Latin America’s satellite and network services sector is reeling from a worldwide economic downturn, and no one expects much improvement anytime soon.

Many companies in the region receive revenues in weak local currency but must pay their expenses in U.S. dollars. That unwieldy mix has led to severe financial problems at satellite TV provider DirecTV Latin America, which has begun a financial restructuring that could lead to a merger with News Corp-backed [NWS] satellite TV rival Sky Latin America or to bankruptcy protection (SN, Jan. 13).

AlixPartners, a turnaround management company, is helping Ft. Lauderdale, Fla.-based DirecTV Latin America secure concessions from suppliers, lenders and business partners. DirecTV Latin America, a unit of El Segundo, Calif.-based Hughes Electronics Corp. [GMH], is the largest provider of direct-to-home satellite television service in Latin America.

Major economic problems, particularly in debt-ridden Argentina and politically tumultuous Venezuela, have exacerbated the company’s financial situation. Not even sharp cuts in jobs and expenses could stem the negative trend.

Other satellite companies also have been having problems. Ruben Levcovitz, Intelsat’s regional vice president for Latin American sales, said the Argentine economic crisis required his company to renegotiate contracts with most of its customers to resolve financial issues.

“Over the past year and a half, we have been working very closely with our existing customers, some of whom are in a great deal of distress, to restructure their portfolios and enable them to stay on the Intelsat system,” Levcovitz said.

Intelsat is trying to help struggling customers find “appealing ways” to cut their operational costs without sacrificing the quality and growth of their businesses, Levcovitz said.

“We are very committed to Latin America and believe that, in spite of the current economic situation there, satellites will continue to have a strong role to play. I believe that satellite alone or combined with other technologies, like terrestrial infrastructure, represents a key role for the continued development of Latin America, as it provides fast solutions for telecommunications needs in the region,” Levcovitz said.

Diego Santos, regional manager of sales and marketing with Argentine satellite operator Nahuelsat, said that currency devaluation problems in Argentina and other countries in South America has compelled operators to renegotiate contracts.

“This is a process that has not concluded yet, but has had a significant impact on collections from several operators, albeit not on Nahuelsat,” Santos said. “Among other cases, Sky just left the country, leaving DirecTV Latin America with a virtual monopoly in the [direct-to-home] segment in Argentina.”

On a more positive note, interest is growing in satellite broadband services in the region, Santos said. Specifically, Telespazio and Velconet are two of the latest service providers to sign up for new capacity on Nahuel 1 for broadband access.

Nahuelsat, which serves Latin America’s southern cone of Argentina, Chile, Uruguay and Paraguay, is bracing for intensified competition with the launch and deployment of rival satellite systems.

Most Important Issues

According to Santos, the three most important issues for the region this year are:

1. Weak general economic conditions, particularly in the telecommunications sector.

2. Rising insurance rates and other implications from satellite and launch failures.

3. Aftermath of EchoStar Communications Corp.’s [DISH] failed attempt to Hughes Electronics Corp. [GMH] and its DirecTV unit.

In the wake of a difficult 2002, the satellite industry should begin to see a slow recovery in Latin America this year, Santos said. For Nahuelsat, this will be a year of expansion beyond its traditional local markets, he added.

Julio Mazzarella, chief financial officer of telecommunications networks provider MetroRED Telecom Group, said the Latin American market should be viewed country-by-country to account for unique economic characteristics and other differences. MetroRED is an integrated communications provider in Brazil and Mexico that delivers data and Internet services via a fiber optic network and data centers for corporate and telecommunications carrier customers.

Weakness will continue to persist in Argentina’s business and consumer sectors during the next year or two due to currency exchange rate fluctuations, even if a small recovery begins, Mazzarella said. Demand for data, Internet access and services in Argentina is sustained primarily in the high-end corporate market.

“However, the ability to make economic sense out of delivering these services will continue to be extremely difficult for the service providers,” Mazzarella said. “This is because the payback periods for the capital required to deliver these services will remain over 12 to 14 months due to the need to buy equipment in U.S. dollars but collect payments in the weakened local currency.”

A 12- to 14-month payback on capital expenditures in Argentina requires a service provider to cut all other expenses to the bone to generate positive cash flows, Mazzarella said.

In the major Brazilian cities of Sao Paulo and Rio de Janeiro, the macroeconomic situation is better and the demand is far greater. That situation allows a service provider to grow profitably but involves “much keener” competition that pressures profit margins, he said.

Maria Velez de Berliner, president of Latin American Solutions Inc., of Gibsonia, Pa.-based consultancy, said she expects Argentina to make a “modest recovery” by year’s end only in the consumer goods sector where imports can be replaced by inexpensive local products. She projected economic growth for Peru and Ecuador and scaled back growth in Brazil, Mexico, Chile and Colombia.

Venezuela is slipping into a recession and no catalyst appears on the horizon to revive it, Velez de Berliner said.

A significant concern is that violence in Colombia has spread to Venezuela, Ecuador, Peru and northern Brazil.

“Neither Ecuador nor Peru has the economic and political resilience needed to withstand the migration of Colombians, guerrillas and otherwise, to these countries,” Velez de Berliner said.

Another sign of economic distress in the region is that previously neglected groups are gaining influence to oppose privatizations in Peru and needed infrastructure projects in Mexico, Velez de Berliner said. “Ominous hints” are surfacing about rolling back the privatizations of utilities and public services that took place in Argentina during the 1990s, she added.

The systemic economic problems will be worsened if the International Monetary Fund continues to lend money to countries already saddled with high levels of debt, Velez de Berliner said. Countries such as Argentina that borrow to pay obligations, and then borrow the same amount again, are engaging in a mere “paper transaction,” she explained.

She compared it to “giving an extra drink to a drunkard who is sitting behind the wheel, and is turning on the ignition key,” Velez de Berliner said. “When countries become direct exporters of capital to [meet debt] service obligations, they have little room to maneuver financially. Continued borrowing is not solid monetary policy.”

Telecom Services Needed

Despite the economic uncertainties, Latin America needs telecommunications, especially cellular and high-potential WiFi services, Velez de Berliner said. Along with the opportunity comes increased competition for subscribers that puts downward pressure on margins, she said.

A $70 million investment by Siemens in Brazil’s Manaus Industrial Park is a good sign that the telecommunications sector is still attracting capital, Velez de Berliner said. Strategic joint ventures offer one way to rationalize costs and boost market share, such as a recent joint venture formed by Portugal Telecom and Spain’s Telefonica Moviles to invest in Latin America.

“Where the satellite industry has the greatest potential for growth is in the area of intelligence, not only in the government sector but in industrial intelligence,” Velez de Berliner said. “And, since Latin America has shown its capacity to grow from the ashes time after time, it is not surprising that Argentina is using satellites to catch tax evaders who underestimate productive acreage, and Florida will use a satellite to ‘tell’ on Brazil’s orange crop estimates. Intelligence satellites that can beam information on production lines, cargo at ports, substances being transported, and any other industrial or financial activity would be welcomed.”

Satellite companies need to do more “out-of-the-box thinking” to find new applications, Velez de Berliner said. Latin America presents ideal conditions to test new applications and new technologies, she added.

–Paul Dykewicz

(Veronica Diaz, DirecTV Latin America, 954/958-3381; Ruben Levcovitz, Intelsat, 212/944-7206; Diego Santos, Nahuelsat S.A., (54 11) 5811 2645; Maria Velez de Berliner, Latin Trade Solutions, 724/625-8510)

DirecTV Latin America

• 1.6 million subscribers
• Established on Feb. 13, 1995
• Serves 28 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Puerto Rico, Trinidad & Tobago, Uruguay, Venezuela and several Caribbean island nations

Source: DirecTV Latin America