Source: Wall Street Jounal
By: David Luhnow and Taos Turner
11.10.2013
BUENOS AIRES—As head of a hedge fund that specializes in distressed debt, David Martinez has had lots of practice trying to figure out when an asset's value has been beaten down so much that it is a buy. He has just made an unusual call: Invest in Argentina.
Mr. Martinez's investment group, Fintech Advisory, plans to buy Telecom Argentina TECO2.BA +0.82% and related assets for $960 million from Telecom Italia, TIT.MI +1.76% which is selling its Argentine unit to pay down debt. Mr. Martinez confirmed the purchase Friday.
Argentina has been a cautionary tale for many investors since its 2001 default on $100 billion in sovereign debt. Since then, a husband-and-wife team of populist politicians, the late Néstor Kirchner and his wife, President Cristina Kirchner, has used higher commodity prices and public spending to get the economy back on its feet. But it has come at the cost of high inflation, price controls and growing fiscal problems.
The Kirchners have also repeatedly gone mano a mano with big business, including a long battle with the country's top soy farmers as well as having nationalized oil company YPF SA, YPFD.BA +5.72% previously owned by Spain's Repsol SA REP.MC +0.26% . Mrs. Kirchner's government is now moving to force media giant Clarin SA GCLA.BA -0.54% to break up its business.
"Argentina presents incredible long-term growth opportunities, in my view the highest in Latin America," said Mr. Martinez in an interview. "There is tremendous value in the company. Clearly Argentine values are depressed, but the long-term potential is overwhelming."
Mr. Martinez was born in Mexico and dropped out of a seminary to become a financier. He made a fortune investing in distressed debt from Mexico to India and Pakistan. While he may hunt for bargains in the investment world, Mr. Martinez is known as a free spender in his personal life. He set a record in 2003 for having spent about $42 million for an apartment in Manhattan atop the Time Warner Center. He now spends most of his time in London.
Mr. Martinez is part of a small group of investors who are willing to overlook Argentina's status as a financial pariah and bet long term. Mrs. Kirchner's term ends in 2015, and many investors expect the next government to be more pragmatic and less hostile to business. Chevron Corp. recently agreed to fund most of a $1.5 billion joint venture with YPF to develop Argentina's vast shale oil and gas deposits.
Still, while Argentina may look appealing down the road, risks abound, said Jorge Mariscal, chief investment officer of emerging markets at UBS Wealth Management.
"You can see light at the end of the tunnel," Mr. Mariscal said, "but you don't know if it's the train coming towards you."
Among other things, Mr. Mariscal said Argentina's currency is overvalued. If the government suddenly let it trade freely, it could cut the value of dollar-denominated Argentine assets in half overnight, he said.
Argentina still hasn't paid Repsol for expropriating its 51% stake in YPF last year, and the Spanish company is suing the government for $10.5 billion in compensation. Before taking over YPF, the government had expropriated Argentina's flagship airline from another Spanish company.
In April, Brazil's mining giant, Vale SA, VALE3.BR +0.54% decided to leave Argentina and halt work on a nearly $6 billion potash-mining project after investing $2.2 billion in the project. Like other companies, Vale struggled with rampant inflation, rising costs, a ban on sending dividends abroad and a heavily regulated foreign-exchange market.
There are also risks in the telecommunications market, as the story of Clarin shows. Mr. Martinez has seen from up close how Argentina's government can favor a company one day and undo it the next. He has a 40% stake in Clarin's cable-TV unit.
In 2005, Mr. Kirchner extended Clarín's broadcast licenses for a decade and later let Clarín buy a rival cable TV company. After relations soured, however, the government stripped Clarín of lucrative soccer-broadcasting rights, seized control of a newsprint maker in which Clarín is a shareholder and passed a media law aimed at breaking up the company.
If Telecom Italia and the Argentine government give Mr. Martinez approval for Telecom Argentina, he said he hoped he could keep his minority stake in the cable firm but would comply with any decision from the government, including giving up voting rights or selling his stake. He said it had been a profitable investment.
Argentine officials say Mr. Martinez laid the groundwork for Clarin to comply with the media law by first presenting a plan that voluntarily called for the company's breakup. And as the owner of $1 billion in Argentine bonds, he is trying to help Argentina deal with creditors suing it over the 2001 default. He has proved adept at working with governments to advance mutual interests.
There are challenges, too, in the telecommunications business. Mrs. Kirchner's government called Telecom Argentina a monopoly a few years ago and threatened to nationalize it. Argentina hasn't let telecom companies buy spectrum to improve mobile services, and the country has fallen behind its peers in offering options such as 4G data communications.
"There are obviously some policy limitations that exist in the short term, but that is the short term," he said. "Overcoming that and many other difficulties involves talking to the government and negotiating. These environments are difficult and challenging but that doesn't mean those bottlenecks can't be overcome. I'm quite confident they will."
Mr. Martinez could also find it challenging to compete against the local units of Mexico's America Movil SAB and Spain's Telefonica SA, whose size offers advantages, said Enrique Carrier, a telecom analyst. But Mr. Martinez plans to retain technical assistance from Telecom Italia, which could give him added leverage in the market.
"On top of that, he's buying a business that's profitable," Mr. Carrier says. "In three to four years Telecom Argentina could be worth much more and it would make sense to sell it."
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