Compania de Telefonos de Chile

Compania de Telefonos de Chile

Problem Definition

Compania de Telefonos de Chile is looking to raise capital due to its primary investor running into financial distress. CTC needs to determine if they should raise capital domestically or if it would be in their best interest to raise capital abroad.

Description of Methodology

Compania de Telefonos de Chile was reviewing its opportunities to raise new capital that would enable it to continue expanding. The possible options include the local stock market, Chilean banks, Chilean pension funds, and overseas capital markets. In the below analysis, we will review each of the options and then make our recommendation.

Analysis

CTC’s difficult financial situation arose from the company’s overly aggressive expansion plan combined with the Bond Company’s sale of its share of CTC in 1990. CTC is in need of funds, as it is in the middle of an expansion program which requires substantial capital resources. The expansion program includes substantial reduction in the time to get telephone service from 10 to 4 years, and expansion of the capabilities of the company to provide some of the latest high-tech capabilities in the telecommunications industry.

Unfortunately, internally generated funds are not sufficient to meet the requirements of the expansion project. There are actually little to no internally generated funds, as it has been the long time practice of CTC to distribute 100 per cent of its income to its stockholders as dividends, though this percentage was eventually decreased to sixty per cent. Therefore, CTC has to look for external sources of funds.

The local stock market does not appear to be a viable option for CTC to raise enough capital to continue its expansion plans. The market was thinly capitalized, and analysts estimated that a large Chilean company would only be able to raise about one percent of the total market capitalization of the market with a new offering. Also, the market was only open for...