Simon Romero; Brasil Telecom Uses Problems on Its Turf to Make Gains

Brazil, with its volatile currency and fast-changing economy, is coming to symbolize the dashed expansionist hopes of numerous North American and European telecommunications companies. But while companies like Sprint, WorldCom, BellSouth, France Télécom and Bell Canada International count their speculative losses, one local player - Brasil Telecom - is mining the rubble.

Brasil Telecom is currently in talks to acquire three companies that are backed by foreign investors. One is MetroRed, an Internet access provider controlled by the private-equity arm of Fidelity Investments, a unit of FMR. Another is Globenet, an operator of a fiber optic cable connecting Brazil and the United States, which belongs to the Canadian company 360 networks. The third is Intelig, a long-distance carrier controlled by Sprint, France Télécom and National Grid of Britain.

Talks to buy MetroRed and Globenet are at a more advanced stage than are the negotiations to buy Intelig, said Luiz Octavio Carvalho da Motta Veiga, the chairman of Brasil Telecom's board, who spoke last week by telephone from Rio de Janeiro. Representatives for the other companies involved in the talks declined to comment.

Only a year ago, Brasil Telecom seemed to be a marginal player in its home country, providing telephone service in southern and west-central Brazil. But the pending deals would turn the company into a nationwide long distance carrier and provider of high-speed Internet services to business customers.

The prospect of the acquisitions and the fire-sale prices that Brasil Telecom is believed to be negotiating for the companies have fueled optimism among investors. Despite concern over Brazil's economy in the period before next month's presidential election, two investment banks - UBS Warburg and Merrill Lynch - recently named Brasil Telecom as their top pick among Latin American telecommunications companies.

Since late July, when it became increasingly apparent that Brasil Telecom would resolve an internal shareholder dispute with Telecom Italia, its American depository receipts have climbed more than 19 percent, closing at $25.90, on Friday.

Certainly, the failed efforts of foreign telecommunications investors have left many distressed properties in Brazil. WorldCom, for example, shifted the poor results of its Brazilian subsidiary, Embratel, off its balance sheet. WorldCom has recently begun to reconsider that move, which could lead to the company's restating its past losses by an additional $2 billion to $3 billion. WorldCom is also seeking to find a buyer for Embratel.

Meanwhile, BellSouth has had trouble at its BCP unit, a large wireless carrier serving the city of São Paulo. BCP defaulted on a $375 million debt payment earlier this year, setting off a dispute with BCP's Brazilian shareholders.

And Bell Canada International, Qualcomm and VeloCom, a Colorado investment firm, have had only losses from the $1.6 billion they jointly invested in Vesper, a fixed wireless communications venture.

For now, though, Brasil Telecom is focusing on Intelig, MetroRed and Globenet. Rodrigo Magela Pereira, an analyst at Banco Pactual in Rio de Janeiro, said Brasil Telecom could end up paying as little as $200 million for Intelig, in which Sprint and its partners have invested $1.5 billion since 1999, and $50 million for MetroRed, in which a group led by Fidelity invested $200 million.

A person involved in the talks to sell GlobeNet, which 360networks acquired for $1 billion, said the eventual price would be "anyone's guess at this point." But if recent sales of other fiber optic assets are any indication, Brasil Telecom could pay just a penny on the dollar for GlobeNet, which is controlled by a group of banks and Alcatel of France.

Analysts say Brasil Telecom arrived at its enviable bargaining position not through any grand business vision but because an internal power struggle delayed its own investments - allowing the company to preserve its cash while rivals were scrambling to upgrade their networks.

Brasil Telecom is believed to have a cash pile of about $500 million for acquisitions. Carla Cico, Brasil Telecom's chief executive, declined to comment on how much the company was prepared to spend for those or other properties.

"We'd like to pursue deals that leave us in a financially strong position,"Ms. Cico said.

A person involved in the talks between Intelig and Brasil Telecom said that deal was the more tenuous of the three, with regulatory hurdles and the possibility of a liquidation of Intelig's assets hanging over negotiations. Brasil Telecom could also succeed in acquiring Intelig for a lot less than $200 million, the figure publicly discussed, this person said.

The ability to proceed with these deals came after Opportunity, the Rio de Janeiro-based private-equity group that owns part of Brasil Telecom, engineered a complex deal last month that gave it control of the company. The agreement ended two years of infighting.

Under the terms of the transaction, Telecom Italia ceded its stake in Brasil Telecom to a trustee in London. Telecom Italia's wireless division was then freed from regulatory constraints that had kept it from a plan to provide cellular service across Brazil.

Telecom Italia had spent more than $900 million for wireless licenses and had reportedly been losing $500,000 a day because its plans were stalled until the resolution of its dispute. Telecom Italia Mobile said it had not publicly disclosed losses related to the operation.

Bruno Contigiani, a spokesman for Telecom Italia in Rome, said its relationship with Opportunity and Brasil Telecom was a "more peaceful situation now." Part of the deal may allow Telecom Italia to repurchase its stake in Brasil Telecom at a later date, if regulators allow.

Opportunity, which is run by the Brazilian financier Daniel Dantas, is no stranger to controversy. For example, it has been in a long legal dispute over control of two wireless carriers with Telesystem International Wireless, a wireless company based in Montreal, and several Brazilian pension funds.

So it remains to be seen how Brasil Telecom will proceed with its acquisition strategy even as its controlling shareholder, Opportunity, seeks to resolve other disputes, including a legal battle in the Cayman Islands over management practices at CVC/Opportunity, an investment fund backed in part by Citigroup.