AOL Latin America: Down South

Of course, America Online is more than America. In a sense, the company
wants to be World Online. To satisfy its global ambitions, this week AOL
launched the IPO of
AOL Latin America (let’s call it AOLA for short).
In the IPO, AOLA raised about $200 million.

Unfortunately, the aftermarket performance was quite lackluster. On its
first day of trading, the stock was up a mere 7/16 to 8-7/16.

Keep in mind, the original price range of the IPO was $15-$17. The lead
underwriter, Salomon Smith Barney, then slashed the price range to $8-$10.
What’s more, two new investment banks were added to the underwriter’s list
(Prudential and Cazenove). There was also a delay of the IPO. In other
words, investors had very little interest swallowing 25 million shares of
AOLA. Interestingly enough, right before the IPO, the Cisneros Group and
AOL came in to purchase 8 million shares.

Now, this is not to imply that AOLA is a troubled company. Actually, the
company’s strategic backers will provide many advantages. AOL will help to
not only provide strong brand recognition, but also help with
infrastructure. As for the Cisneros Group, it will help with regional
issues in Latin America (the Cisneros Group is a leading media company in
Latin America).

Basically, AOLA will offer an AOL-style subscription online service to the
big market segments: Brazil, Mexico, and Argentina. AOLA launched its services in
Brazil in November, 1999 and Mexico in July 2000. The Argentina service is expected soon.

So why are investors nervous? First of all, while the Internet market in
Latin America is growing strong, it is nonetheless small. Thus, expect AOLA
to sustain losses for quite awhile. For example, for the nine months ended
March 31, 2000, losses were $51.2 million. Sales were a pittance: $5.2
million.

Next, the regulatory environment in Latin America is suffocating. Local
phone calls are charged on a minute-by-minute basis. Moreover, credit card
billing is a new thing in Latin America. In fact, about 22% of AOLA
accounts are past due.

Finally, the competition is intense. Competitors include Star Media, Terra
Networks, El Sitio, Telmex and so on.

In view of all this, it is no surprise that investors stayed away. And, it
should not be surprising that this will continue, putting further pressure
on the stock price. AOLA will likely be a stock that is out-of-favor for
some time.