2AFF5300 Case studies in finance: Case 2 Paginas Amarelas Jizhe Li 23847050 Introduction
In July 1996, with the current and expected privatization trend occurred in telephone business, the market environment and competition extent changed and expected to change dramatically in Latin America. As consequence, Brasil Investimentos, a Brazilian industrial conglomerate, interested in sale or restructuring its subsidiary: Paginas Amarelas which mainly involved in telephone-directory business in three Latin America countries. A new associate of J.P. Morgan Latin America M&A group: Juan Lopez was in charge of this task in order to measure the value this business. In order to achieve the objective of this task, Lopez followed the process of fundamental analysis. During the analysis, as a challenge, estimate WACC of Paginas Amarelas become critical. For the sake of enhance the relationship with Brasil Investimentos and strengthen the leading position in Latin America, J.P. Morgan take the task fairly serious.
* Macro economy analysis
To estimate the value of a firm, there were 3 methods available for J.P. Morgan: DCF, trading multiples and transaction multiples. Those methods are based on different perspectives. DCF is more precisely focus on measure the fundamental value by obtain free cash flow, discount factors and WACC of a firm. Trading multiples measures the value based on peer group and transaction multiples provide a benchmark of acquisition value of the firm. In order to start the fundamental analysis approach (top-down), Lopez put his effort on investigate the overall economy situation of Latin America, especially on Argentina, Brazil and Chile which were the countries Paginas Amarelas operated in. Since 1980s those countries had built the democratic system, the political situations were considered stable. The overall economies were increasingly stable and growth moderately, the current government of those countries in favor of free markets, privatization, trade liberalization and low inflation. As the results of established market economies and created Mercour there were a dramatic improvement in international trade, control inflation and foreign direct investment. However the Mexican peso crisis leaded the deterioration of confidence among investors, with the temporary leave of foreign capital, the local stock markets and currencies plummeted.
There were numbers of characteristic shared by those 3 economies, however, in detail the situation were distinct. Argentine economy was hardest hit by peso crisis, the depression occurred until recent sign showed the recovery start. The unemployment and currency overvaluation were the most critical problem Argentina suffered. Because of exchange rate policy, Brazil was suffered from fiscal deficit and deterioration of balance of trade. With the successful reformation of economy, Chile enjoyed high growth sustainably. The unemployment, inflation and interest rate were decrease; both foreign investment and foreign asset improved.
* Industry analysis
Telephone-directory industry provided users a listing of addresses and telephone numbers of local residential and commercial subscribers as advertisement. The major clients of this industry were local businesses and professionals. The revenues of this industry were derived from advertising space on the listings, on the other hand, the cost of this industry were closely related to the cost of paper, printing and distribution. In Latin America, Directory firms were involved in contract with local phone operators through a competitive bid. The bidder who can provide highest economic and technology mix aspects win a contract with 1 to 7 years duration. Since the winner of last period was not guarantee to win next one, Lopez took this probability into account. The reason made Telephone-directory industry unique in Latin America was this industry heavily and positively related to business cycle. The other...
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