Psst! Want A Piece Of A Hot Cuban Deal?

The phone company's Mexican part-owner needs cash-fast

The few households in Cuba with phones have become settings for a new family ritual: gatherings to chat with relatives in the U.S., who pay in dollars for the calls. Such long-distance talkfests are one result of the 1992 Cuban Democracy Act, which tightened the U.S. embargo against the island but authorized American carriers to upgrade U.S.-Cuba phone links. The aim: to open Fidel Castro's closed society by expanding people-to-people contacts.

A startling side effect, though, has been to convert Cuba's dilapidated phone company, Etecsa, into a potential bonanza, both for Castro and for Mexican conglomerate Grupo Domos. In 1994, in a $750 million deal and Castro's biggest privatization to date, Domos CEO Javier Garza Calderon bought 49% of Etecsa, including management control. Garza expected the phone company to earn a modest $34 million profit in 1995. Instead, it will make $120 million because of its 50% share of soaring dollar revenues from calls across the Florida Straits.

Trouble is, Garza now has serious problems at home that threaten to break his grip on this rich lode. Besides still owing $300 million to Cuba for the Etecsa purchase, Garza is also committed to upgrading its local phone system. But Mexico's peso devaluation has made it tough for his privately held Monterrey-based company, which has interests from tourism to waste management, to meet dollar commitments. Garza is now 10 months overdue on a $196 million installment to Cuba.

To avoid losing his prize, Garza has started selling off some of his Etecsa stake. Last April, he sold a 25% share in Citel, the Domos subsidiary that holds the Cuban stake, for $281 million to Italian phone giant STET. Now Garza is trying to peddle an additional 24% of Citel to other telecom companies, suppliers, or investors in Europe and Asia. STET has the right to preempt other prospective buyers but would do so only if the price is "extremely interesting," says STET International CEO Massimo Masini. He warns that any new partner would have to be a financial investor without an operating role. That could dampen the interest of other telecom companies.

LOW WAGES. So far, the Cuban government has kept silent on Garza's missed payment, insisting that the venture is successful. A collapse could stir doubts about Cuba among other foreign investors Castro is trying to woo to sidestep the embargo. On the bright side, U.S.-Cuba phone traffic over the new long-distance circuits installed by AT&T, Sprint, MCI, and Worldcom have swollen Etecsa's long-distance volume from 400 calls per day when Garza took over to some 50,000 daily, he claims. The revenue-generating potential of the new circuits has also added about $300 million to Etecsa's value, a senior U.S. official estimates.

But Garza concedes that Domos and STET have spent little so far to upgrade Cuba's rickety domestic phone system, beyond installing three new exchanges and importing Mitsubishi utility vehicles to raise the productivity of Etecsa crews. The low outlays are one reason why profits are so fat. Another is that Etecsa gets most of its revenue from international calls paid in dollars, but it pays its 14,500 employees in cheap Cuban pesos, plus allotments of food and clothing. The average Etecsa worker's monthly cash salary of 330 pesos amounts to just $13.20 at the current free-market exchange rate.

Domos and STET will have to start spending more to fulfill terms of the 1994 agreement. It calls for adding more domestic lines, now estimated at around 300,000, to raise the island's phone installation from 3 per 100 residents to 10 within seven years. That compares with the Latin American average of 7 per 100. To meet commitments and payments, Garza says that he could raise capital if necessary by allowing outsiders to buy into Grupo Domos.

For the U.S., a breakdown in the phone venture could also set back efforts to loosen Castro's grip by promoting still more "people-to-people" contacts. Soon, Cuba plans to shift computer networks in ministries and institutions such as the University of Havana, which have been tied to the Internet through Canada, to hookups directly through the U.S. But broader links across the island among users of computers, modems, and faxes won't happen until the domestic phone system improves. Allowing a U.S. company to buy the stake Garza is peddling, a prospect he says he would welcome, would help achieve that. It's a possibility that has been discussed within the Clinton Administration, but any decision is probably months away. So Garza's urgent call for new investors is getting a busy signal from the U.S.

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