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*New* Latin Loot: Telmex Could Lose Fee War; Unibanco and Banespa

What Latin Loot Is About

Volatile, unpredictable -- and even a little suspect. That's the perception many have of

Latin American


It's unfair. The 77 Latin corporations listed on the

New York Stock Exchange

have a combined market capitalization of $210 billion. Most are competently, even excellently, run and boast world-beating growth.

Even so, closely tracking Latin corporations from the U.S. can be difficult. That's why

is starting Latin Loot, a column that will run at least weekly.

Here, we will chiefly focus on the U.S.-listed Latin companies. Our intention is to put them under a harsh spotlight. But at the same time, Latin Loot will strive not to indulge in knee-jerk negativity.

Also in our sights are large, locally listed companies -- especially those likely to join the Big Board. And no Latin-focused column can ignore economics and politics. Frequently, big moves in Latin markets have more to do with one macroeconomic statistic than an earnings announcement. It'll be a rough ride. Latin Loot's aim is to spot the potholes. Feel free to

email comments and possible story ideas.

* * * * *

Slim's Pride Cometh Before a Fall?

What better place to kick off than with Mexico's dominant and formerly state-owned telecommunications company,


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, which both have partners going after Telmex's business in Mexico.

The market has shrugged off this confrontation, believing that Slim can win. But it's a more even fight than some think.

So what's the flash point?

Telmex's Mexican rivals


, backed by AT&T, and


, MCI's joint venture, have to pay Telmex

interconnection charges

every time they route a call through its system. AT&T and MCI think the interconnection charges, currently 37 cents a minute, are excessive.

This fee income is an important revenue source for Telmex. And because it costs the company almost nothing to generate, it carries a fat margin.

But if AT&T and MCI can force Telmex to reduce these fees more quickly than is currently scheduled, then analysts may start hacking big chunks off Telmex's 1998 earnings-per-share forecasts. The Americans are going right to the top to get things changed. MCI has asked the

World Trade Organization

to pressure Telmex to reduce charges. And both MCI and AT&T, through an appeal to the U.S.

Federal Communications Commission

, are trying to prevent Telmex from gaining access to the U.S market.

Slim's response to the U.S. companies' kvetching has been to call them crybabies. He adds that they have known of the fee schedule for some time, but are only complaining now because they are finding Mexico tough going. The U.S. companies respond that the fees were set after they had laid the foundations of their Mexican operations.

Despite this head-butting, Telmex ADRs are up a nice 11% since the end of January, more than double the dollar return from the

MSCI Mexico Free


The market doesn't seem to be reflecting in Telmex's share price the very real possibility that Alestra and Avantel, as well as other Telmex rivals, could just refuse to pay interconnection charges above a certain level. The fees are scheduled to fall to 34 cents next year, and 19 cents in 2000. One tactic would be to pay only 25 cents a minute this year. If this happens, Tony Figueiredo, Latin telecoms analyst at

Caspian Securities

, would shave 15 cents off his 1998 earnings-per-share target of $4.25.

This fight is expected to come to head -- and perhaps a conclusion -- as early as the end of this month. ADR holders should be careful not to get clobbered by a flying bottle.

Unibanco, Bad Loans and Banespa



, which has had substantial operations in Brazil for decades.

Going into Banespa with Itau and Bradesco would decisively shut the door on serious foreign competition in the fast-growing, heavily populated Sao Paulo region. The three banks would then just split up Banespa's 570 branches and 2.8 million clients, and absorb them into their existing operations.

Some argue that a divvying up scheme like this is not as easy, or potentially profitable, as it sounds.

First, Unibanco already has a big presence in the Sao Paulo region -- and may not benefit greatly from more customers. And second, Banespa workers get paid more than those in the private sector. So absorbing Banespa employees would mean upping everyone's pay in the three banks they joined.

On balance, though, an Unibanco-Banespa tie-up is probably a smart idea -- as long as Unibanco doesn't go in with Itau or Bradesco.

To get around the wage problem, Unibanco and Citi could buy Banespa and keep it as one whole entity, thus reducing the chances that Unibanco workers will be "infected" with the higher-pay virus from Banespa.

What's more, Unibanco can use the new customers to improve profitability -- by selling new products that Banespa clients have not hitherto had access to. Citi, which has expressed an interest in increasing its retail presence in Brazil, could provide an attractive brand and technical expertise.