Brazil watchdog probes TNL appraisals

An inquiry by the CVM, Brazil’s securities commission, has found that Ernst & Young and JPMorgan significantly overestimated the value of a Brazilian mobile telephone operator while working on a merger that took place in May 2003.

The three-year inquiry, whose report has been seen by the Financial Times, found that Ernst & Young and consultants working for it overstated the company’s market value by R$1.17bn ($595m).

The deal involved the sale by TNL, a holding company, of Oi, its mobile operator, to Telemar, its fixed-line operator, for R$4.76bn in debt.

The report says Ernst & Young and its consultants engaged in “double-counting” of installation and other costs which inflated the company’s fixed and intangible assets; failed to adjust liabilities to market value even though the company had itself done so in its most recent accounts presented before the merger; and over-estimated the value of the company’s operating licence by at least 130 per cent, booking it at the price paid two years previously and ignoring reductions in the value of similar licences sold shortly before the merger.

The report says JPMorgan, hired to provide an estimate of the company’s enterprise value, failed to justify its range of R$4.05bn to R$5.2bn. The mid-point of JPMorgan’s range, of R$4.58bn, was equivalent to US$1.36bn at the time and significantly higher than valuations made by six other investment banks in the four months prior to the deal, of between $500m and $1bn.

None of those named in the report were available or willing to comment yesterday. The CVM also declined to comment.

TNL used the valuations to justify selling Oi to Telemar for R$1.00. It said the symbolic price absolved it from the need to call a shareholders’ meeting to approve the transaction.

The inquiry found that TNL broke the law in this and other regards and has called on the CVM’s board to take action against 18 named individuals including Telemar’s management and representatives of TNL’s controlling shareholders.

The CVM’s board will conduct hearings until the end of the month before reaching a judgment. Several minority shareholders in Telemar have complained that the deal favoured TNL’s controlling shareholders.

An action for damages is under way in a Rio de Janeiro court.

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