracted operator of Telgua. His main concern right now is to move into the other Central American countries and bid for the telephone companies in those countries—an option that was made possible through the acquisition of Telgua.

The Privatization Process

As part of the current government’s initiative to integrate Guatemala into the international capital markets, and to further develop the country’s own local capital market, the Government of Guatemala decided to open up the historically protected telecommunications monopoly for competition. In August 1996 the Government passed the General Telecommunications Law which allowed competition in telecommunications. Consequently, the Government of Guatemala (GOG) decided that it should privatize the national telephone company.

The government hired Arthur Andersen to define the steps of the privatization process, participate in the Due Diligence process, and assist in the development of the sales contract. Soon after, the Government of Guatemala, with the help of Arthur Andersen, selected J.P. Morgan to conduct the structure, promotion, and realization of the privatization of Guatemala’s Telephone Company (GUATEL).

To overcome congressional opposition, the current government (PAN—Partido de Accion Nacional) had to find a means to overcome the current law, which prohibited the privatization of Guatel. Hence, the Government formed a new company, Telgua, and sold all of Guatel’s assets to Telgua. Telgua, the new company, could be privatized, since the law prohibited the sale of Guatel, but not the sale of the newly formed Telgua.

JP Morgan

After JP Morgan’s initial evaluation, J.P. Morgan suggested that Telgua should be sold to an international Telecom operator with proven operational capabilities. This excluded all other potential investors. J.P. Morgan looked for investors both nationally and internationally for a public auction to be held on December 16, 1997.

|Summary of Pre-requisites for the December 1997 Auction: |

|JP Morgan will have to pre-select potential bidders. |

|Must be an international telecom operator with at least 1.5 million lines. |

|Private investors cannot bid for Telgua. |

JP Morgan values the firm at US$ 750-950 million on December 1997 (See EXHIBIT 8 for JP Morgan’s Cost of Capital Calculation[4]). The higher value is subject to government protection against competition in the early stages after the acquisition[5]. TelMex, the only bidder, offers US$529 million (or $19.33 per line) but the government refuses the offer claiming it is too low.

JP Morgan decides to do another auction—this time relaxing the limitations of the first auction and opening up the opportunity to private investors.[6]

|Summary of Pre-requisites for the October 1998 Auction: |

|JP Morgan will have to pre-select potential participants |

|Telgua will be sold to an international telecom operator with at least 500 thousand lines or a local and/or international private |

|investor. |

|If not a Telecom operator, participant must have the backup of an internationally renowned investment bank |

|If not a Telecom operator, participant must have a signed management contract with an international Telecom operator. |

By September 1998, one month before the scheduled auction, not one potential bidder had confirmed its participation in the auction. LUCA, a group of local investors led by Mr. Ricardo Bueso, confirmed that they were interested in participating, but that they had not completed negotiations with an international Telecom operator. Deutsche Telecom, who had expressed its interest in bidding for Telgua, withdrew from the process. Hence, on Tuesday, September 29, the rules of the auction got modified again, allowing private investors to participate as long as they were in the process of negotiating a management contract with an international Telecom operator.[7] Luca’s bid arrives three minutes before the auction’s deadline. LUCA, the only bidder, wins the bid.

Worldwide Financial Crisis

Foreign investment in Latin America for 1998 was gravely affected by the financial crisis that started in Asian back in 1997, by the economic collapse of Russia in mid 1998, and by the consequential negative reaction of the major European and US capital markets. The “emerging markets”, which were looked upon by investors as great investment opportunities, plummeted. The dramatic downfall can be appreciated by comparing the market capitalization of the Latin American stock markets in September 1997 with the market capitalization in September 1998. In addition, most of the Latin American currencies during this period lost value against the dollar.

More specifically, the main Telecom Companies in Latin America suffered similar losses in value during this period. Telmex’s shares plummeted from US$ 58.00 to US$ 43.00. Telefónica de Argentina’s shares plummeted from US$ 39.38 to US$ 28.88. CTC de Chile’s shares fell from US$ 33.63 to US$ 18.00. CANTV de Venezuela’s shares dropped from US$ 48.63 to US$ 13.94.

This environment generated lack of confidence in the emerging markets in general, and more specifically, a negative climate for investing in Latin America. Hence, many of the strong international Telecom operators that had been investing in Latin America retracted from the process of privatization in Guatemala.

The Transaction

On October 1, 1998, the Government of Guatemala announced the sale of its 95% equity interest in Telecomunicaciones de Guatemala S.A. (Telgua) to a Guatemalan holding company created specifically for the purpose of acquiring Telgua. The purchase price for 95% of the equity interest was $700 million (See EXHIBIT 13-14 to see Telgua’s Firm Value relative to other Latin American Telecom) The closing of the transaction took place on November 5, 1998. The buyer signed a contract with TelMex (a Mexican telecommunications company) to manage the day to day operations of Telgua[8]. Although no equity infusion was required from the selected operator, TelMex was given the option to acquire 49% of Telgua's equity at an exercise price equal to the price per share paid during the privatization. The option contract expires five years after the acquisition.

LUCA contracted Salomon Smith Barney to guide them throughout the privatization process[9]. LUCA offered $700 million for 95% of Telgua with an up-front payment of $200 million payable at closing. The $200 million paid at closing consisted of (i) $100 million of LUCA cash equity and (ii) an exchange of $100 notes among the parties. Due to the world financial crisis and to the contraction of debt and equity markets in Latin America, the government, decided to allow the winner to scale the rest of the payment.

The Government provided LUCA with subordinated financing for the $500 million balance of the purchase price, $150 million due in 18 months and $350 million in 36 months. These maturities can be extended to 5 years. The Government financing was in the form of pay-in-kind ("PIK") notes bearing an interest rate of LIBOR plus 3%. As security of the PIK notes, LUCA pledged all its newly acquired Telgua shares. If LUCA chooses to extend the maturity of the PIK notes, the interest rate will increase to LIBOR plus 6%. See overview of the transaction in EXHIBIT 1 and a breakdown of LUCA’s payment in EXHIBIT 2.

In essence, LUCA paid $700 million for 95% of the equity. Taking into account Telgua's outstanding debt of $256.5 million as of November 5, 1998[10], the total value of the firm adds up to $858 million. The breakdown of the firm's value as of November 1998 is the following:

| |Firm value |

| |($ millions) |

|Equity (100%) |736 |

|Net Debt |222 |

|Exchange Note |(100) |

|Firm value |858 |

See LUCA capitalization and Telgua capitalization at the moment of the transaction in EXHIBIT 3 and EXHIBIT 4 respectively.

The Politicization of the Privatization of Telgua

Political, popular, and union sectors have demanded that the government make the privatization process clear, given that “this has been the biggest and darkest business done in the history of Guatemala”.[11] In essence, the privatization process has been criticized for two main reasons: 1) the government, with the advice of JP Morgan, constantly changed the rules of the auction process, and of who could participate, which in turn obscured the transparency of the process; and 2) the government of Guatemala, with the advice of JP Morgan, “gave away” the largest business in Central America for a bargain price.

The privatization of Telgua has been said to be the main cause of the country’s current financial crisis. “Do to the financed scale payment agreement, the sale [of Telgua] did not result in the inflow of US dollars that were necessary to pay the country’s foreign debt, invest in important development projects, reduce the Central Bank’s losses. The financing generated a devaluation of the local currency due to the great demand of US$ to pay for the first obligation. In addition, local currency interest rates went up due to the liquidity squeeze that was generated due to the great demand of local funds to finance the acquisition of Telgua. The local bank where these funds were deposited turned around and financed the banks that had been drained at very high interest rates.” [12]

Moreover, different political leaders and the Guatemalan population in general are afraid that Mr. Bueso will be forced to raise tariffs due to the highly leveraged acquisition. Guatemala is a very poor country, with a GDP per capita of only $ 1,400 (that is less than $4 a day). Contingent political parties and union leaders have recommended that the government establish tariff regulations to subsidize telephone users. “The Guatemalan telecom market is still monopolistic, it is important that the government regulate price increases until there is competition.” In addition, the Head of Congress suggested that the Telecommunications Law should be revised with the objective to regulate tariffs.

The Truth about the Privatization Process according to Bueso

Lack of information, confusion created by the media, no protection laws against competition, the worldwide financial crisis etc., all contributed to highlighting the investment risk in Guatemala, which in turn alienated potential foreign investors and international telephone operators/investors for the privatization of Telgua.

Given that JP Morgan did not find qualified Telecom operators and/or foreign investors interested investing the stipulated amounts for Telgua, they had to change the privatization rules that had been instituted in January of 1997 to allowed local investors to participate in the privatization process.

Mr. Bueso’s mid-term objective is to make Telgua a public company. “I want to develop the equity market in Guatemala, and allow millions of Guatemalan citizens to invest in a profitable company, to create an investment culture in the country, bring back capital that is being invested abroad at miserable returns, and grow the telephone business in Guatemala.”[13]

The Company

Telgua owns and operates the largest telecommunications system in Guatemala. The Company is currently the leading provider of local and long-distance telephone services throughout Guatemala and is the principal full-service telecommunications provider in Central America. It owns the nationwide network of local telephone lines and the principal public long-distance telephone transmission facilities. In addition, Telgua has the only nationwide digital long-distance network in Guatemala. It also provides telephone-related services such as directory services, cellular mobile telephone service, 800 service, paging service and interconnection services to other carriers.

Based on total assets at December 31, 1997, Telgua was the largest company in Guatemala and the largest company in Central America too. At December 31, 1997, the Mexican telephone system comprised 426,145 fix lines in service, or 3.8 lines in service per 100 inhabitants of which Telgua holds a 100% market share.

Telgua is the largest non-governmental employer in Guatemala. At December 31, 1997, it had almost 7,000 employees. The ratio of lines per employee is of 60. This measures indicates that the company is highly inefficient. This standard ratio for the companies in the region of similar characteristics is around 150 lines per employee.

During 1996 and 1997 the company has gone under a big restructuring process mainly focussed on the expansion of the lines in service. The compounded annual growth of the lines in service for the 96-97 period was of 22%.

This growth required a CAPEX of U$307M. The company has existing infrastructure for 200,000 additional fixed lines. The estimated pent-up demand for basic telephony service according to Salomon Smith Barney is of nearly one million lines. The company holds the right to use the band-A PCS spectrum and is finalizing the deployment of Nortel CDMA equipment to offer mobile and WLL services.

Two months after acquiring the company, Ricardo Bueso discharged approximately 2,500 employees (30% of the total workforce). Telgua’s lines in use per employee ratio, an important efficiency ratio in the Telecom industry, was very low compared to other Latin American Telecom companies that have been recently privatized. Hence, Ricardo Bueso’s initial move to achieve world class operational standards. As a consequence of the downsizing, Telgua's EBITDA was heavily impacted. This impact, however, could be reduced due to the expected increase in "Maintenance Costs" and "Other Costs" from increased outsourcing after the lay off.

Into the Future

As Ricardo Bueso sits on his desk at Telgua, he thinks about future threats and opportunities. The current political environment presents a tangible risk to Bueso’s investment, and, more significantly, to the process of economic modernization in Guatemala. Bueso, however, is confident that the current social and political distress is a natural reaction to the process of privatization, especially in a country that has been closed and heavily protected for decades. Bueso is considering other threats and opportunities. Bueso’s main concern is the option to expand into other Central American countries. “Now that I have acquired Guatemala, the largest company in Central America, I will go after the other telephone companies in the area. We have to start the valuation of the telephone companies in Honduras and Nicaragua as soon as possible, bid for them, and start operating.”[14]

Mr. Bueso does not question the price he paid for Telgua. He insists, “it was a bargain price for me and an excellent price for the government.”[15] As he says, however, “we will go throughout the entire process again in Honduras and Nicaragua, and we must accurately appraise those companies.”[16]

Analysis

Evaluate the risks built-in the privatization of Telgua.

1. What was the price paid for 95% of the equity of Telgua? Discuss the transaction and

its mid-term and long term implications for both Luca and Telgua.

2. Discuss the cost of capital methodologies used by JP Morgan and Bain & Company.

3. Present your own valuation of the company using the DCF method. Detail your assumptions used for your valuation. Present a detailed description of your cost of capital calculation. Perform Value at Risk (VaR) analysis.

4. Evaluate Comparables Valuation Methodology as a means for valuing a company in Guatemala (See Comparables data in EHXIBITS 15-18)

EXHIBIT 1 Overview of the transaction

EXHIBIT 2 The transaction—Luca’s payment breakdown

| | |

|Cash |$100 MM |

|5% Telgua Note (Workers) |5MM |

|Government Notes |500MM |

|New Hamilton |114MM |

|Old Telgua’s Net Debt |96MM |

|Total |$815 MM |

EXHIBIT 3 LUCA Capitalization

| | | | | |

| |Actual |Adjustment |As Adjusted | |

| | | | | |

|Government Notes |500 | |500 | |

|Telgua Note |100 |-100 |0 | |

|Total Debt |600 |-100 |500 | |

| | | | | |

|Shareholders' Equity |100 |100 |200 | |

| | | | | |

|Total Capitalization |700 |0 |700 | |

| | | | | |

EXHIBIT 4 Telgua Capitalization

| | | | | |

| |Actual |Adjustment |As Adjusted | |

| | | | | |

|Senior Debt | | | | |

| | | | | |

|BCIE (Fiber Optic Project) |45 | |45 | |

|BCIE (External Plant) |40 | |40 | |

|Vendor |45 | |45 | |

|Other Credit Facilities |6.5 | |6.5 | |

|Total Senior Debt |136.5 |0 |136.5 | |

| | | | | |

|Other Debt | | | | |

| | | | | |

|New Hamilton |0 |120 |120 | |

|Old Hamilton |120 |-120 |0 | |

|Total Other Debt |120 |0 |120 | |

| | | | | |

|Total Capitalization |256.5 |0 |256.5 | |

| | | | | |

| | | | | |

EXHIBIT 5 Selected Company Data

|Telgua |1997 |

|Revenues (U$ millions) |226.8 |

|% from International Telephony |51% |

|% from National Telephony |34% |

|% from line installation |7% |

|% from Others |8% |

|EBITDA (U$ millions) |124 |

|Market Share | |

|Local Service |100% |

|International Service |100% |

| | | | | |

EXHIBIT 6 Income Statement in millions of Quetzales[17]

| |From 01/01/98 |

| |to 6/30/1998 |

| | |

|Monthly Basic Charges |32 |

|Additional residential services |90 |

|Local Measured Service |136 |

|Domestic long Distance |147 |

|Basic Telephone Services |5 |

|Installation charges |69 |

|International long distance |217 |

|Public telephones |14 |

|Cellular |13 |

|Telex |4 |

|Data transmission |5 |

|Others |72 |

|Net Revenues |804 |

|Salaries and Social Security |120 |

|Depreciation and Amortization |136 |

|Material Consumption |35 |

|Allowance for doubtful accounts |47 |

|Services |30 |

|Lines connections |77 |

|Maintenance |21 |

|Fees |22 |

|Publicity and promotions |5 |

|Others |14 |

|Total operating expenses |507 |

|Operating Income |297 |

|EBITDA |433 |

|Financial gain/(loss) |(45) |

|Other Income/(Expenses) | |

|Minority Interest | |

|Income tax |(6) |

|Net Income |246 |

EXHIBIT 7 Balance Sheet in millions of Quetzales[18]

| |June 30, |

| |1998 |

| | |

|Cash |4 |

|Bank Deposit |131 |

|ST Receivables |858 |

|ST Inventories |256 |

|Other Receivables |599 |

|ST Assets |1,848 |

|Other Receivables |645 |

|Fixed Assets |2,849 |

|LT Assets |3,494 |

|Total Assets |5,342 |

|ST Payables |428 |

|ST Debt |821 |

|Wages and Social Cont. |3 |

|Fiscal Debt |19 |

|Other Loans |72 |

|Lines Connections |75 |

|ST Liabilities |1,418 |

|LT Debt |370 |

|Other Loans |20 |

|Provisions |134 |

|LT Liabilities |524 |

|Total Liabilities |1,942 |

|Net Worth |3,400 |

EXHIBIT 8 Cost of Capital Calculation – JP Morgan

| | | |

|Cost of Equity = 16.27% |30-year T-Bond |= 6.27% |

| |(-) liquidity premium |= 1.25% |

| |Risk free rate |= 5.02 |

| | | |

| |Market premium |= 5.00% |

| |Beta |= 1.25 |

| |Country risk |= 5.00% |

| | | |

| |Cost of equity capital |= 16.27% |

| | | |

|Cost of debt (after-tax) = 7.50% |Cost of debt |= 10.00% |

| |Tax shield |= 2.50% |

| |After tax cost of debt |= 7.50% |

| | | |

|Target capital structure |Debt total |= 30% |

| | | |

| |WACC |= 13.6% |

Source: JP Morgan Valuation, December 1997

EXHIBIT 9 Cost of Capital Calculation – Bain & Company[19]

Bain & Company uses a similar method to that of JP Morgan for calculating the cost of capital in Guatemala. Specifically, Bain & Company calculates the Beta of comparable companies in Latin America that trade in the United States as American Depository Receipts. Bain uses the average of these betas in their cost of capital calculation. Bain adds a measure of country risk to the equity premium to account for the risk of investing in Guatemala. The country risk is the difference between the borrowing rate in $US of Guatemalan companies vs. comparable US companies.

The appropriate discount rate for discounting free cash flows to equity holders (FCFE) is:

KE = Rf + BE(Rm-Rf) + CR

□ Guatemala has no equity markets, so Telgua’s equity beta (BE) is estimated by taking the average equity betas of Latin American telephone companies that trade in the United States as ADRs.

|American Depository Receipts (ADRs) |Beta vs. S&P 500 market index |

|TelMex – Mexico |0.93 |

|Telecom – Argentina |1.16 |

|Telefonos de Venezuela |1.06 |

|Telebras – Brazil |2.06 |

|Telecom – Chile |1.17 |

|Telefónica del Peru |0.90 |

|Average |1.21 |

□ The approximate spread of the borrowing rate of Guatemalan companies over comparable US companies (270 basis points) is used by Bain & Company to determine the country risk premium.

|Country Risk Calculation | |

|Telgua debt rate in $US |10.50% |

|US Telecom average debt rate in $US | 7.80% |

|Country Risk | 2.70% |

□ Using these inputs, and assuming a 5.30% yield on long-term US Treasury bonds, and a 7.90% market premium, Telgua’s cost of equity (KE) is:

KE = Rf + BE(Rm-Rf) + CR

17.56 = 5.30 + 1.21 (7.90) + 2.70

EXHIBIT 10 Historical Averages – US equity market and bond returns

|Arithmetic Average |Stocks |T-bills |T-bonds |Stocks-Bills |Stocks-Bonds |

|1926-1998 |13.17% |3.86% |5.22% |9.31% |7.95% |

|1962-1998 |13.13% |6.32% |7.10% |6.81% |6.03% |

|1987-1998 |18.59% |5.63% |7.87% |12.96% |10.72% |

|Geometric Average |Stocks |T-bills |T-bonds |Stocks-Bills |Stocks-Bonds |

|1926-1998 |11.21% |3.81% |4.89% |7.40% |6.32% |

|1962-1998 |12.61% |6.39% |6.68% |6.22% |5.93% |

|1987-1998 |19.06% |5.63% |8.76% |13.43% |10.30% |

EXHIBIT 11 US Telecom Average Cost of Capital.[20]

| | |

|Beta |= 1.22 |

|Unlevered Beta |= 1.13 |

|Cost of Equity |= 12.02% |

|E/(D+E) |= 86.38% |

|Std Dev in Stock |= 51.66% |

|Cost of Debt |= 7.80% |

|Tax Rate |= 50.00% |

EXHIBIT 12 Country Credit Rating

Note: n/r = not rated

A foreign currency long-term debt rating is the rating agency's assessment of each government's capacity and willingness to repay its foreign currency denominated long-term debt according to the debt's terms.

The following table provides a guide to S&P's and Moody's ratings:

Institutional Investor's "Country Credit Ratings" are based on a survey of 75 to 100 international banks. Bankers were asked to grade each country on a scale of 0 to 100, with 100 representing the least chance of default.

EXHIBIT 12 (cont.) Country Credit Rating

□ There is a clear relationship between the credit ratings:

□ Guatemala's Credit Rating has improved during the '90s

▪ Political stability (peace treaty with the guerilla movement)

▪ An aggressive privatization program

▪ The De-regulation of the economy

EXHIBIT 13 Firm Value relative to other Latin American Privatizations

The following is a list of Latin American Telecommunications companies to which Telgua has been compared. Information is given also regarding the actual date of privatization.

An initial comparison between the price paid for Telgua vs. the price paid in other auctions, can be done by comparing two useful ratios:

▪ The Firm Value (Equity Value plus Net Debt) divided by EBITDA (Earnings before Interest, Tax, Depreciation and Amortization), and

▪ The Firm Value divided by Total Lines in Service. This gives an idea of the price effectively paid to the old company per installed and in service line.

EXHIBIT 13 (cont.) Firm Value relative to other Latin American Privatizations

The two previous plots suggest that the price paid by LUCA for TELGUA may not have been excessive. In fact, compared to previous Lain American privatizations during the '90s, Firm Value / EBITDA is the lowest (6.2 for TELGUA compared to an average of 11.9) and Firm Value / LIS is the second lowest (US$ 1,618 vs. an average of US$ 3,436).

EXHIBIT 14 Tele-density

The following graph describes the path of Tele-density (ratio of total lines in service per 100 inhabitants) for our comparable countries:

The main factors behind this common upward trend have been:

▪ High levels of pent-up demand

▪ Improved macroeconomic environments

▪ More efficient

operators

EXHIBIT 15 Comparables vs. Latin American publicly traded companies

Although our firm universe is the same as the previous one, it is important to mention that the following comparative analysis responds to prices as of Feb 19, 1999.

EXHIBIT 16 Trading Multiples

EXHIBIT 16 (cont.) Trading Multiples, December 1998

Regarding Trading Multiples (that is, including information available to date), it appears that the conclusion of the analysis of previous privatizations vs. TELGUA is not validated. Specifically, the Price-to-Earnings ratio estimated for 1999 is the highest for TELGUA (17.3 vs. an average of 10.7). Additionally, Firm Value / EBITDA is also the highest for TELGUA (7.5 vs. average of 4.7). The problem is that this more expensive relative value does not correspond to a higher growth rate in the company's cash flows: EBITDA CAGR (compounded annual growth rate) estimated for the next 5 years by Morgan Stanley Dean Witter is only 5.2% for TELGUA, while for the average is 7.6%.

EXHIBIT 17 Operating Multiples, December 1998

EXHIBIT 18 Comparative Tariffs Structure, December 1998

A common feature across all previously-public telecommunications companies has been a distorted structure of relative prices charged for the services rendered. This is not unusual for TELGUA either, and is also a key opportunity to improve efficiency and performance of the firm. The following graphs - comparing TELGUA to its Latin American peers - are self-explanatory.

EXHIBIT 18 (cont.) Comparative Tariffs Structure, December 1998

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[1] The joint venture of Telefónica de España and MCI for Latin America showed interest in participating in the auction for the Guatemala Telephone Company but retired from the process before the October 1, 1998 auction. They had been willing to pay up to US $550 million for the company.

[2] Interview with Ricardo Bueso

[3] Interview with Ricardo Bueso

[4] As an alternative cost of capital methodology see EXHIBIT 9.

[5] J.P. Morgan’s fees are .05% for the first $700 million, and 1% for everything over $700 million.

[6] Ricardo Bueso, president of LUCA approached the government in 1996 to demonstrate his interest in the privatization of the Telephone Company, but his interest was rejected due to the specific prerequisites established by JP Morgan in the December auction.

[7] Luca had almost closed an investor/operator deal with Telefónica de España on June 1998. Telefónica de España, however, unexpectedly ended talks with LUCA. Apparently, Telefónica de España had been, at the same time they were negotiating with LUCA for the purchase of the national telephone company, negotiating with another local investor group for the acquisition of Bandwidth A. If Telefónica de España had been able to win the bid for Bandwidth A (cost US$ 25 million), the price of Telgua would have dramatically dropped. The government, however, decided not to auction Bandwidth A.

[8] TelMex’s management fees are 1% of EBITDA plus 9% of Revenues.

[9] Salomon Smith Barney’s October 1998 valuation of Telgua was $700 million. Salomon Smith Barney’s valuation is based on trading comparables from other Latin American Telecom companies.

[10]Exchange Rate 6.5 quetzales per 1$US

[11] Congressman

[12] Congressman

[13] Interview with Ricardo Bueso, president of LUCA, October 1999.

[14] Interview with Ricardo Bueso, President and CEO-Telgua, January 1999

[15] Interview with Ricardo Bueso, President and CEO-Telgua, January 1999

[16] Interview with Ricardo Bueso, President and CEO-Telgua, January 1999

[17] Exchange Rate 6.5 quetzales per 1$US

[18] Exchange Rate 6.5 quetzales per 1$US

[19] Source: Bain & Company presentation, 1/8/96. Cost of capital calculation method was obtained from the cost of capital calculation method that Bain & Company used for the valuation of the main Coca-Cola bottler in Guatemala City.

[20] Sample: 131 firms

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