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Chile: Newly Privatized Smaller Firms to Seek U.S. Listings
The Wall Street Journal / September 20, 1996

By Larry Luxner

SANTIAGO -- Foreigners seeking to cash in on Chile's economic boom don't have to travel very far these days. Twenty-one Chilean companies now issue American Depositary Receipts (ADRs), which are securities that represent shares in an overseas company and are traded on the New York Stock Exchange or Nasdaq like any other U.S. stocks.

Observers say ADRs have brought a number of positive developments to the Santiago stock exchange, including improved liquidity; a boost in prices and volumes traded; opening of new financing sources and a drop in financing costs; more transparency; an increase in available information, an expanded investor base, and international prestige.

In July 1990, Compañía de Teléfonos de Chile (now Compañía de Telecomunicaciones de Chile) became the first company in South America to issue ADRs.

"The investor base has increased since then, and what's more interesting is that the price has increased too," says Isabel Margarita Bravo, CTC's head of investor relations, explaining that an ADR represents 17 series-A common shares of CTC. "When we were first listed on the New York Stock Exchange, our ADRs were placed at $15 1/8. Now it's trading at $98 a share, a six-fold increase."

Foreigners holding ADRs now represent 16.8% of CTC's ownership -- the third largest investor group after Telefónica Internacional de España (43.6%) and the Chilean pension fund AFP (24.8%). The amount of CTC stock traded in New York through ADRs, says Bravo, is worth 2.7 times as much as what's traded locally. In the last seven months alone, CTC's ADR price has jumped by 16.3%.

"ADRs have helped transform CTC from just a long-distance telephone provider to a telecommunications company with a presence in all business sectors," she said.

Indeed, CTC plans to invest $605 million this year in expanding phone lines, developing its cellular and PCS business, boosting market share in the cable TV business and completing a fiberoptic network stretching from Arica to Puerto Montt. According to local press reports, it'll also spend $24.3 million to develop rural communications throughout Chile, and another $200 million on reinforcing its position in the Latin telecom sector. The company is currently looking at projects in Brazil, Colombia, Mexico, Nicaragua, Panama and Paraguay. Among the most promising opportunities: privatization of Brazil's CRT, a stake in the Colombian long-distance market and a Mexican venture with Bancomer and GTE Corp.

Although ADRs have now been associated with Chile for six years, their popularity peaked in 1994, when 11 Chilean companies entered the ADR market. In 1995, three more did so, and this year, one more signed up.

Duff & Phelps Credit Rating Co. recently assigned an initial rating of "BBB" to the senior unsecured foreign-currency obligations of one ADR issuer, Sociedad Química y Minera de Chile S.A. A natural nitrate producer and the world's largest iodine producer, Soquimich has annual sales of $314 million and cash and marketable securities of $109 million, with debt totaling $151 million. In December, another equity offering resulted in proceeds of around $150 million; total 1995-97 investments could top $400 million.

"Soquimich has made steady progress in reducing costs by improving manufacturing efficiency and reducing headcount," said DCR. "Recent high prices and increased demand in the fertilizer segment has also bostered performance."

Another ADR issuer, Banco de A. Edwards -- which focuses on high-income individuals and medium-sized companies -- reported second-quarter 1996 income of of $11.8 million (or 34¢ per ADR), up 36% from second-quarter 1995 earnings. The bank credits "higher operating revenues, mainly attributable to an increase in the loan portfolio and capital enhancement; improving relations between operating revenues and operating expenses, and lower taxes, as a consequence of tax loss carry-forwards originated by payjent in full of the Central Bank subordinated debt."

One of the latest companies to join the ADR club is Santa Isabel S.A., Chile's leading supermarket chain. It recently completed a public offering of 3.7 million ADRs priced at $26 each, with each ADR representing 15 common shares. The offering, led by Citicorp Securities Inc., was the first fully secondary offering in Chile, and the second fully secondary offering in Latin America.

In addition to its Chilean operations, the Valparaiso-based company operates the second-largest supermarket chain in Peru, as well as the largest chain in Paraguay. According to Citibank, "Santa Isabel's business has grown substantially in the past five years in Chile, especially in regions outside Santiago, and since 1993 in Lima, resulting in a base of strategically located stores and strong name recognition."

All shares in the offering were sold by Eduardo Elberg, who'll retain a 40% stake in the chain; he'll also stay on as CEO and chairman of the board.

One area looking increasingly to ADRs is the mining sector. Despite the importance of copper, gold and silver in the Chilean economy, very few mining compainies are listed on the Santiago stock exchange, and only two or three mining firms in the rest of Latin America issue ADRs. That may change, following a 1994 law that allows state-owned Codelco to pursue joint copper ventures with private companies. Some 24 smaller firms -- most of them recently privatized by the government -- now want to raise capital, and many of them may soon issue ADRs so that their shares can be traded not only in New York but also on the Vancouver Stock Exchange, where dozens of Canadian mining companies are also listed.

Yet despite their early popularity among investors, ADRs may be starting to lose their edge.

"For a time, it was the principal way of growing companies and expanding their businesses," says Lynn Gray, investor relations manager for Santa Isabel. "During 1996, however, we've seen more companies looking at the debt market than the equity market, because now there are interesting propositions on that side. There are now different market conditions, and Chilean companies are opting for alternatives that were unavailable to them only a couple of years ago."

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