Portugal Telecom Sgps S.A. Business Information, Profile, and History

Company Perspectives:

Mission and Outlook

We intend to be the largest Portuguese business group and to be amongst the largest international infocommunications groups.

To reach this aim we will keep up the strong growth and will create shareholder value through: Leadership in all national business; International growth and leadership; Belief in businesses of high growth; Reinforcement of alliances and partnerships; Maintenance of the excellence and innovation standard.

History of Portugal Telecom Sgps S.A.

Portugal Telecom SGPS S.A. (PT) is not only Portugal's largest telecommunications company, it is also Portugal's largest company. Lisbon-based PT, formed in the privatization of the country's telephone services sector, provides a full range of fixed-line and wireless telecommunications services, including high-speed and ADSL-based voice and data transmission and mobile telephone services, to the Portuguese market. The company is also one of the country's leading multimedia groups, overseeing Portugal's largest cable television network, through which it also provides broadband internet services. PT claims to be one of the most efficient telecommunications providers in Europe, and enjoys one of the lowest net debt-to-earnings ratios in the sector. PT remains the dominant telecommunications group at home, controlling 92 percent of the country's fixed-line services, 80 percent of data transmission traffic, 52 percent of the mobile telephone market, and 84 percent of the cable television market. PT, however, has been transforming itself into a global telecommunications group in the early 2000s, targeting the Latin American market, and specifically Brazil, for its future expansion. PT has invested strongly in the Brazilian market since the late 1990s, in large part in cooperation with Spanish partner Telefonica Moviles. Together the companies control Brasilcel, which operates Vivo, the leading mobile telephone provider in Brazil, with 17 million active customers and, with a geographic penetration of more than 90 percent, access to a potential market of more than 125 million. PT also holds an 18 percent share of UOL, Brazil's leading Internet access provider, and is active in data and voice transmission, the Dedic call center service, and the Mobitel message transmission service. Together with Telefonica Moviles, PT has begun to expand into the larger Latin American market, targeting the mobile markets in Peru, Chile, Argentina, Venezuela, and Colombia. Unlike most of its European counterparts, which also were created from the former state-owned telecoms, PT is now nearly 100 percent privatized as the Portuguese government has retained just 500 "golden shares" in the company. PT is listed on the Lisbon and New York Stock Exchanges. In 2003, the company, led by Miguel Horta e Costa, generated more than $7.5 billion in revenues.

Founding Portugal's Telecom Industry in the 19th Century

The first telephone system appeared in Portugal in 1877--just one year after Bell claimed the invention of the telephone itself. King D. Luis I, impressed by the new technology, ordered that a private telephone network be set up for him linking Lisbon to Carcavelos.

The first full-fledged telephone networks appeared in the country only five years later, however. In 1881, the British-owned Edison Gower Bell Company of Europe was granted the exclusive right to establish telephone systems in the principal cities of Lisbon and Oporto. The Bell company installed separate networks for each city that year. The networks were quite small at the outset, boasting just 22 and 19 subscribers, respectively.

Before the end of the decade, the concession for the two cities' phone services was transferred to a new company, the Anglo Portuguese Telephone Company (APTC). APTC's initial contract ran out in 1901. The contact's renewal, as well as subsequent renewals, were made conditional on APTC's agreement to invest in technology improvements and upgrades, such as the installation of double circuit lines, better switching equipment, and underground cabling within the city centers.

Building demand for telephone service led to the extension of the country's telephone network beyond its capital cities at the dawn of the 20th century. This task was turned over to the country's postal and telegraph department, Correios e Telégrafos, which was subsequently renamed as Correios e Telecomunicaçoes de Portugal (CTT) in 1911. CTT's original mandate made it responsible for building not only the country's continental telephone network (apart from Lisbon and Porto), but also for extending its telecommunications reach to include the Madeira and Azores Islands and the country's colonial holdings in Africa and elsewhere.

By 1905, CTT had successfully connected Lisbon and Oporto for the first time, and by 1906 had begun providing service to Braga and Coimbra as well. CTT continued building up the country's telephone network through the end of the decade.

The overthrow of the monarchy in 1910 and the political and economic upheaval that followed brought a reduction in CTT's expansion, particularly its plans for developing the country's intercontinental telephone connection. The new Portuguese government decided to turn over this part of the country's telecommunications sector to a private operator instead.

Portugal's vast colonial empire, which stretched around the world, made developing and operating its intercontinental system an extremely attractive prospect for the continent's private wireless telephone groups, including Telefunken in Germany and Marconi, from the United Kingdom. Marconi finally won out, signing a contract with the government in 1912. The government in its turn agreed to build the infrastructure needed for the installation of Marconi's equipment.

The intervention of World War I made it impossible for the Portuguese government to hold up its end of the agreement and no progress was made on the wireless network. In 1922, the two parties formed a new agreement, creating the Lisbon-based Companhia Portuguesa Rádio Marconi (CPRM) with both Portuguese and British owners. CPRM then took over the exclusive concession for developing the country's wireless intercontinental networks, finally becoming operational only in 1925 under a 40-year contract. CPRM struggled heavily through the next decade, however, in part because of the costs of keeping up with rapid technological developments, in part because of the strong competition with the submarine-based international cable systems, but also because of illegal commercial wireless activity conducted through the Portuguese Navy.

APTC in the meantime had signed a new 40-year contract in 1928, which enabled it to make its own push to extend its Lisbon and Oporto phone networks. Yet APTC, too, struggled through the next decade: from nearly 16,500 phone lines in 1928, the company barely reached 37,000 ten years later. The installation of the first automatic exchanges, in Lisbon in 1930 and in Oporto in 1952, helped boost the company's range, with 100,000 telephone lines by 1950 and a waiting list of some 23,000. Nevertheless, connections between the two cities remained manually operated until 1961.

The arrival to power of the Salazar government spelled a new era for both CPRM and CTT. The government recognized that the telecommunications sector played an important role in its political aims, in particular the maintenance of control over the country's colonial empire. The new government brought about greater cooperation between CPRM and CTT, and also ended the illegal wireless transmissions during the 1930s and 1940s. The need to ensure strong communications between Portugal and its colonies, which were more and more subject to growing nationalist unrest, helped make CPRM's success a priority of the Portuguese government.

During the 1950s, as its contract renewal date approached, CPRM worked to make itself indispensable, forging agreements with submarine cable operators Italcable and Cable and Wireless, in which CPRM took over the role as coordinator of long-distance communications among the three providers. The government ultimately renewed CPRM's contract in 1966, if only because it lacked the technological capacity and personnel to operate the intercontinental wireless network.

Control and Reform in the 1970s

The increasing unrest in Angola, Mozambique, Guinea-Bissau, and other Portuguese colonial possessions transformed the telecommunications sector into a vital and politically sensitive sector. The Salazar government became particularly anxious about the country's situation, in which much of its telecommunications sector remained part-owned by foreign interests. In 1968, therefore, it nationalized the 51 percent of CPRM controlled by Portuguese interests, effectively taking control of the company. CPRM's British shareholders finally sold out their stake in the company to the government in 1972.

APTC, meantime, had continued investing in its networks in Oporto and Lisbon, bringing the total number of lines in those cities to more than 312,000 by the mid-1960s. Yet, recognizing that its contract would most likely not be renewed by the Salazar government, APTC more or less ended further investments in the early 1960s, and instead began raising its rates. In 1967, as APTC lapsed, the government took control of its operations and placed them under a newly formed, state-owned company, Telefones de Lisboa e Port (TLP). CTT in its turn also was restructured, and converted into a state-owned for-profit corporation.

The change in government, which saw Marcello Caetano replace Salazar in the late 1960s, had a major impact on the telecommunications sector. Whereas Salazar had sought to control the telecommunications sector as a means to assert and develop his political control, Caetano recognized the telecommunications market as a means of reviving Portugal's flagging economy. Under the Caetano government, therefore, the telecommunications market became the focus of massive government investment throughout the 1970s.

The Caetano government also sought to streamline the country's three-headed telecommunications industry, pushing for a merger between TLP and CTT. Yet the coup d'état of 1974 and the resulting political upheaval led the government to abandon the plan. Successive minority governments, as Portugal struggled toward democratic stability into the mid-1980s, continued to hamper the expansion of the country's telecommunications network. By the late 1980s, Portugal's telecommunications sector lagged far behind its Western European counterparts. Indeed, with penetration rates as low as just 15 lines per 100 people, it placed behind many Soviet-dominated Eastern European countries as well.

Reform of the country's telecommunications industry began in earnest after Portugal was accepted into the European Community in 1986. In that year, the government commissioned a study of the industry, resulting in a series of recommendations that led to the adoption of a new Basic Telecommunications Law in 1989. The new legislation represented a landmark in the Portuguese telecommunications industry and pointed the way to the creation of a single national company, Portugal Telecom.

That reform gained momentum in 1992, when legislation was passed to separate CTT into its postal and telecommunications operations, with the latter renamed as Telecom Portugal. In that year, also, the Portuguese government set up a new holding company for its various communications interests. That company, called Comunicaçoes Nacionais (CN), then became the umbrella for CTT, Telecom Portugal, CPRM, TLP, and the country's television broadcasting arm, Teledifusora de Portugal (TDP).

Global Operations in the 2000s

CN proved short-lived, however. By 1994, the company had completed a series of mergers among its subsidiaries, resulting in the fusion of Telecom Portugal, TLP, CPRM, and TDP into a single, national telecommunications powerhouse, Portugal Telecom.

Through the remainder of the 1990s, the Portuguese government carried out a privatization program for PT. This occurred in several steps, starting with the public offering of 27.26 percent in 1995. By 1996, the government's stake had dropped to just 51 percent and by 1997, PT became privately controlled at 75 percent. The Portuguese government nonetheless continued in its privatization, and by the end of 2000 had sold all but 500 so-called "golden shares" in the company. In this way, PT had become the most privatized of the European telecoms.

PT in the meantime began investing heavily in new technologies, such as mobile telephone services starting in the early 1990s and internet access services under the Sapo name in 1995. In 2002, the company rolled out Sapo ADSL, bringing broadband to Portugal. By 2003, the company had firmly embraced the digital age, with the avowed goal of transforming Portugal into a digital society. In that year, the company rolled out its PT Wi-Fi service as well.

In the meantime, PT also had begun to expand internationally. For this, the company targeted the world's Portuguese markets, especially the huge Brazilian telecom market. In 1998, PT joined with partner Telefonica Moviles to enter Brazil, acquiring state-owned Telesp Celular in what was then considered the world's largest privatization offer. The purchase marked the start of a $5.5 billion investment in the Brazilian telecommunications market by PT, leading to the launch of the nationally operating VIVO service, with more than 17 million customers and a potential market of more than 125 million subscribers.

By 2004, PT and Telefonica Moviles signaled their intention to build a major presence in the South American market, with the announcement of an agreement to acquire BellSouth's operations in the region for $5.8 billion. This purchase brought the company into Argentina, Chile, Peru, Colombia, and Venezuela. Led by Miguel Horte e Costa, PT now laid claim to the title of being one of Europe's most efficient telecoms, with a debt-to-equity ratio of just 1.75. Indeed, as Horte e Costa proudly told the Financial Times, PT had grown into "the jewel in the crown" of Europe's telecommunications industry.

Principal Subsidiaries: Brasilcel N.V. (Brazil); PT Prime - Solucoes Empresariais de Telecomunicacoes e Sistemas S.A.; Telepac II - Comunicacoes Interactivas S.A. TELEPAC; TMN - Telecomunicacoes Moveis Nacionais S.A.; TV Cabo Portugal S.A.

Principal Competitors: Turk Telekomunikasyon End A.S.; Deutsche Telekom AG; France Telecom S.A.; TRACTEBEL S.A.; Telefonica S.A.; British Telecommunications PLC; Bouygues S.A.; MCI Inc.; Sprint Corporation.

Chronology

• Key Dates:
• 1877: The first telephone service is installed between Lisbon and Carcavelos.
• 1887: APTC (Anglo Portuguese Telephone Company) takes over the telephone concession for Lisbon and Oporto.
• 1905: CTT takes over the creation of domestic telephone service outside of Lisbon and Oporto and connects two cities for the first time.
• 1925: Companhia Portuguesa Rádio Marconi (CPRM) is created to develop Portugal's wireless intercontinental telecommunications system.
• 1930: APTC installs the first automatic exchange in Lisbon.
• 1952: APTC installs an automatic exchange in Oporto.
• 1967: The Portuguese government takes over APTC's operations, which are placed under Telefones de Lisboa e Port (TLP).
• 1968: The government nationalizes 51 percent of CPRM, then buys out its British shareholders.
• 1989: The passage of the Basic Telecommunications Act paves the way for privatization of the telecommunications sector.
• 1992: CN is created as a holding company for government-owned communications interests.
• 1994: Portugal Telecom (PT) is created as a single national telecommunications company; the government begins privatization of PT.
• 1998: PT and partner Telefonicas Moviles acquire Telesp Celular in Brazil, entering that market's mobile telephone sector.
• 2000: Privatization of PT is completed.
• 2004: PT and Telefonicas Moviles acquire the South American regional operations of BellSouth.