An arbitrage opportunity is possible right this minute by shorting Nortel Inversora S.A. while using the proceeds to go long with Telecom Argentina S.A. In fact, Nortel Inversora’s only asset is the ownership of a controlling block of common stock comprising 55% of Telecom Argentina and right now that shareholding alone trades at a market value hovering $ 2 billion while the entire holding company in question, which trades in Buenos Aires and here in the US, as an ADR on the NYSE under the ticker symbol (NTL), currently fetches in turn just over $ 3 billion in market value. In other words, Nortel Inversora trades at a premium to its underlying NAV. As a consequence, it is just a matter of time before spread widening starts gaining ground. Likewise, the Argentine Werthein clan, which used to be partners 50/50 with Telecom Italia S.p.A. in the investment vehicle that owns 78% of Nortel and known as Sofora Telecomunicaciones S.A., has been divesting themselves of their shares in Sofora going from 50% not too long ago to 32% presently. In similar fashion, Telecom Italia is now following the same course by selling its 68% shareholding in Sofora to Mexican financier David Martínez Guzmán for a cool $ 960 million. Moreover, why are both the Werthein family and Telecom Italia cashing out on their investment in Sofora and selling to a self-made Mexican financier who specializes in distressed debt through a vulture fund known as Fintech Advisory Corporation? The answer I have is that Nortel Inversora is overpriced and consequently, the only direction of the stock is to go down or lose value steadily but maybe not in a steep manner. Moreover, since what we have here is a scenario of one public company being underpriced while its controlling holding and publicly-traded entity is overpriced, the arbitrage we have in question is one of spread widening. Accordingly, the strategy that should be implemented is shorting Nortel Inversora and using the proceeds to go long with Telecom Argentina. Another possible scenario but less profitable is going long Telecom Argentina only. Maybe Nortel is priced correctly while Telecom Argentina is underpriced and is just a matter of time before the latter catches up with the former. Nevertheless, I would personally go with the first scenario because is potentially more lucrative and like George Soros said to his protégé Stanley Druckenmiller when shorting the British Pound Sterling in the early 1990s, you’ve got to go for the jugular.
To conclude, Telecom Argentina generated roughly $ 500 million in profits from around $ 4.5 billion in combined revenues during 2012 and giving the company a current price/earnings multiple of 8 which is low even to Latin American standards taking into consideration economies like Argentina which are projected to take off like Chile according to some economists. Currently, Telecom Argentina fetches close to $ 4 billion in market value including shares listed as ADRs on the NYSE under the ticker symbol (TEO) while possessing a very strong market position stemming from being part of a duopoly together with Telefónica Argentina S.A. In addition, the telecom carrier is one of three wireless telecom services providers in the country besides offering wireline telecom and broadband internet services covering the most populous region in Argentina by including Greater Buenos Aires.