Telgua

Luca’s Team

Introduction Transaction Company Statistics Latin America Telecom Market DCF Analysis Comparable Cost of Capital Discussion Conclusion

Overview

Country: Guatemala Case: Privatization of Telecom Players:

– Guatemalan Government—seller– LUCA—local investors– TelMex—contracted operator– Investment Banks:

• J.P. Morgan—seller• Salomon Smith Barney—buyer

Introduction

Recently privatized—10/1/98 Unlike other Telecom privatization in Latin

America:– Auction—one sole bidder– No involvement from International Telecom

operators or foreign investors

– Highly leveraged acquisition

– No initial protection against competition

Relevance

Political Uncertainty-Expropriation

Income Inequality Closed Economy (Agrarian) Telecom open for competition

Risks

Government

Workers

LUCA

TELGUA

Telgua Shares

95%

5%

$100 MM

Government Liability

$100 MM

LUCA Exchange Note

$700 MM (i)

The Transaction

LUCA's Payment

100

5

500

114

96

Cash

5% Telgua Note(Workers)

GovernmentNotes

New Hamilton

Old Telgua'sNet Debt

Transaction, cont.

Telgua in 1998

Biggest firm in C.A. - real options. Big restructuring in the past 2 years

– 22% avg. annual lines growth– CAPEX > U$200M

So a good part of the restructuring costs have been spent.

Potential growth based on:» High levels of unmet demand» Improved macroeconomic environment» More efficient operators

0

5

10

15

20

25

1991 1992 1993 1994 1995 1996 1997 1998

Line

s pe

r 100

ARG

CHI

VEN

BRA

MEX

PER

GUA

Regional Comparables

FV / LIS

CHI ARG ARG MEX

VEN

PER

PER

CHI

BRA

GUA0

2,000

4,000

6,000

8,000

10,000

USD

Competition (Brazil, Ecuador, Puerto Rico) Consolidation of the US market Legal Uncertainty Emerging Markets crisis

Past Paid Values

DCF

Main Sensitivity Variables:– # lines– revenues per line– expenses per line

We run Crystal Ball on this variables– Found the mean and standard deviation

Revenues: # of LinesLowest Average Highest Standard Dev. n

Salomon proyections 7% 11% 18% 4% 9Telefonica Argentina 3% 11% 17% 5% 7Telefonica Peru 13% 23% 38% 12% 4Telmex -2% 4% 10% 6% 4

Telgua's Basic Service Main Assumptions

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Teledencity

Revenues: $$Lowest Average Highest Standard Dev. n

Salomon proyections -8% -1% 4% 4% 9Telefonica Argentina -11% -5% 2% 6% 5Telecom Argentina -11% -3% 10% 8% 5Telefonica Peru -34% -13% 2% 16% 4Telmex -136% -37% 17% 68% 4

Telgua's Main Assumptions

$-

$100

$200

$300

$400

$500

$600

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009$-

$100,000$200,000

$300,000

$400,000

$500,000$600,000

$700,000

$800,000$900,000

$1,000,000

Rev. Per line

Revenues

Expenses

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Number of employees

Time

Number of Employees

TOTAL CAPEX

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Dolla

rds

(000

)

Efficiency

60

115

159

204226

250277

301328

354374 385

397

0

50

100

150

200

250

300

350

400

Dol

lard

s

Lines per employee

Time

Lines per employee

Expenses

Average Tenure Advertising Allowance doubtful

accounts Interest rate Total Debt/EBITDA

15 years 4% sales 5% sales,

then 3% 10-12% 2 - 1.8 - 1.4

Leverage

858

863

881

926

1021

1132

1264

1427

1614

1822

2049

2288

257

304

399

452

509

481

546

488

543

593

527

550

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Total Debt

Firm Value

P / E (E) 1999

17.313.5

8.811.6 10.0

12.37.8

05

10

152025

TELGUA CTC VNT TEO TAR TMX TDP

Mul

tiple

FIRM VALUE / EBITDA

7.5 7.4

2.44.4 4.1

5.74.6

0

5

10

TELGUA CTC VNT TEO TAR TMX TDP

EBITDA CAGR 5 YEARS (E)

5.2%7.6%

6.1% 6.7% 6.9%

11.1%

7.4%

0.0%

5.0%

10.0%

15.0%

TELGUA CTC VNT TEO TAR TMX TDP

FIRM VALUE / LIS

$1,620

$2,846

$869

$2,348$2,032

$2,555 $2,465

$0

$1,000

$2,000

$3,000

$4,000

TELGUA CTC VNT TEO TAR TMX TDP

Comparables

INSTALATION CHARGE

0250500750

1,000

GUA MEX BRA ARG CHI PER VEN

US$

MONTHLY CHARGE

05

101520

GUA MEX BRA ARG CHI PER VEN

US$

RELATIVE PRICES: LD INT / LOCAL

050

100150200250

GUA MEX BRA ARG CHI PER VEN

Mul

tiple

RELATIVE PRICES: LD INT / LD DOM

01020304050

GUA MEX BRA ARG CHI PER VEN

Mul

tiple

Tariffs

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

TEO TAR CTC TMX TDP VNT

1998Average 5 Yrs

Correlation with Markets

Cost of K

Three Models– Bain & Company– J.P. Morgan– IICCRC

BetaADRs US marketTelmex-Mexico 0.93Telecom-Argentina 1.16Telephones de Venezuela 1.06Telebras-Brazil 2.06 Telecom-Chile 1.17 Telefonica del Peru 0.90

Average 1.21

Bain & CompanyCost of K

Average Beta 1.21

Risk Free Rate 5.30

Market Premium 7.90

Equity Premium 14.38

Country Risk 2.70

Cost of Equity 17.80

Bain & CompanyCost of K, cont.

Country Risk: borrowing rate of Guatemalan companies vs.. comparable US companies.

Telgua debt rate in $: 10.50%

US Telecom debt rate in $: 7.80%Country risk and small privatecompany risk 2.70% {

1.4% Small private company risk

1.3% Country Risk*

*Citibank’s premium to loans in Guatemala to account for sovereign country risk.

Bain & Company

J.P. Morgan

Cost of equity = 16.27% 30-year T-Bond = 6.27%(-) liquidity premium = 1.25%Risk free rate = 5.02%

Market premium = 5.00%Beta = 1.25Country risk = 5.00%

Cost of equity = 16.27%

Cost of debt (after-tax) = 7.50% Cost of debt = 10.00%Tax shield = 2.50%After tax cost of debt = 7.50%

Target capital structure Debt/total = 30%

WACC = 13.6%

Inputs:

Risk free rate 5.22%Risk premium 7.95%Cost of Equity (ICCRC) 36.70%Tax rate 25.00%

Debt to Equity Ratio 27.0% 40.0% 60.0%Cost of Debt 10.5% 11.5% 12.5%WACC 28.92% 25.47% 20.31%

ICCRCCost of KIICCR 26.6 (Sept. 98)

J.P. Morgan $750-$950 MM

Salomon Smith Barney $700 MM

Emerging Markets Team $563 MM

Different Perspectives

Open for Discussion

Premium paid by Luca $170-$220 MM Discount Rate Inconsistency Real Options:

– Muscle Power, largest company in Central America

– Acquire Telecom in Honduras, Nicaragua, El Salvador

– IPO, lead the development of Capital Markets in Guatemala

Conclusions

Luca’s Repayment of $500 MM Debt– TelMex exercises option– Dividend payments– Additional leverage– IPO

Conclusions, cont.