Vicente Llatas is executive vice president of CanTV, Venezuela’s biggest telecoms provider. After working for 34 years at PDVSA, the state petroleum group, Llatas joined CanTV for what he thought would be a one-or two-year stint. That was four years ago. He’s had his share of challenges since taking up the job, including seeing off a hostile takeover bid last November from AES, the US energy group that in 2000 had pulled off Latin America’s first successful hostile takeover, buying Electricidad de Caracas, Venezuela’s biggest power utility, for $1.7 billion. But perhaps the toughest challenge of all has been to keep the company in good health in what has often been a distinctly unfriendly business environment. He spoke to Latin Finance about the recent past and the outlook for CanTV.
LatinFinance: How has the hostile bid from AES affected CanTV?
Vicente Llatas: We came out of it unharmed. But it did make us rethink our dividend policy. We’ve always been rich in cash, but our previous dividend policy was not entirely predictable. After the acquisition offer, analysts recommended to us that we should have a totally predictable policy that spells out cash flow available for dividends. It makes us more like a big utility, with a clear dividend policy, rather than some dotcom where you can never tell what’s next. And we remain a very steady company in our core businesses.
LF: How much competition are you facing in those businesses?
VL: A big issue that affects our response to competition is the fact that in local telephony and other services related to traditional telephony, we are heavily regulated. Any changes in tariffs, monthly fees, connection charges, all have to be approved by the regulator [Conatel, the government telecoms agency]. That’s not the case in the cellular market – we and our competitors can change our rates according to what the market can sustain. You simply have to inform the regulator. The same is true of data services.
But in the fixed market, the regulator says to us, ‘CanTV is so dominant, you are the ones we are going to regulate.’ Telcel has 200,000 fixed wireless lines, and it’s not regulated.
We have a very good relationship with the regulator, but there are problems. We discuss rates in January and May each year. This year we asked for a 13% rate increase in January and we still haven’t had a response. There are a lot of reasons – political problems and conflicting factors within the regulator. They want to increase penetration, so they want tariffs to be low, but they also want us to invest to expand the system. But if tariffs are low, our return on investment will be negative. Fixed line penetration is about 12% of the population, which is very low, even if you consider that we have something like 35% to 40% penetration of homes.
Even though penetration is low we have only one competitor for our fixed line services. There may be more in the future but because of the political situation the number of competitors willing to invest is not so great. Another reason is the very high penetration of cellular phones, so in fact the voice market is very well served. There are about 7 million cellular lines in Venezuela and about 2.8 million fixed wire and wireless lines.
LF: There’s a lot of advertising visible in Caracas for cellular services. How fierce is competition in that market?
VL: Telcel has a service called “`Habla Pegado” which allows you to call any other Telcel cellular phone for an unlimited time at a flat rate. I think it’s the only market in the world with that kind of service. Telcel has more than three million customers, and they pay zero cost for those calls. I have an 18-year old son; it was hard trying to convince him not to change to Telcel. On our service, I know how much he talks, I can control him. Now he has Telcel he can talk all the time. I know it is eroding some of our share. And it hits local long-distance too, which they also offer at zero cost.
LF: Won’t you have to offer the same service, too?
VL: We don’t plan to. What we do is offer packages of say 500 minutes. It’s very cheap indeed but there will always be a limit. When you open up the network completely, instead of talking for 10 minutes people talk for 10 hours. Then the network starts to suffer, and you have to invest a lot in an area where profits are limited. My guess is that Telcel will start restricting their services as soon as their networks reach their limit.
LF: What impact has the devaluation of the bolivar had on your income?
VL: It’s affected us because we can’t change our tariffs for fixed line services without permission from the regulator. And we can’t ask for an increase to compensate for the exchange rate and inflation until our previous request has been dealt with. If there’s a delay, the devaluation will have a big impact, because our capital expenditure is in dollars. We will get fewer lines per dollar, and less income. If we don’t get approval to increase our tariffs, our income could suffer by $40 million to $50 million dollars this year. But we are confident we will be allowed to increase tariffs.
On the cellular side we can adjust to take account of inflation. It’s a question of how much the market will bear, and we’re still looking at that. But almost the whole economy will pass the devaluation through to consumers in the form of inflation. Some items such as electrical goods move very quickly, some basic areas like foods have a slower pass-through. But most of the devaluation will work its way through over the next six to 12 months.
LF: How much do you plan to invest this year, and where will you raise the money?
VL: The amount we’re investing has been cut back because of the uncertain political situation. We planned to spend $550 million last year, mostly on the wireline network, but reduced that to $500 million. This year we had $500 million to $550 million planned or available, but now we plan to spend just $400 million, to keep plenty of free cash flow available. About half will go on the wireline network and about half on the cellular side. Our cellular service uses the TDMA system, but this year we started implementing a CDMA overlay called CDMA 2000 1X-RTT, which is 2.5, nearly 3G [third generation, advanced technology services]. It should be complete by July.
CanTV has a very strong balance sheet, which has been true for the past four or five years. Worldwide we’re one of the best in the industry in that respect, we have a debt-to-equity ratio of just 10%. Most of the debt is in dollars. It’s four or five years now since we entered the capital markets, because of the political situation. So we keep a lot of cash. When dividend payments were discretionary, we kept cash very high to put the company in a strong financial position. Before the takeover bid, we had $1 billion in cash and short term investments. That fell to $356 million at the end of 2001 and it fell again to $247 million on March 31 this year, mostly because we paid off a $100 million Yankee bond out of available cash.
LF: How else has your business been affected by the political situation?
VL: On the one hand, people are less willing to take the risk of entering the market, so we have less competition. I don’t want to call that positive, we prefer to have strong competition to make sure we wake up every morning, but we do have an easier life as a result.
The more negative side is that our medium- and large-sized business customers are very reluctant to make investments in data services. Nowadays customers want to see an immediate return on their investments. If it’s going to be some time before they see a return, in this climate they prefer to wait to see what happens. If our sales force is trying to sell a $100,000 system that gives the customer quicker download times on a fast data link, right now the customer says, ‘That’s OK, I’ll download more slowly for a while longer.’
The investment community really wants to see the economy on the right footing, and it knows that as soon as that happens, the telecoms sector will see a substantial increase in activity. In April [during the coup] our share price moved up 30% in one day. w