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SCIENTECH's IssueAlert
Today's IssueAlert Sponsors: =09 [IMAGE] SCIENTECH is currently interviewing 1,500 utilities on CIS/CRM and = customer care in the United States and Canada to determine: The leadin= g software providers Drivers of utility technology decisions Analysis of = license sales versus ASP sales New market opportunities Growing/shrinking= software markets Download a sample prospectus for an introduction to th= is new survey at: http://secure.scientech.com/specialpages/Multi_Client.asp= and contact Jon Brock at 505-244-7607 for more details.=09 [IMAGE] [IMAGE] October 17, 2001=20 AES Hits Brick Wall in Venezuelan Acquisition=20 By Will McNamara Director, Electric Industry Analysis=20 [IMAGE] [News item from Reuters] Venezuelan telecommunications firm CANTV, or Compa= nia Anomima Nacional Telefonos, facing a $1.37-billion hostile takeover bid= by AES Corp. (NYSE: AES) has forced a showdown with the U.S.-based global = power company by announcing a share repurchase program. The Board of Direct= ors of CANTV, Venezuela's biggest telecommunications company, recommended t= hat shareholders approve a proposed share buyback program of up to 15 perce= nt of CANTV's shares at a price of $30 per American Depositary Share (ADS),= or approximately $4.29 per share. Analysts said the CANTV Board's proposal= s, which would be submitted to shareholders at an extraordinary meeting set= for Oct. 24, clearly flung down the gauntlet to AES. =20 Analysis: AES' expansion in Latin America's telecommunications market was a= lways seen as a risky move, and now that risk seems to be resulting in a bi= g bite out of the company's strategy. CANTV, which was an appealing takeove= r target for AES due to its long-standing monopoly over the telecom market = in Venezuela, has a strong ally in the form of Verizon Communications (NYSE= : VZ), which holds a 28.5-percent stake in the company. Verizon came out in= support of the 15-percent repurchase program being launched by CANTV, whic= h clearly is a form of aggressive resistance against AES' efforts to gain c= ontrol over the company. The repurchase could be seen as a power play, with= Verizon also seeking to increase its share in CANTV, which many analysts m= ight see as a more appropriate synergy. However, this story also highlights= the difficulty that AES has had with its expansion efforts in Latin Americ= a, especially since CANTV's resistance comes on the heels of AES' pulling o= ut of another acquisition project in Ecuador. =20 For background, it is important to note that AES already owns 6.9 percent o= f CANTV through its majority ownership of Electricidad de Caracas, Venezuel= a's largest private electricity company. Thus, the takeover effort is an at= tempt to gain majority ownership of the company and take control away from = Verizon. CANTV, which was privatized a decade ago, is a full-service telec= ommunications provider offering switched and local, domestic and internatio= nal long-distance service throughout Venezuela Company. CANTV also offers m= obile cellular services, wireless services, Internet access and other value= -added services, and owns all of the Venezuelan public exchanges and nation= al network of public telephone lines. CANTV became privatized about 10 year= s ago and until last year reportedly had a monopoly on the fixed-line telep= hone service in Venezuela. The company has a market capitalization of $2.6 = billion. =20 AES had bid $24 in cash for each of the 28.57-million U.S.-listed shares in= CANTV and $3.43 in cash for each of the 200 million shares of CANTV traded= in Venezuela. AES' offer for CANTV's American shares represents a 9.2-perc= ent premium over CANTV's closing price of $21.98 on Aug. 29, the time at wh= ich the takeover effort was launched. From the start of the offer, some cri= tics charged that this bid was too low, but AES has maintained that the off= er is fair. AES reportedly plans to sell off CANTV's mobile services, which= account for about a quarter of the company's revenues, and distribute the = proceeds to shareholders.=20 CANTV was never very receptive to AES' bid, and did consider it to be a hos= tile takeover. In fact, workers' representatives at CANTV circulated a stat= ement strongly objecting to the bid from AES, stating that the deal would s= everely damage Venezuela and CANTV workers. CANTV employees hold a 10.9-per= cent interest in the company. Now we see that CANTV is upping that resistan= ce a notch by attempting a repurchase of its own stock. Note that CANTV wil= l most likely issue the buyback program at $30, compared to the $24 that AE= S had offered. Thus, the challenge for AES, if it still wants to gain contr= ol over CANTV, will be to increase its already 9.2-percent premium offer. T= he word circulating in the industry is that AES still intends to proceed wi= th its takeover attempt, and the CANTV strategy will not derail these attem= pts. =20 AES' rationale for increasing its holdings in the company is most likely tw= ofold in nature. First, AES obviously finds great appeal in the Latin Ameri= can market as the company already owns electricity assets in Brazil, Chile = and other countries. Just this week, AES announced its penetration of the A= rgentina market by inking a $376-million deal to purchase distribution and = generation assets in that country from New Jersey-based Public Service Ente= rprise Group (PSEG). In another recent announcement, AES launched a cash te= nder offer to acquire all of the outstanding loan participation certificate= s of Empresa Electrica del Norte Grande in northern Chile, a company that c= onsists of 716 MW of generation and 1,056 kilometers of transmission. In fa= ct, AES reportedly rivals Spain's Endesa as the region's most dominant powe= r company and by all appearances now derives a large part of its business t= hroughout Latin America. Whereas AES was clearly diversified across the Uni= ted States, Asia, Europe, and Latin America, many investors now perceive th= e company as moving into a heavier focus on Latin America, which constitute= s a risky proposition in and of itself due to unique politics in the variou= s Latin American countries.=20 However, AES recently pulled out of its attempt to launch a $128-million ta= keover bid for Chilean generator Edelnor. Currently, Edelnor, which is one = of the largest electrical generators in Chile, is controlled by Mirant Corp= ., one of AES' direct competitors in the independent power producing market= . Perhaps also reacting to the volatility in the region, Mirant has announc= ed that it will not sink any additional capital into the Edelnor unit unles= s it can be assured of repayment. AES did not give a reason for its decisio= n to terminate the Edelnor takeover, but one can surmise that investor reac= tor to its ongoing efforts in Venezuela may have been a significant factor.= Further, on Sept. 25, AES cut its earnings estimate for 2001 to a range of= $1.25 to $1.45 per share from a previous range of $1.75 to $1.90. AES blam= ed poor currency exchange rates between the Brazilian real and U.S. dollar,= lower U.K. power prices, and the company's inability to replace earnings a= nticipated from the planned acquisition of the Mohave power plant. The drop= in AES' earnings estimate may have lowered available capital that the comp= any needed to purchase Edelnor.=20 AES shares were priced at $24.25 prior to the earnings revision. After the = announcement, at least as of early morning trading on Sept. 27, AES shares = were priced at $12.25, significantly down from the 52-week high of $73, whi= ch is what the stock was priced at a year ago. As of early morning trading = on Oct. 17, AES shares were priced at $14.81.=20 Moreover, investors did not react positively to AES' plan to increase its s= take in CANTV. In fact, after word of the deal began to circulate on Aug. 2= 9 (a day on which many stocks fell) AES' stock closed down $2.94, or 8.3 pe= rcent, to a 20-month low of $32.65 on the New York Stock Exchange. AES CEO = Dennis Bakke immediately attempted to reassure investors that the purchase = did not represent a change of strategy for AES, which he says will remain f= ocused on power. In addition, Bakke noted that the purchase does not repres= ent a new venture for AES as the company already holds telecom assets in Br= azil and Bolivia. Further, Bakke clearly stated that AES is "not going to a= nnounce a bunch of telecom acquisitions around the world." Nevertheless, so= me investors believe that AES is imprudently expanding into the telecom sec= tor, which is already significantly troubled, and becoming too heavily entr= enched in Latin America, a market that is prone to political volatility. On= e investment analyst perhaps spoke for many when he commented that AES has = little experience in the telecom sector and its limited experience to date = has not been terribly successful. This, coupled with the general market dow= nturn for most companies with telecom exposure, does not make for a good re= cipe from an investor's perspective, at least as of today. =20 In fairness to AES, penetrating the Venezuelan market could represent a ver= y strategic move from a long-term perspective. With a population of 23.5 mi= llion, Venezuela represents a large potential market for energy and other r= elated services. In addition, Venezuela is an asset-rich country, particula= rly with regard to oil resources. According to the Department of Energy, Ve= nezuela is important to world energy markets because it holds proven oil re= serves of 77 billion barrels, plus billions of barrels of extra-heavy oil a= nd bitumen. Venezuela consistently ranks as one the top suppliers of U.S. o= il imports and is among the top 10 crude oil producers in the world. In add= ition, as noted AES' investments in Latin America are not exclusively focus= ed on Venezuela, as the company also is present in Argentina, Brazil, Chile= , etc.=20 Concerns about telecom arguably overshadow concerns about expansion in Lati= n America and play a larger role in the drop in AES' stock, especially when= we consider that AES has been present in Latin America for some time. Only= little more than a year ago, the telecom sector was at its peak, with bill= ions of capital investment flooding into the sector as wildly optimistic ex= pectations for demand seemingly exaggerated the scale of the market. Howeve= r, a massive downturn has ensued, impacting not only companies operating in= the telecom space but the nation's entire economy as well. The bottom of t= he telecom sector has fallen out, due in large part to the fact that the in= crease in bandwidth capacity has outpaced the growth in market demand. =20 As I've said before when analyzing this company, the further that AES depar= ts from its core strategy, the more likely it is that we will continue to s= ee volatility in the company's stock. Up until these recent announcements, = AES maintained that it was engaged in three lines of businesses, which were= all equally important to its strategy: power generation, network delivery = services and retail energy marketing. Generation always appeared to be the = main core of the company's business model, as AES controls some 125 facilit= ies totaling over 44 gigawatts of capacity worldwide. This business model w= orked well for AES and was well received by investors. Any perceived deviat= ion from this successful strategy-especially if it includes expansion into = the dangerous territory of telecom-could mark a new and risky era for AES. = =20 Nevertheless, one could also surmise that AES has found a market opportunit= y that is worth exploring. Latin America has low electrification and Intern= et usage statistics. Some analysts project high growth in the next 5 to 10 = years in Latin America in both electrification and Internet use, which in t= urn involves telecommunications. The telecom industry is struggling at the = moment. Thus, if one believes that telecom will make a comeback, then buyin= g now may make a wise strategy for those involved.=20 An archive list of previous IssueAlerts is available atwww.scientech.com=20 We encourage our readers to contact us with their comments. We look forwar= d to hearing from you. Nancy Spring Reach thousands of utility analysts = and decision makers every day. Your company can schedule a sponsorship of I= ssueAlert by contacting Jane Pelz . Advertising opportunities are also ava= ilable on our Website. =09 Our staff is comprised of leading energy experts with diverse background= s in utility generation, transmission & distribution, retail markets, new = technologies, I/T, renewable energy, regulatory affairs, community relatio= ns and international issues. Contact consulting@scientech.com or call Nan= cy Spring at 1-505-244-7613. =09 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us know if we can help you with in-depth analyses or any other SCIENTECH i= nformation products. If you would like to refer a colleague to receive our= free, daily IssueAlerts, please reply to this e-mail and include their f= ull name and e-mail address or register directly on our site. If you no = longer wish to receive this daily e-mail, and you are currently a registere= d subscriber to IssueAlert via SCIENTECH's website, please visit http://s= ecure.scientech.com/account/ to unsubscribe. Otherwise, please send an e-= mail to to IssueAlert , with "Delete IA Subscription" in the subject line.= =09 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAler= ts are not intended to predict financial performance of companies discusse= d, or to be the basis for investment decisions of any kind. SCIENTECH's so= le purpose in publishing its IssueAlerts is to offer an independent perspe= ctive regarding the key events occurring in the energy industry, based on = its long-standing reputation as an expert on energy issues. Copyright = 2001. SCIENTECH, Inc. All rights reserved.=09
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