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Static over Puerto Rico Telephone Company privatization
The Miami Herald / June 7, 1997

By Larry Luxner

Within the next 30 days, Puerto Rico's Government Development Bank (GDB) expects to wrap up the sale of state-owned Puerto Rico Telephone Co., in what would rank as the largest telephone privatization in U.S. history.

The two leading contenders for PRTC are Connecticut-based GTE Corp. and Spain's Telefonica Internacional S.A., though most of the privatization details are shrouded in secrecy -- with only one government official, GDB President Marcos Rodriguez-Ema, authorized to talk to the press.

In an interview Wednesday, Rodriguez-Ema -- who oversees all privatizations for Puerto Rico Gov. Pedro Rossello -- refused to specify which companies he's still negotiating with, how much PRTC is worth or even what percentage of the telco will be sold.

"The parties we've been talking to are well-known, respectable operators," he told The Herald. "That was our aim, to get well-known operators involved in this whole process and be able to bring quality and vision to telecommunications in Puerto Rico."

PRTC, with 1.6 million lines in service, is currently the 12th largest telco in the United States. It's also highly profitable; in 1996, the company had net income of $107 million on operating revenues of $1.1 billion. Since Puerto Rico is a U.S. Commonwealth, is the only market under U.S. jurisdiction in which the local exchange carrier, PRTC, is owned by the government. Yet the sale faces bitter opposition from unions, who have loudly vowed "to fight the privatization to the death."

For people who track such things carefully, all this may seem like deja vu.

In 1990, then-Gov. Rafael Hernandez Colon attempted to sell PRTC to Atlanta-based BellSouth International, but the deal was stymied by labor unions opposed to privatization, and by a law that required PRTC to be sold for at least $3 billion and prohibited the buyer from firing any employees for 18 months. Two years later, the government did manage to spin off a majority stake in TLD (a long-distance subsidiary) to Telefonica for $142 million, but gave up all talk about selling the phone company itself.

So why should the government succeed now?

First of all, say industry analysts, it's a different government in power. Gov. Rossello is a staunch supporter of not only statehood for Puerto Rico but also privatization of all government-run companies. Secondly, passage of the 1996 Telecommunications Act has forced PRTC to open up its local market to competition -- something it's never had to deal with. Centennial Landline has already built a fiberoptic ring around metropolitan San Juan -- enabling it to offer local service in competition with PRTC. Other likely competitors to PRTC include AT&T Wireless Services, TLD, Sprint and MCI.

All of this makes PRTC in its present form uncompetitive, says Rodriguez-Ema, and is why the government should get out of the business now.

"Once you have the private sector engaged, there is no doubt in my mind the consumer will benefit," he said. "In Puerto Rico we are seeling the benefits of competition in cellular, long-distance, beepers and e-mail -- everything but normal phone service."

Rodriguez-Ema says the 1990 privatization attempt failed because the legislation authorizing it was "extremely convoluted" and because Puerto Rico's leaders "lacked the political will" to sell the company.

"Times have changed," said the bank president. "I think people sincerely realize, despite the union's objections, that the time is right to sell the phone company, that the effects of competition and telecom legislation really mandate a sale as quickly as possible."

As for labor opposition, Rodriguez-Ema says the unions "have a 60s mentality that government companies are better than private companies, which is dead wrong." He adds that while none of PRTC's 7,900 employees would be fired outright in the event of a sale, "over time, we will see voluntary layoffs, shifting of employees from subsidiaries to other companies, and early retirement . That's probably the right way to accomplish it."

GTE spokesman James Savage says acquisition of PRTC would be a natural fit for his company, which already controls two Latin American phone monopolies: 100% of Codetel in the Dominican Republic (with 750,000 lines), and 40% of Venezuela's CANTV (with over 3 million lines).

"Puerto Rico is a nice middle ground between our operations in the Dominican Republic and Venezuela, and our domestic U.S. operations, in that it has characteristics of both," he said. "It's a nice mix of areas, and we fell we have certain advantages we could bring to the table."

Meanwhile, the Yankee Group, a Boston-based consulting firm that tracks the telecom industry, predicts the sale should go through.

"Certainly the advent of competition in Puerto Rico will affect any current assessment of PRTC's value. However, PRTC can now boast certain assets (such as its 270,000 cellular subscribers) that it did not possess in 1990," says a Yankee Group analyst. "The net effect of this remains to be seen, but we believe PRTC should still command a sum comparable to what it might have achieved in 1990."

The Yankee Group adds that "as the Rossello administration favors statehood for Puerto Rico, we believe it will ultimately choose to sell PRTC to a U.S. operator" -- thereby strengthening the chances that GTE will win the bid.

Neither GTE's Savage nor the GDB's Rodriguez-Ema could say how much of PRTC will be sold, though it's clear the government could likely end up owning a substantial part of the company.

"We have to acknowledge reality in the telecom market. This is not the right time for any company to buy 100% of anything," he said. "If you look at the telephone business, you can achieve substantial control without having to buy 100% of the stocks. Even if the government retains a portion of the company, it will be with the clear intention of selling it in an IPO at a future date, either directly or through the government retirement system. It's all part of the negotiations."

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