VERIZON AGREES TO SELL CANTV SHARES TO THE BRV

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E.O. 12958: N/A
TAGS: ECON ECPS ENRG PGOV VE
SUBJECT: VERIZON AGREES TO SELL CANTV SHARES TO THE BRV

REF: A. CARACAS 59

B. CARACAS 84

C. CARACAS 302


1. (SBU) Four days after AES agreed to sell the BRV its
interest in EDC (Reftel A),the BRV and Verizon announced
February 12 that they had struck a deal for the sale of
Verizon's 28.51 percent controlling interest in CANTV.
Verizon will be paid USD 572 million for its shares and has
indicated that it is pleased with the deal. The price is
less than Mexican telecom investor Carlos Slim's April 2006
tender offer, but higher than the current market value for
these CANTV shares. At the signing ceremony, Vice President
Jorge Rodriguez underscored that Venezuela had recovered its
"sovereignty," while Telecommunications Minister Jesse Chacon
announced the birth of a new CANTV that would expand its
service to rural southern Venezuela. Despite the
revolutionary rhetoric, the BRV again seemed eager to prove
to the international community, especially the United States
(both to investors and the USG),that it respects
international standards of prompt, adequate, and effective
compensation. End Summary.

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The Deal
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2. (SBU) The BRV and Verizon signed a Memorandum of
Understanding during a ceremony the evening of February 12,
only four days after AES agreed to sell the BRV its 82
percent interest in EDC for USD 739 million. Verizon Vice
President for Development, John Diercksen, signed for Verizon
and Vice President Jorge Rodriguez and Minister of
Telecommunications Jesse Chacon signed for the BRV. The BRV
will purchase Verizon's 28.51 percent controlling stake in
CANTV for USD 572 million, USD 17.85 per ADR. This price is
below that of Mexican telecom investor Carlos Slim's USD 677
million offer to Verizon for its stake in CANTV in April
2006, but higher than CANTV's current per share market value.
At close of business on February 12, CANTV's ADR price was
USD 16.08. We have also heard rumors that CANTV will soon
announce a USD 3 dividend per ADR to make up the price
difference with Slim's 2006 tender offer. In a statement
lasting less than a minute, a somber Diercksen said Verizon
was pleased with the deal and appreciated the BRV's
willingness to negotiate quickly. During early trading on
February 13, CANTV's ADR price was climbing towards the
tender price. At 11 am New York time, the price had reached
USD 17.30, up 7.59 percent from the price at close of
business on February 12.


3. (SBU) The BRV will own 35.1 percent of CANTV after
acquiring Verizon's shares. (Note: The BRV currently owns
6.6 percent of CANTV through BANDES. End Note.) Spanish
telecom giant Telefonica owns 6.9 percent of CANTV. Over
half of CANTV's shares, 51.4 percent, are traded on the
Caracas Stock Exchange and as ADRs on the New York Stock
Exchange. In order to obtain the funds to acquire a majority
stake in the company, the BRV will launch two tender offers,
one in the local market and one in the United States. Legal
counsel for Brandes Investment, a U.S. investment company
that owns 15 percent of CANTV through the ADR market,
previously told EconOff that the company had filed an ICSID
arbitration claim against the BRV two weeks ago. While this
appears to be a negotiation strategy, it shows that more
posturing and negotiations can be expected in the BRV's
continued acquisition of CANTV shares.

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Telecommunications Minister Chacon: The New CANTV
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4. (SBU) At the signing ceremony, Jesse Chacon proclaimed
"today begins the birth of a new CANTV. It will be truly
national within the model of social management moving forward
to socialism in the 21st century." He said CANTV would
universalize internet access, expand its service, and invest
in infrastructure development in rural southern Venezuela,
investment that the private sector had considered
unprofitable. He continued in the vein that CANTV would

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expand its coverage to all Venezuelans, in every corner of
the country, and announced that a new rate structure would
take effect, based on "justice." Commenting on the
nationalization process, Chacon said that signing ceremony
knocked down the series of domestic and international lies
that intended to stigmatize the way that the Venezuelan state
proceeded to nationalize these strategic companies for
national sovereignty.

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Vice President Rodriguez: Recovering National Sovereignty
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5. (SBU) The drum beat of recovering national sovereignty
was the focus of Vice President Rodriguez' comments. "When
we have CANTV in the hands of the state, Venezuelans will
feel the recovery of sovereignty, they will feel it in better
service, more solidarity, and a greater presence of the state
in its telecommunications policy in every corner of the
country," said Rodriguez. He also offered his take on
historical privatizations in Latin America, stating that
between 1985 and 2000, strategic sectors were nationalized
for USD 80 billion, promising social development and
delivering misery and poverty. CANTV, according to
Rodriguez, was a monopoly for nine years, with the most
expensive rates in the world, leaving 40 percent of urban
residents and 75 percent of the rural population without
telecommunications access. He also accused the CANTV Board
of Directors of complicity in the 2002 coup against Chavez
and other attempts to destabilize the government. (Note:
CANTV President Gustavo Roosen tendered his resignation on
February 13.) Despite the Bolivarian rhetoric, Rodriguez
also emphasized the transparency of the transaction, as he
did at the EDC ceremony. "We are recovering this company at
a price that we discussed transparently with Verizon, and
appreciate the opportunity to resolve this point rapidly,
transparently, and clearly," said the Vice President.

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The Impact of the Deals on AES and Verizon
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6. (SBU) AES' sale of its 82 percent stake in EDC has a
greater impact on its overall business operations and value
than Verizon's sale of 28.5 percent of CANTV. EDC represents
a USD 739 million investment for a company whose market
capitalization is roughly USD 15 billion. In contrast,
Verizon's investment in CANTV is a minor asset for a company
whose capitalization is over USD 110 billion. AES
involvement in the Venezuelan market and control over EDC was
deeper and more comprehensive than Verizon's relationship
with CANTV. AES controlled over 80 percent of EDC and was
actively engaged in management of the company. AES insisted
that minority shareholders be treated fairly to preserve its
reputation if it wanted to return to Venezuela. Despite
having a controlling interest, Verizon never sought to manage
CANTV's operations. Moreover, Verizon was already trying to
sell CANTV and its motivation was to maximize value, whether
the purchaser were Carlos Slim or the BRV.

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Comment
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7. (SBU) While the EDC sale was simply a business
transaction for the BRV, CANTV has always meant more. Chavez
firmly believes that telecommunications is a strategic sector
and, along with key BRV ministers, believes in principle that
CANTV should never have been privatized (Reftel B).
Statements made by Rodriguez and Chacon at the CANTV signing
were far more acerbic and infused with revolutionary rhetoric
than the remarks on February 8 at the EDC ceremony. Despite
the revolutionary rhetoric in Rodriguez' comments and
denunciations of capitalism, the Vice President repeatedly
highlighted the transparency of the negotiations with
Verizon, showing that the BRV remains concerned about
international perceptions of its nationalization campaign.
End Comment.

BROWNFIELD