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Tele Norte Leste Participaç

Tele Norte Leste Participações S.A.

Rua Humberto de Campos, 425
Rio de Janeiro, 22430-190
Brazil
Telephone: (55) (21) 3131-1314
Toll Free: 0800-31-0800
Fax: (55) (21) 3131-1155
Web site: http://www.telemar.com.br

Public Company
Incorporated:
1998
Employees: 47,107
Sales: BRL 16.75 billion ($6.86 billion) (2005)
Stock Exchanges: São Paulo
Ticker Symbol: TNLP3, TNLP4; TNE
NAIC: 517110 Wired Telecommunications Carrier; 517212 Cellular and Other Wireless Telecommunications; 518111 Internet Service Providers; 518112 Web Search Portals; 551112 Offices of Other Holding Companies

Tele Norte Leste Participações S.A. (TNL) is the holding company for Telemar Norte Leste S.A. (Telemar), the largest provider of fixed-line telecommunication services in South America, based on the total number of lines in service. These services are marketed under the Telemar brand name. Telemar has the concession to provide fixed-line telecommunications in 16 states of northern and northeastern Brazil. These 16 of the nation's 27 states, which include Rio de Janeiroheadquarters for Telemarcover 64 percent of the national territory and take in more than half the population. Besides fixed-line local and long-distance telephone service, TNL also provides wireless services in Brazil through Oi, broadband Internet access through Velox, data transmission through Pegasus, and a variety of value-added services for businesses, including voice data and videoconferencing.

BRAZILIAN TELEPHONY BEFORE 1998

Brazil's experience with the telephone dates from 1876, when Emperor Pedro II visited the Centennial Exhibition in Philadelphia and tried out Alexander Graham Bell's invention. The emperor had a telephone line installed in his palace later that year. By 1940 there were more than 800 telephone companies in Brazil, but rural areas were poorly served. The number of companies grew to over 1,000 by the 1960s, although Canadabased Companhia Telefônica Brasileira was dominant. In 1962 the government created the Brazilian Telecommunications Enterprise (Embratel), which took over the main line and ultimately became responsible for long-distance and international telephone transmission. In 1968 the ministry of communications assumed control of Companhia Telefônica Brasileira, and a constitutional change reserved telecommunications service to the state. Embratel was taken over in 1972 by Telecommunicações Brasileiras S.A. (Telebrás), 80-percent-owned by the Brazilian government.

Telebrás was financed by an unusual system that required potential subscribers to buy shares of stock in exchange for a phone line. By 1992, this entailed an investment of $4,000. The scheme eventually reduced the government's stake in Telebrás to 52 percent. It also made a private line unaffordable for poor people while acting as a cash cow for the government, which dipped into the funds for other purposes and left Telebrás short of money needed to finance new technology and infrastructure. Nevertheless, Brazil successfully launched communications satellites in 198586, enabling telecommunications service to reach all of the enormous nation, including the Amazon basin. Cellular service was available by the mid-1990s. Yet 15 million people were on waiting lists for fixed-line service and another 5 million for cellular phones. Half of Brazil's businesses had no telephone service at all.

TELEMAR'S INCEPTION AND PROGRESS: 19982004

Privatization took place in 1998, when Telebrás established 12 new holding companies: eight for mobile telephone operations, a ninth for Embratel, and the other three as fixed-line operators. One of the latter was Tele Norte Leste (TLN), which was privatized and purchased by Consortium Telemar, a six-company union of Brazilian investors headed by the construction group Construtora Andrade Gutierrez S.A. The consortium, which successfully bid BRL 3.43 billion ($2.94 billion) for its concession, was seen as the weakest of the three fixed-line operators because, unlike the others, it did not have a foreign partner to help provide the cash needed to upgrade its system. The Economist (November 28, 1998) described it as "a ramshackle group of local investors." All voting shares held by the consortium were acquired in 1999 by Telemar Participações S.A., the parent of TLN. BNDESPar, the investment arm of Brazil's national development bank, held a 25-percent stake.

Telemar's perceived weakness did not keep it from outbidding Telecom Italia S.p.A., which was part of the controlling group of rival Brasil Telecom Participações S.A., in 2001, for a D-band-frequency license to provide wireless service in the same area where it was providing fixed lines. Telemar paid the Brazilian government $656 million for the right to use this frequency, which was expected to provide improved roaming and faster Internet connections than existing services. Telemar had also purchased the Internet-access arm of the online media company IG and controlled more fixed-line phones than any other Brazilian telecommunications company.

A major reorganization of Telemar also took place in 2001. Fifteen fixed-line subsidiaries, one each in 15 states, were merged into the 16th, whose corporate name was changed to Telemar Norte Leste S.A. TLN retained 82 percent of Telemar's combined shares.

TNL's mobile-phone service, named Oi, began operating in June 2002 and by May 2003 had 2 million subscribers. In order to finance the operation, however, Oi incurred debts of BRL 5.32 billion ($1.85 billion). TNL provided Oi with BRL 562 million ($195 million) to reduce the debt, then sold Oi to Telemar for BRL 1 (35 cents), the equity value assigned to Oi by TNL's advisers, Ernst & Young, and transferred Oi's debt to Telemar. This did not please Telemar's minority shareholders, who argued that Telemar had in effect overpaid by assuming so much debt for an operation that was still losing money.

By mid-2003, Telemar had climbed from third to second place among Brazil's nongovernment and nonfinancial enterprises, advancing on a broad front by offering fixed, mobile, and national and international long-distance telephone services, plus data transmission. The number of its installed fixed-line telephones had grown from 8 million to 17.5 million (31 percent in Rio de Janeiro). The number of Oi's cellular phones had reached 2.2 million. While Telemars local and intraregional services were confined to 16 states, the company also was offering data transmission throughout Brazil and long-distance phone service both interregionally and internationally. Starting in 2003, Oi began to have a significant market share in long-distance calls originated on wireless telephones.

COMPANY PERSPECTIVES

The major objective of the company is to offer whatever is most modern in telecommunications, surpassing the levels of demand of customers and the market. That is why Telemar invests strongly in the development of new technology and the training of its functionaries, with the aim of providing the best service to its clients.

Telemar had acquired, in late 2002, a controlling interest in Pegasus Telecom S.A. in order to offer data-communications solutions in the part of Brazil not within its concessions. It completed the acquisition in 2003. This enabled Telemar to expand its market share in the corporate data segment by offering nationwide bundled services, including third-party network management (outsourcing). In addition, TNL Contax S.A. had been established for call centers and other business services. (It was spun off to TNL shareholders in 2005 as Contax Participações S.A.)

But it was Oi that Telemar was relying on for rapid growth. "Brazil is the biggest growth market in Latin America," a securities analyst told Michael Kepp of Latin Trade. "This is not just because of the country's population and room-for-growth penetration rate, but because the fixed-line sector is a no-growth market, leaving the mobile market to grow and steal market share away from the fixed-line market." Because Oi's license area was the same as Telemar's fixed-line area, it was able to reduce the cost of connecting wireless calls to the fixed-phone system, and lower costs meant it could reduce cellular-phone prices and attract more customers. By the end of 2003 Oi had 7.3 million subscribers. Lower prices were not the only attraction. Oi successfully enrolled youths from every income group as having a cellular phone became an "in" thing to do. Prepaid mobile phones were among the hottest Christmas gifts bought by lower-income parents for their children. Hence, Oi's marketing director told Kepp that the unit's growth plan involved "targeting young and youthful-spirited people who like technology, daring new services and innovative technology."

TELEMAR IN 2005

The Telemar group customer base totaled 26 million by the end of 2005. Telemar had more than 17 million lines, of which nearly 14.9 million were in service, including public telephones as well as residential and commercial ones. Ninety-seven percent of the lines had been digitalized. There was, however, a slight decrease in lines in service, mainly from customer migration to mobile and broadband services. Broadband Internet access rose by 80 percent during the year, to 805,000 subscribers. Oi ended the year with more than 10 million customers and 12 percent of the cellular market. Oi Internet was created in 2005 as an Internet-access provider. Other company units included HiCorp, which was providing Internet access to Internet service providers; Pegasus, offering data-transmission services; and Contaxt, which was offering call-center services to Telemar, Oi, and third-party customers, including major financial institutions. TNL was, in terms of revenue, the second-largest nongovernment company in Brazil in 2005.

Telemar's local services in Region I (the 16 states in which it had obtained a concession) included installation, monthly subscription, measured service, collect calls, and supplemental local services. Telemar was also providing long-distance services between the states in this region and, since 2002, providing interregional long-distance services between its region and the other two in Brazil. Also in 2002, it began providing international long-distance services originating from Region I, using the wireless telecommunications services license granted to Oi. In 2003 it began to offer fixed-line interregional and international long-distance services originating in the two other regions, using the same license granted to Oi. Telemar's fixed-line services also included calls originated from its fixed-line customers to customers of wireless service providers, including Oi. It also owned and operated public telephones throughout Region I, all of them activated by a prepaid card.

Oi's revenues from wireless telecommunications services came from usage fees for outgoing calls made and value-added services such as access to the Internet, data transmission, short messages, forwarding, call waiting, and call blocking; monthly subscriptions; roaming; interconnection fees received from other operators on incoming calls; and sales of handsets. Some 86 percent of its customer base was buying prepaid cards; the postpaid customers paid a monthly subscription fee and were billed on a monthly basis for services provided during the previous month, such as mailbox, caller ID, and conference calls. GPRS service, available in the main cities of Region I, alloweddepending on the handset modelwireless access to the Internet through mobile telephones, laptops, or personal digital assistants (such as Palm Pilots). It also enabled customers to use voice and data services simultaneously. The WAP portal was a service-and-contents channel available to wireless customers.

KEY DATES

1998:
A consortium wins the concession for fixed-line telecommunications in 16 Brazilian states.
2001:
Telemar wins a license to offer wireless service in the same area as its fixed-line concession.
2002:
TNL's mobile-phone arm, Oi, begins providing wireless telecommunications service.
2002:
Telemar acquires control of Pegasus, a broadband data-transmission provider.
2003:
TNL merges Oi into Telemar.
2005:
Oi Internet is established as an Internet service provider.

Telemar's variety of customized, high-speed data-transmission services, through Pegasus, included video conferencing, video/image transmission, multimedia ap-plications, and interconnectivity between local area networks at data-transmission speeds. Its Velox service was offering high-speed Internet service and other data-transmission services using ADSL technology to residential customers as well as small and medium-sized business customers. The company also was leasing dedicated lines to other telecommunications service providers, Internet service providers, and corporate customers.

TLN was 58-percent-owned by Telemar Participações S.A. in 2005. This company consisted of nine common-stock shareholders, with the largest being BNDES Participações S.A., representing the government development bank and holding one-quarter of the shares. Until late 2004 TNL still owned 81 percent of the combined share capital of Telemar. Then TNL's board of directors approved a proposal to capitalize its new wholly-owned subsidiary, Telemar Telecomunicações Ltda., by transferring to it all the Telemar preferred shares held by TNL. After this change, TNL became a direct holder of 43 percent of Telemar's share capital, indirectly maintaining a holding of 97 percent of the voting capital and 81 percent of the total share capital of Telemar through Telemar Telecomunicações. In May 2006 TNL proposed that its shareholders approve a plan that would make TNL a wholly owned subsidiary of Telemar Participações S.A., exchanging their TNL shares for shares in the parent company.

PRINCIPAL SUBSIDIARIES

HiCorp Comunicações Corporativas S.A.; Telemar Norte Leste S.A.-Telemar; Telemar Telecommunicações Ltda.

PRINCIPAL COMPETITORS

BCP S.A.; Brasil Telecom S.A.; Cellular CRT Participações S.A.; Empresa Brasileira de Telecomunicações S.A.; Telefónica Empresas S.A.; TIM Celular S.A.

FURTHER READING

"Brazilian Phone Company Buys Internet Access Concern," New York Times, December 25, 2000, p. C2.

Kepp, Michael, "Built for Speed," Latin Trade, March 2004, pp. 30-31.

"The Questionable Case of Telemar," LatinFinance, December 2000, p. 77.

Rich, Jennifer, "In Quick Recovery, Brazil Sells Three Wireless Licenses," New York Times, February 14, 2001, p. W1.

Wheatley, Jonathan, "Brazil Deal Opens Debate on Governance," Financial Times, June 9, 2003, p. 28.

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