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The Lean, Mean Phone Machine: Venezuela's CANTV
Latin CEO / January-February 2002

By Larry Luxner

Under normal circumstances, Gustavo Roosen would be thrilled. Just last fall, the canny president of Compañía Anónima Nacional de Teléfonos de Venezuela (CANTV) successfully fended off a very public hostile takeover attempt by US-based energy-cum-telecom company AES. And for the year just ended, despite some slippage in the second half, the company posted total revenues estimated at US$2.8 billion, up from US$2.6 billion in 2000, with pre-tax income of around US$1.2 billion, compared to US$1.1 billion in 2000.

The fundamentals at CANTV, in fact, look fantastic.

In June 1995, when Roosen took over as president, the newly privatized phone company was still struggling against foreign-exchange controls and illegal callback services that had sprung up in response to CANTV’s outrageously expensive rates for international calls.

At the same time, GTE Corp. (now Verizon Communications Inc.) was battling the Venezuelan government over the terms of its 1991 concession, spurring persistent rumors that GTE would pull out of the consortium running CANTV. The company was also frequently at odds with its militant, sometimes hostile, labor union. And it didn’t help when police briefly detained Roosen’s predecessor, Bruce Haddad, after subcontracted workers laying a fiber-optic cable for AT&T hit a Caracas gas main, setting off an explosion that killed 60 people.

Today, the picture is much brighter. In the seven years since Roosen replaced Haddad – who died in a 1996 plane crash in Guatemala – CANTV’s public image has dramatically improved. The company has boosted its number of access lines to 2.7 million, so it now serves 40 percent of Venezuela’s 5.5 million households. Its Movilnet subsidiary has 2.3 million cellular subscribers, up 31.5 percent during the past 12 months, and the number of Internet service subscribers jumped 37 percent last year to 133,000, more than half the national market.

Despite layoffs that have shrunk the workforce from 23,000 to 12,400, labor relations are friendlier today, and a one-minute call to the United States – which accounts for 66 percent of CANTV’s international long-distance traffic – costs 53 cents, down from US$2 a minute in years past.

Obviously,” says Roosen, “the presence of private ownership in CANTV, with foreign ownership criteria and planning tools, has resulted in consistent improvements over the last 10 years, which in turn has resulted in a much better image in the eyes of the consumers, who are happy and content with the quality of service.”

Then why isn’t the CANTV chief celebrating?

The short answer: falling oil prices and the crumbling image of another prominent Venezuelan, President Hugo Chávez. In the wake of Sept. 11, the worldwide price of petroleum continues to tumble in response to weaker demand, hurting Venezuela, the world’s fourth-largest oil exporter. Combined with Chávez’s anti-business rhetoric, which seems to grow louder every day, potential investors are thinking twice about buying stock in CANTV.

"It’s a fairly contradictory situation,” says Roosen. “The company is doing very well, and we have a very modern telecom law that regulates the entire sector, but nevertheless we are under the cloud of political uncertainty and the lack of a credible macroeconomic plan that’s affecting the overall perception of the company.

Investors are not pulling out, but there is less interest in buying our stock, and therefore our stock price has fallen by 30 percent in the last three months [Oct. through Dec.], from US$22 down to US$15,” says Roosen. “For the time being, the foreign investment community is staying away.”

Such challenges are nothing new for the 57-year-old executive, who in 1968 earned his master’s degree in comparative law from New York University. Following a successful career at American Can, Roosen went on to head the food division of Organización Polar – one of Venezuela’s largest conglomerates – for most of the 1980s, and served under President Carlos Andrés Pérez’s administration as minister of education from 1989 to 1992. He was then named transitional president of state oil entity Petróleos de Venezuela SA (PDVSA), a post Roosen held until 1994, when he was tapped to lead the reorganization of troubled Banco Latino. From there, he went directly to CANTV.

"Gustavo is in many ways Venezuela’s most capable executive,” says Robert Bottome, editor of the weekly VenEconomy. “He did a fantastic job at PDVSA, and trying to save Banco Latino.” The bank was ultimately seized by the government, a victim of Venezuela’s banking crisis of the early 1990s.

Roosen, who sits on the boards of several companies, including Envases Venezolanos SA and Banco Provincial, is a low-key executive who clearly doesn’t like praising himself. But he agrees that CANTV has generally performed well under his stewardship. “In revenue terms, we are the largest private company in Venezuela [just ahead of food and beer conglomerate Polar],” he says. “In 2002, our capital investment will be in excess of US$500 million, so that’s proof of our commitment.”

At the moment, international long-distance calls generate 8 percent of CANTV’s total revenues, and data transmission another 11 percent. The balance is local and domestic long-distance.

International callback services [which are still illegal] no longer exist because we are fairly competitive in our long-distance structure,” says Roosen, estimating current telephone density at around 18 lines per 100 people. “We’re now ahead of Mexico, but behind Argentina, Chile and even Colombia, because even Colombia has a very subsidized structure of fixed lines.” Roosen adds that the average residential customer now pays US$11 a month for basic phone service, up from US$5 or US$6 before privatization.

In December, CANTV marked its 10th anniversary as a private company. Since privatization, it has been controlled by the VenWorld consortium, which is comprised of Verizon (65 percent), Telefónica de España (20 percent) and small shareholders (15 percent). Besides VenWorld, which holds 28.04 percent of the company, CANTV’s other owners include the Venezuelan government (5.6 percent); workers and pensioners (10.25 percent); individual stockholders (41.11 percent); and stock repurchased by the company itself (15 percent).

When the CANTV monopoly was privatized in 1991 for US$1.89 billion, labor unions were among the loudest protesters. That has changed under Roosen, who has cultivated a “constructive, healthy relationship” with the unions, even as he’s let go of thousands of workers in order to make the phone company – which now boasts 366 lines per employee – far more efficient than it used to be.

"These people were retired or dismissed, but handsomely paid off with good packages,” he says. “We have been a fair employer, having to adjust to best practices, but doing so by being fair at all times. We have the only labor contract in Venezuela which includes variable compensation to unionized workers based on their own performance, with measures we look at on a monthly basis. As a result, workers now earn more money than they would without these features.”

While labor relations have long been a thorny issue, there’s one thing CANTV hasn’t had to worry about for most of its existence: competition. With the glaring exception of mobile telephony – which, since its introduction to Venezuela in 1988, has been dominated by BellSouth’s Telcel – CANTV has enjoyed monopoly status. That changed in November 2000, when Venezuelan regulatory agency Conatel threw open the doors to rival companies that hoped to offer both local and long-distance service.

But so far, those rivals haven’t made much of a dent in CANTV’s traditional areas of dominance.

When the telecom market was opened up, expectations were tremendous, and some investment did come in,” says Antonio Herrera, executive director of the normally gung-ho Venezuelan-American Chamber of Commerce. “But it seems to have slowed down, and I don’t know where it’s going from here, given the overall economic conditions in Venezuela.”

In fact, as the incumbent operator, CANTV still enjoys 99 percent of the country’s fixed-line voice market and remains the long-distance carrier of choice for an overwhelming number of Venezuelans. “We were expecting to lose 25 percent of our international long-distance market, which we did not,” says Roosen. “Future competition all depends on how many people want to come and invest here.”

According to industry statistics, Venezuela now has 6.83 million mobile lines, which is more than double the number of fixed lines in service. Telcel has 56 percent of the market, with 3.82 million subscribers. Next is CANTV’s Movilnet, with 2.17 million subscribers (32 percent), followed by much smaller Digitel, with 566,000 (8 percent); Infonet, with 151,000 (2.2 percent); and Digicel, with 126,000 (1.8 percent).

"Within our Movilnet subsidiary, 90 percent of our customers are prepaid,” says Roosen. “Average revenue per subscriber [ARPS] is between US$23 and US$25 a month, compared to US$90 a month for post-paid customers. It’s true that ARPS is declining every year as we penetrate further into lower-income levels, but this is a more efficient use of our network.”

Movilnet recently announced it would invest US$200 million to migrate to 2.5G, a new industry standard that requires expensive handsets but allows subscribers to do more with their cellphones. It is a move that clearly targets high-end business and residential customers.

Carlos Rodríguez, a senior telecom analyst at Pyramid Research, says that’s a questionable strategy right now. “In principle, Movilnet should be able to take subscribers away from Telcel, especially high-end subscribers with higher ARPS,” says Rodríguez. “But it’s unclear that people are going to go out and buy new handsets, given the economic crisis.”

The same is true of other value-added services, like Internet access.

CANTV was expecting to increase ARPS by increasing their broadband penetration,” says analyst Grant Smith of The Yankee Group. “Usually, broadband options like DSL [high-speed Internet service] or cable are perfect for high-income residential customers and small- or medium-sized enterprises, and right now, neither of these segments are spending money. Business users are disconnecting because companies are going under, and those that are not are simply relocating to Miami or elsewhere in Latin America.”

Yet Smith praises CANTV for its perseverance in the face of economic difficulties. “To the extent that they’re getting very focused on the ADSL rollout they started last November, making that successful while expanding corporate services, I think they’re doing a very good job, particularly in light of the downsizing they’ve gone through and the distractions of ownership,” he says.

Those “distractions” refer to an unsolicited attempt last September by AES Corp. to buy up to 43 percent of CANTV’s stock – in addition to the 7 percent it already owned – for a price of US$24 per ADS. “AES thought CANTV would roll over and play dead, but it didn’t,” says Bottome, who estimates the Virginia-based utility spent US$25 million in the attempt. “CANTV is doing very well, and AES would probably have made quite a killing if it had been able to take over.”

One reason: CANTV had assembled a huge war chest of cash – some US$1.1 billion – which would have belonged to AES if its attempt had succeeded. (Since then, much of that cash has been distributed in the form of dividends for shareholders.) AES was also considering spinning off CANTV’s mobile division.

But Roosen was opposed to the hostile takeover bid for a number of reasons, and led his board of directors in rejecting it at a meeting in early October (see sidebar pg. 29).

When AES departed VenWorld, they felt they could basically capture back the company as an extension of their activities in Venezuela,” explains the CANTV boss. “It is not so clear at this juncture, but the events of Sept. 11 basically changed the horizon so dramatically that what they had in mind back in June or July was altered.

"Their offer would have given AES 51 percent of the company,” Roosen continues. “But it was highly conditional, the financing was not sufficiently clear in their filing papers, and they didn’t have any experience in running a telephone operation. They also came forth with the idea of spinning off Movilnet, which we felt was inappropriate.”

Analyst Smith says that wouldn’t have been such a bad idea.

"We think they missed an opportunity,” he told LatinCEO. “Investors would have been better off, and more important than anything, it would have introduced a new competitor to the market because they would have sold Movilnet to Telefónica, the only real party which had an interest in it.”

AES officials in Venezuela couldn’t be reached for comment, but Roosen says he doesn’t think another hostile takeover attempt is likely.

"Now we have Verizon and Telefónica entrenched with the management, and they’re happy sharehold ers. So, whoever wants to come in would have to take them into consideration,” he says, adding that “we have put forth a new dividend guideline for the investment community that indicates we are prepared to pay 50 percent of our free cash flow as dividends in cash for 2002,” something that will both enhance stock value and leave the company less attractive to hostile takeovers.

Smith suggests that CANTV should now focus on the different business units it has not typically dominated, like cellular telephony and corporate data. “Basic phone service is a cash cow, and the first area of attack for new entrants is corporate accounts. A year and two months ago, competitors couldn’t offer those services in Venezuela. Now, they can,” he says. “As the dominant player, CANTV can only lose market share. By splitting up and being intensely focused on each line of business, they can defend their territory. Their model should be Telmex.”

One area CANTV had considered moving into was cable TV, especially for its broadband potential. But Conatel’s rules have put off any acquisitions, and Roosen doesn’t like the idea of starting from scratch. “We cannot buy an existing cable company for one more year, but we could invest in a new cable endeavor if we wanted,” he says. “But we will not, because deployment of ADSL technology for broadband is a better product for our company.”

Meanwhile, Roosen is concerned about morale at CANTV, and says he must constantly reassure workers that their jobs are secure. “As the overall perception of the country has deteriorated, so has our ability to convince shareholders of the quality of our work,” he says. “By the same token, there is a lot of apprehension and nervousness among the workforce, which sees the critical situation of companies that have been less successful than ours.”

Yet Roosen – a former president of the Caracas Chamber of Commerce – remains optimistic about Venezuela’s telecom industry, despite the current economic and political mess.

Besides CANTV, BellSouth has made a commitment to pursue investments in telecom. And Telecom Italia, with its purchase of Digitel, is also entering the market,” he says. “In general, the performance of the telecom sector has been better than the oil sector. But we feel there’s a lot more potential. We think that as a percentage of GDP, the telecom sector could expand beyond the current 4.4 percent.”

When asked what personal qualities have helped him get where he is today, CANTV’s chief executive doesn’t hesitate: “The ability to select good people and build a consensus management as a way of doing business in Venezuela, which is appropriate for an operation of this size in our country,” he says. “It’s important to get people to agree to go in the same direction. One of the unfortunate characteristics of our culture is that it’s more power-oriented than results-oriented. So you have to keep that in mind at all times when leading a corporation.”

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