Plug and Pay.

Argentina's CEI connects the first Latin American high-tech media empire, but gets shocked in the process.

NOT LONG AGO, CEI CITICORP Holdings was the hottest media player in a hot market. Starting in 1997, the Argentine holding company embarked on a US$3 billion spending spree, snatching up the country's broadcast, publishing and communications companies, while investors scrambled to get on board.

But as emerging markets go sour, so go the fortunes of CEI. Over the last year, the firm has been forced to cancel a planned equity offering and an international bond issue. Then the tab came due on $950 million owed by its cable TV arm and the company's celebrated masterminds were suddenly scrambling for cash. They finally hawked enough debt to cover half the sum, but CEI's triumvirate of shareholders--Argentina's Banco Republica and U.S. partners Citibank and Hicks, Muse, Tate & Furst--were forced to ante up $400 million in fresh funding to avoid defaulting on the loan. "We are not over-leveraged. Just unlucky," says Richard Handley, a board member and the company's chief strategist. "The market went to hell on us."

That it did. But equally important, CEI is failing to deliver on its high-tech dream of combining phone service, pay TV and a host of media content into a multimedia powerhouse. After years of acquisitions toward that vision, the sum of the parts is not greater than the whole. The holding company is profitable, but largely thanks to its phone company. "Few of the subsidiaries are making money," says Christopher Ecclestone, head analyst at investment boutique Buenos Aires Trust Co., who reckons that the company made profits of $53 million in 1998 and will net $86 million this year, which represents a miserly 2% return on assets worth over $4 billion.

Big and sexy. That's hardly the type of return most investors expected when they bought into CEI's vision. And what a vision it was. "They were the center of attention. They were buying aggressively and making the headlines," says Andres Pichon, an analyst at Merchant Bankers Asociados. "They were big and sexy."

Indeed, it could have been a lusty affair. Argentina boasts the world's third highest cable TV density--after the United States and Canada--and the region's top per capita earning levels, making it a viable candidate for testing the idea that media and telecom work together. But the world's largest phone companies and biggest broadcasters have yet to figure out the mix. CEI's bankers had no better luck, and then time ran out. Investors were waiting for CEI's stock offering, says Pichon. "Now nobody's going to waste their time."

The concept has made many a mogul stop and think. If a company owns- one transmission line into a consumer's home, why not maximize revenue by piping in as many services as possible? Be it a cable TV or telephone line, stuff it with a wide variety of fee-generating items--news, movies, the Internet, e-mail, long-distance calling, etc. AT&T is chasing after the same dream, having bought the largest U.S. cable TV operator and joined forces with content giant Time Warner to pipe everything from Martha Stewart to mother's phone calls into U.S. homes.

Not everybody is sold on so-called convergence, including CEI rival Telecom Argentina, which provides phone service to the northern half of the country. Says CEO Juan Carlos Masjoan, "The truth is, I don't believe in convergence." In a bull market, CEI executives' powerful vision rode roughshod over the details toward a rosy future where investors--of course, only those who got in early--would make heaps of profits. Now, as Argentina's outlook turns bleak, that line has become an extremely hard sell.

Many see last year's near-default as a turning point, among them Ecclestone, who says, "That's when things really started to fall apart."

Out of nowhere. Just about a decade ago, CEI was a sleepy holding company. The firm's major asset was a pile of Argentine government debt with a nominal value of $1 billion but with little hope of ever being collected in full. At the time, the country's economy was an international poster child of hyperinflation, but Citibank, like many other commercial banks, was hanging on to the paper with the hope that someday the government might make good.

When the government announced in 1990 that it would swap its debt for shares in state companies on the road to privatization, CEI suddenly came to life. The holding company started buying and selling shares in state-run companies over the next five years, turning a good profit in sectors from natural-gas distribution and hotels to paper and meat-packing.

Using the proceeds, CEI began to focus on telecommunications, gradually taking a 50.2% stake in the parent company that controls Telefonica de Argentina. The creeping takeover forced Telefonica's operator, Spain's Telefonica Internacional SA (TISA), to negotiate a settlement that saw the two companies sharing both ownership of the phone company and a juicy management fee.

CEI's first foray into cable came in 1995, when the company acquired a minority stake in the cable TV operation of Clarin, Argentina's leading media company and publisher of the world's largest-circulation Spanish-language newspaper, Clarin. But the marriage did not last long, and in 1997 CEI and new partner Telefonica acquired Cablevision, Clarin's main rival. After spending $1.5 billion to buy out smaller cable outfits, Cablevision became the leading cable operator, alongside Clarin, whose cable subsidiary had embarked on its own buying spree.

Consolidating viewers from over 60 independent operators was a coup, but as the two groups competed to buy cable properties, the price of those assets began to rise, up to a pricey $1,800 per subscriber. "This was no bargain," says analyst Pinchon. At the high prices paid, he says, "The bet has to be to raise revenues per subscriber."

A more conservative strategy might have been to stop short. But CEI sold its backers on a bigger dream. The idea was to use the cable platform to offer one big, seamless package that would include communications, TV, programming and Internet access. Additionally, once deregulation hit Argentine phone markets, CEI could use the cable TV lines it already owned to reach homes in competitor Telecom Argentina's service area.

Weird science. Deregulation, however, was postponed from 1997 to this year. Nonetheless, CEI continued on its expansion binge, using large amounts of other people's money to fund its purchases. Having bought most of the cable companies available, the cable raider turned its attention to other media interests, adding Editorial Atlantida, the nation's second largest magazine publisher, which in turn owns the top broadcast-TV station. Another broadcaster was added, along with a company that owns rights to sporting events.

Shortly after the company began looking in July 1998 at buying a piece of the highly troubled cable operations of Brazilian publishing giant Abril, the capital markets tumbled on news of the Russian default on its debt. As the year wore on, the hopes of issuing equity or at least bonds to keep the mountain of debt from collapsing faded. The owners of CEI were forced to commit $400 million of their own to stay current and the time to take stock of the purchased assets had arrived.

The reality, at least for now, is that CEI's holdings resemble Frankenstein's monster, odd-fitting assets stitched together with few immediate synergies that would justify the top-dollar prices paid. And there is a caveat: Few of the media properties were profitable as stand-alone companies.

The business plan was always more art than science. Theories abound, but there is no blueprint for the convergence scheme CEI used to justify its purchases. Smashing together competitors and reaping the cost savings is a more-tested plan, albeit with its own dangers. And worse yet, while concentrating on the somewhat unfocused big picture, CEI lost sight of the details that could have made a difference.

Take, for instance, cable TV, where CEI's Cablevision/TCI--in partnership with U.S-based Tele-Communications International (TCI) and Spain's Telefonica--has had little luck upping margins. Argentine users are accustomed to receiving channels usually considered premium as part of a standard package so they have fought hard against attempts to boost revenues by introducing premium services. Partly in a dispute over this issue, two of the leading channels, HBO Ole and Cinemax, pulled their programming in January. This came right after a new 10.5% tax on cable was decreed in December. With subscribers unwilling to pay more for less, there has been a steep increase in cancellations.

Problems spill over into publishing and broadcast TV as well. Together, CEI and Telefonica paid $194 million to the Vigil family to take control of Editorial Atlantida. In an attempt to reduce losses, Atlantida has launched an economy drive that has seen the closure of publications and its cable news channel, as well as staff axings, including leading newscasters. The efforts were rewarded with a $66 million profit in the second half of last year, which helped clinch a refinancing package, according to CEI executives. After years of losses, however, analysts are skeptical that the result will be repeated in future balances.

No synergies yet. Things are worse at Canal 9, the third-ranked on-air channel, which CEI bought through a subsidiary in late 1997. It has since been renamed Canal Azul and is busy regurgitating old episodes of Mexican soap operas and Baywatch, a move that has done little to improve its dismal ratings. Losses last year reached $9 million.

CEI and TISA are now trying to untangle a complicated structure of holdings and cross-holdings to generate some economies. Earlier this year they pooled the group's TV holdings, bringing the money-losing Azul under the Vigil family's expert eye for the first time. The idea is also to pool content between cable and broadcast TV operations, which the company says will be the first of more synergies to come this year.

This looks more like a cost-cutting exercise than the much-vaunted merger of communications and content to create a new multimedia animal. Miguel Smimoff, a local media specialist, is skeptical: "The parts function separately and there are no synergies. They use Atlantida to promote [TV network] Telefe, but that is not a synergy."

The companies also have a lot of debt. The holding company registered debts of $781 million in September 1998, though that sum represents much less than the total accumulated debt of the subsidiaries.

While CEI struggles mightily to pay loans used to acquire media assets unrelated to its original vision of convergence, the government is preparing to go forward with deregulation in November, which would allow it to use TV cable operations for phone service. Telefonica, jointly controlled by CEI and TISA, has long held a monopoly on basic telephony in the southern part of the country and central Buenos Aires. The partners will now use their cable networks to gain a foothold in the north, where its rival Telecom Argentina holds a monopoly on basic phone service.

That sounds more like a true merging of industries. But when the time comes, CEI will need even more capital to launch new phone service. Judging by the recent failed round of fundraising, investors are in no mood to hear promises of future returns, raising questions as to whether CEI's day as a "converging" multimedia empire has already come and gone.

Digital Reproduction

WHILE THE SCALE OF CEI's AMBITION may have made its current squeeze especially tight, misery loves company. Its main rival, the Clarin group, is struggling under its own debt mountain, piled high after a similar, though more subdued, drive to acquire media assets.

Clarin's overall profitability is still based on its king-sized newspaper circulation, which generates around a third of the group's $1.7 billion revenues. And there, confesses Roberto Guareschi, the paper's managing editor, the crossover with the rest of the group is still limited. "For us, it is most important to maintain the autonomy of each medium. Personally, I am not sure that you don't lose quality otherwise," he says.

From its solid base as publisher of the world's largest Spanish-language daily, Clarin has amassed an impressive mix of media, including pay and broadcast TV, publishing, radio and a stake in a wireless phone company. Multicanal, Clarin's cable company, leads the market and now accounts for more than a quarter of all the group's revenues. But the operator has taken on debts of US$780 million to expand its network and operates at a loss after interest payments.

At the group's TV station, for example, the content that is supposed to be the engine of a multimedia powerhouse is mainly contracted out to independent producers like Pol-Ka, which has served up its last two big soaps. "The channels are just antennas now," says Pablo Sirven, a local media writer. "The hits are made by someone else."

While debts are growing and existing businesses don't seem to be working together, Clarin is not finished expanding. Already allied with GTE in wireless telephony, the group is now preparing to offer basic phone service after deregulation in November 1999. The company plans to spend $120 million to upgrade its pay-TV network with fiber optic cable to serve as a platform for a wider range of services, such as offering a dialtone and Internet access.

Clarin has proudly snubbed suitors in the past. But beggars can't be choosers and after Multicanal had its plans for an international stock offering scuppered in August, it retained Morgan Stanley Dean Witter and BankBoston in the hope of selling 45% of its shares in the cable provider. Venezuela's Cisneros Group, GTE and AT&T have been mentioned as potential buyers.

                           CABLE TV MARKET SHARE

Multicanal  28%
Cablevision 29%
Grupo Uno   10%
Others      33%


SOURCE: CEI

                              BIG COMPETITION
           CEI is not the only company on a media buying binge.
                Here's a look at the two main competitors.

GRUPO CLARIN
Clarin, Ole                     Newspapers
Cimeco (with La Nacion)         Newspapers
Papel Prensa (with La Nacion)   Newsprint
Editora de Revistas Transandina Magazines
Multicanal                      Cable TV
Artear, Canal 13                TV broadcasting and
                                programming
Radio Mitre                     Radio
CTI (24.5%)                     Wireless telephony
Galaxy Entertainment (DirecTV)  Satellite TV
GRUPO UNO
Supercanal Internacional        Cable TV
Uno TV                          Broadcast TV
Uno Grafica                     Newspaper and
                                magazines
Uno Radio                       Radio
TDH                             Satellite TV


SOURCE: LATIN TRADE