Telecom Argentina S.A. History

Company Perspectives:

The strategies and politics of the distinct companies of the Group are aligned in order to generate a synergy both in business matters and in the development of network technology.

Key Dates:

1990:

Telecom is founded to provide telephone service in the northern half of Argentina.

1994:

Telecom Argentina has connected 300,000 new telephone lines since its inception.

1997:

The company has digitalized nearly 96 percent of its network.

1998:

Telecom Personal has signed up 490,000 customers for its cellular service.

1999:

Telecom Argentina's 3.2 million fixed telephone lines are fully digitalized.

2002:

Following devaluation, the company defaults on its debts by suspending payments.

2003:

France Telecom sells its stake in the company to a private Argentine group.

Company History:

Telecom Argentina S.A. is one of the two enterprises that dominate telecommunications services in Argentina (the other being Telefónica de Argentina S.A. and its affiliated companies) and one of the nation's biggest businesses. It vies with Telefónica for leadership in fixed-line services, including local, long-distance, and international telephone service, and is the nation's leading operator in cellular telephone services and access to the Internet.

Serving Half of Argentina: 1990-95

A Belgian company and an American company provided the first commercial telephone service in Argentina in 1881. Both were acquired the following year by a British company that formed Unión Telefónica del Río de la Plata Ltd. This company merged with a British rival, Compania de Telefono Gower-Bell, in 1886. In 1929 it was acquired by the U.S.-based multinational International Telephone & Telegraph Corp. The Argentine government purchased Unión Telefónica in 1946 and renamed it Empresa Nacional de Telecomunicaciones (ENTel) in 1956, by which time telephone service was virtually a government monopoly. Under government control ENTel was a deficit-ridden, poorly administered behemoth. By 1990 the bloated workforce of 47,000 had been under 28 chief executives in the last 30 years. People were waiting as long as 15 years to obtain a phone line, and installation cost as much as $1,500. One journalist called ENTel the most corrupt telephone company in the world, "served" by staffers who took bribes and kickbacks.

As part of a vast privatization program, 60 percent of ENTel was offered for sale in 1990 to private investors in two parts. One concession, serving southern Argentina, including 57 percent of the access lines in metropolitan Buenos Aires, was purchased by Telefónica de España S.A. The other, serving the northern part of the country and the remaining Buenos Aires lines, was sold to Nortel Inversora S.A., a consortium whose shareholders included the Italian telecommunications company Stet-Societá Finanziaria Telefónica S.p.A. (which later became Telecom Italia S.p.A.); France Telecom S.A.; the Perez Companc group, an Argentine holding company; and the U.S. investment bank J.P. Morgan & Co. Inc. Nortel paid $2.31 billion in government bonds and $100 million in cash for the concession. Another 30 percent was sold to public investors in 1992 on the Buenos Aires and New York stock exchanges for $1.23 billion, and the remaining 10 percent went to ENTel employees through a stock participation program.

The new company was named Telecom Argentina Stet-France Telecom S.A. The concession gave Telecom Argentina the exclusive right to provide basic public telephone service in its designated area for a period of seven years, with an extension of three years if terms and conditions were met. Stet and France Cables et Radio S.A., a subsidiary of France Telecom, were awarded the management contract. Prices were linked to the dollar by a regulatory agency, with periodic adjustments based on the U.S. consumer price inflation index.

Telecom Argentina adopted a five-year plan to spend $3.3 billion in order to achieve a 60 percent, 1.1 million increase in the existing lines (only one-ninth digitalized) in its concession area. The company had to revise the architecture of the network because of apparent sabotage by employees who opposed privatization. It reduced employment from 19,234 to 16,101 in its first 13 months of operation (and 9,275 by late 1999) and increased productivity by 18 percent in that time. By 1994 some 300,000 new lines had been connected and even more replaced, raising the proportion of digitalized lines to more than half of the total. Demand for new lines remained heavy, with the waiting list totaling 215,000 by the end of 1993. Telecom and Telefónica were equal partners in three other companies: Telintar, which had a monopoly on international long-distance calls; Startel S.A. for domestic value-added services such as telex, telegraph, videoconferencing, data transmission (including Internet service), and ship-to-shore radio communication; and Movistar (later Miniphone S.A.) for cellular mobile telephone and paging services. Telintar installed the first optic fiber cable in Latin America.

Further Progress: 1995-2000

After several years of double-digit earnings growth, both Telecom Argentina and Telefónica de Argentina developed problems in the mid-1990s. The companies had met unfulfilled demand for new lines and were slashing fees to connect poor people and those living in sparsely settled rural areas. The most profitable part of their business, long-distance services, was meeting competition from credit cards issued by foreign telephone companies and U.S.-based providers offering call-back for overseas calls. Telecom downgraded its commitment to Movistar, the joint cellular company, by establishing Telecom Personal S.A. to operate this mobile service in its concession area. By late 1998 Telecom Personal had signed up 490,000 customers--64 percent of the Argentine market. As with the parent company's fixed lines, however, the growth in cellular customers was reaching a point of diminishing returns, especially in view of competition from CTI Holdings, S.A., the Argentine subsidiary of Verizon Communications Inc., and Moviecom, another rival formed by a consortium led by BellSouth Corp. To keep its impetus, Telecom Personal purchased 75 percent of a new company competing for such service in neighboring Paraguay.

These problems did not keep Telecom Argentina from increasing its revenues 37 percent and its profit 44 percent between 1996 and 1998. By 1997 it had connected 1.3 million new customers and 800 remote areas, installed 22,000 public telephones, laid more than 4,000 kilometers (2,485 miles) of optic fiber, and digitalized 95.6 percent of its network. It also offered a state-of-the-art special support service for businesses and a "smart network" incorporating such features as call credit, universal number, and virtual private networking. By late 1999 the number of lines in service had grown from the original 1.4 million to 3.4 million. The company, which also restructured its organization into autonomous business units, recorded double-digit profits on sales every year between 1992 and 1999.

Foreign investors, who originally paid top dollar for Telecom Argentina and Telefónica de Argentina shares, tended to consider the latter to be the stronger company because it was controlled by a single parent rather than a consortium and because of slightly larger market share. This was reflected in the higher price for Telefónica stock. By 1998, however, Telecom was the favored company, because it was perceived to have remained on firmer ground; Telefónica, by contrast, was spending money to enter the highly competitive field of cable television. In addition, projecting forward into the era of fixed-line competition, analysts saw Telecom as better placed than its rival. Because its concession took in the central business district of Buenos Aires, Telefónica held three-quarters of the corporate market, meaning it had more to lose from competition. In addition, many of this company's other large customers were on the frontier with Telecom, while Telecom's customers in industrial and commercial centers such as Córdoba, Rosario, and Santa Fé were far from Telefónica's base in southern Argentina.

Shortly before the Telecom Argentina and Telefónica de Argentina concessions were due to lapse in October 1999, Telecom was serving 3.2 million telephones, fully digital and based on the most advanced technologies. Telecom Personal obtained licenses to compete for cellular business not only in Buenos Aires--thereby dissolving Miniphone--but also in Telefónica's bailiwick, southern Argentina. Telintar also was dissolved, with Telecom establishing a new subsidiary, Telecom Internacional S.A., to handle international long-distance calls. At the end of 1999 Startel was dissolved, and Telecom Internet S.A. was established. The consortium that held the majority stake in Nortel Inversora now consisted only of Telecom Italia and France Telecom, Perez Companc and J.P. Morgan having agreed in July 1999 to sell their shares for EUR 522 million (about $530 million).

To survive in the new millennium of competition, Telecom Argentina pledged to invest $4.3 billion in the next five years. It was planning not only to lure big corporate customers away from Telefónica but to attract smaller subscribers unable to invest in large networks by offering to link up personal computers with software and connections for $300 a month per workstation. Data communications, including Internet, was providing Telecom with only 3 percent of its revenues, but the company was hoping to win more customers by updating its technology to yield faster connections. (Telecom Internet was absorbed by the parent company in 2001.)

Tougher Road in the New Millennium

As the Argentine recession that began in 1998 deepened, Telecom Argentina suffered reduced earnings. Rates fell because of deregulation, and customers tightened their belts, especially when it came to mobile phones. In 2001 the company tried to reduce its costs by about 4 to 5 percent, or about $85 million, partly by laying off employees. Like most large Argentine companies, Telecom had assumed its debt mostly in dollars, and when, in early 2002, the government found itself unable to maintain its currency--the peso--on a par with the dollar, the value of the peso fell below 30 cents, and dollar-denominated debts ballooned correspondingly. Telecom Argentina suspended payments on its debt of about $3.2 billion in April 2002, putting the company into default. Its losses mounted because, while the inflation rate was 41 percent in 2002, the government would not allow utilities to raise their rates. Telecom incurred a loss of ARS 4.39 billion ($1.38 billion) in 2002.

While Telefónica de Argentina's Spanish parent put up enough cash to keep its subsidiary from defaulting on its debts, Telecom Argentina's French and Italian partners were squabbling among themselves and not inclined to invest a single peso to save the enterprise. Instead they--along with a dozen or so other multinational companies--sought compensation for an alleged breach of bilateral investment treaties before a special panel of the World Bank. France Telecom sources said the action was intended to allow Telecom Argentina to increase its rates in order to catch up with inflation. The claims presented by the partners, along with those made by Telefónica, could cost the Argentine government as much as $17 billion, according to one source.

But in September 2003 France Telecom shed its half-interest in Nortel Inversora, selling it to W de Argentina-Inversiones S.L. for $125 million. W de Argentina was owned by the Wertheim Group, a leading Argentine investment company. According to the terms, France Telecom and Telecom Italia (through subsidiaries) would contribute their shares of common stock in Nortel Inversora (totaling 67.8 percent) to a company created for this purpose, Sofora Telecomunicaciones S.A. The France Telecom subsidiaries would then sell 48 percent of this company's share capital to W de Argentina, along with an option for the purchase of the remaining 2 percent, exercisable between 2008 and 2013. Telecom Italia became the new exclusive operator of Telecom Argentina, in which Nortel continued to hold a 54.74 percent stake. The company's name was shortened to Telecom Argentina S.A.

Telecom Argentina was able to report positive results for 2003, earning a net profit of ARS 351 million ($118 million) on net sales of ARS 3.75 billion ($1.26 billion). Of its net sales, voice, data, and Internet transmission accounted for 68 percent, cellular for 31 percent, and its printing and publishing subsidiary for telephone directories and other such material, along with the sale of advertising in these publications, for 1 percent. Telecom's debt was just short of ARS 10 billion ($3.2 billion) at the end of 2003. The company had about 3.2 million fixed-line subscribers at the end of 2002, some 2.2 million wireless subscribers in Argentina (and 519,000 in Paraguay), about 177,000 Internet subscribers (36 percent of the Argentine market), and 79,812 pay telephones.

Principal Subsidiaries: Nucleo, S.A. (Paraguay; 67.5%); Publicom S.A.; Telecom Argentina USA Inc.; Telecom Personal S.A.

Principal Competitors: CTI Movil; Movicom Bell South; Telefónica de Argentina S.A.

Further Reading:

• Abeles, Martin, et al., El oligopólio telefónico argentino frente a la liberalización del mercado, Bernal, Buenos Aires: Universidad Nacional de Quilmes Ediciones, 2001.
• Bachelet, Pablo, "El día después," America economía, October 21, 1999, pp. 32-34.
• Doman, Matthew, "Trying to Come in Line with Foreign Callers," Financial Times, September 20, 1995, p. 33.
• Druckerman, Pamela, "Telecom Argentina Plans to Suspend Debt Payments," Wall Street Journal, April 3, 2002, pp. A16, A18.
• "France Telecom and Telecom Italia Increase Stake in Telecom Argentina," Cambridge Television Report, August 2, 1999.
• Friedland, Jonathan, "Many Are Called to Argentina's Phone Stocks But Gains May Be Fewer Than Risks Involved," Wall Street Journal, September 25, 1995, p. C2.
• "Goldman Helps France Telecom Sell Latam Stakes," Financial News, September 9, 2003.
• Henni, Jamal, "Telecoms Groups Push for Redress in Argentina," Financial Times, July 18, 2003, p. 31.
• Hickman, Matthew, "Telecom Argentina," LatinFinance, January/February 1994, pp. 74-75.
• Hudson, Peter, "El discreto encanto de Telecom," América economía, May 7, 1998, p. 29.
• ------, "Y ahora, qué?," América economía, December 31, 1998, pp. 27, 30.
• Krauss, Clifford, "Argentina to Hasten End of Phone Monopoly," New York Times, March 11, 1998, p. D4.
• Luxner, Larry, "Argentine telco sale causes uproar," Telephony, April 23, 1990, pp. 9-10.
• Moyano, Julio, ed., The Argentine Economy, Buenos Aires: J. Moyano Communicaciones, 1997, pp. 426-27.
• Smith, Joanne C., "Telecom Argentina," LatinFinance, April 1992, pp. 66-67.
• Voorhees, Richard, "Out of Step," LatinFinance, September 1992, pp. 66-67.

Source: International Directory of Company Histories, Vol.63. St. James Press, 2004.