Shaul Shani, an Israeli entrepeneur in the software market, last week stood next to the president of Brazil and signed an agreement that turned the company that he heads, GVT (Global Village Telecom), into the second largest internal communications operator in one third of Brazil. GVT will supply telephony services to a population of approximately 40 million - almost seven times the population of Israel.
Within eighteen months, GVT has joined the world's top league of communications operators, and will soon dwarf Bezeq. The background was winning a tender in Columbia for constructing and operating a telephony network for $80 million.
The transaction which created GVT was closed in April 1998. What started as a relatively small transaction today appears as potential for a giant Israeli success story, which may exceed that of Check Point, Amdocs, Mirabilis, and the like.
GVT is controlled by the Magnum group, represented in Israel by chairman and general manager Shaul Shani , which holds approximately 55% of the company. Shareholders of US investment bank Merrill Lynch hold 20%, Clal Information Technologies 10%, Discount Investment and PEC 10% and Gilat Satellite Networks 5%. Gilat is soon expected to convert $7.5 million in debentures, which will be put into GVT and will increase GVT's capital to $50 million. Gilat's share of GVT will rise to 20% at the expense of the Magnum group, whose share will fall to 40%. The GVT founding agreement gives Gilat a further option to increase its holding, provided that GVT achieves a cumulative yield on capital of 45% per year.
Joshua Levinberg, one of the legendary founders of Gilat Satellite Networks, was appointed general manager of GVT. His mission was the construction and operation of telephony networks for rural areas in developing countries using the VSAT satellite communication method. Gilat brought to the partnership a tender that it won in Chile for installing 1,500 village telephones for $4 million from the Chilean government and a franchise to operate the network for 20 years. Two additional tenders, for 250 units each, were subsequently won; the total was 2,000 points.
The idea of bringing the most up-to-date communications to the remotest areas shows originality and a spirit of adventure. One of the most exotic sites in Chile in which GVT works is Puerto Natales, below 500 of latitude, near Tierra del Fuego. This site is the point of departure for expeditions to Antarctica. GVT has connected this site to the outside world.
Three Lines at Less than $4,000
Rural telephony already exists, but is very expensive. GVT offers it at a cheap price of less than $3,000 per line - the lowest price in the world today. Gilat's VSAT satellite technology, called "VSAT dial-away", makes possible communication on three lines. It is the only existing product that can provide three lines for less than $4,000.
Exotic sites and profits are not synonymous. Chile was a test case. Most of GVT's profit is to come from operating the network, not from its construction, and problems have arisen. Telephones were installed, some as public telephones and some as regular telephones in important stores or public buildings, but the number of call minutes was disappointing, to say the least. Meanwhile, GVT won another tender, in Peru, and problems at home also appeared.
The group holding the largest share of GVT, the Magnum group, disagreed with policy. Magnum is a group of European investors, which invests mostly private capital, makes few investments and shows active involvement in all of them. The group's representative in Israel is "Limon Investments", owned by Shaul Shani, Zvika Limon and Dani Toktali. When GVT was created, Shaul Shani was appointed as non-executive chairman.
Shani is one of the most successful (and one of the more anonymous) entrepeneurs in the Israeli high-tech market. He was among the founders of Oshap and served as its general manager. He created and managed Sapiens, Technomatics, Eurosoft, a European software company, and Precise. The Magnum group, represented by Shani, Limon, and Toktali, currently holds a controlling interest in DSPG.
Shaul Shani: "We had disagreements concerning GVT's long-term strategy. We queried whether it was possible to achieve a critical mass of business in rural areas that would enable the network to grow to a point which would allow the creation of a telecommunications company which would provide services to additional suppliers.
Conflict between Levinberg and Shani
Here a conflict arose. Levinberg advocated continuing advancement of satellite technology. Shani pressed strongly for using fixed wireless technology in all its aspects in urban or semi-urban areas, while seeking mostly business or private customers. He said rural customers would not provide profits.
The disagreement was not solely about profits, but also about vision. Gilat had discovered a niche and wanted to exploit it. The fact that Gilat supplied equipment to that niche only encouraged Gilat to concentrate on it; Gilat could profit in two directions. Shani, on the other hand, thought in terms of the larger picture, rather than niches. Satellite projects for rural areas can be profitable, but the long-term business model is insufficient for building a telecommunications company. Telecommunications company was the key term for Shani, who came from the computer and electronics sector and lacked communications experience.
The disagreement continued during the second half of 1998. Towards the end of this period, Shani was appointed executive chairman of the group. His role was to help examine a new strategy, while Levinberg continued to act as general manager. The decision clearly favored Shani's position; within two months Levinberg resigned and Shani was appointed general manager while remaining chairman.
At the end of 1998, GVT won another tender in Peru, in competition with several international companies. In the first tender, from mid-1998, GVT committed to construct 193 telephones in isolated settlements in 4 regions in Peru for $3.9 million and a 20-year operating franchise. At the beginning of 1999, GVT won a license to supply long-distance and international telephone call services in Peru. US company Bell South won a similar license, and Telefonica Del Peru's monopoly was broken.
After exhaustive negotiations, an agreement has been signed with Telefonica. According to the agreement, from the beginning of October GVT is the first company besides Telefonica to transmit telephony traffic in and out of Peru. The traffic will be initially between Peru and Latin American countries and the US. This is a landmark for GVT, which from being a "niche" company has become a full-fledged telecommunications company. The tenders won in Brazil and Columbia only underline GVT's new status.
Shani describes his vision: "We can become a leading player in various wireless technologies, competing mainly in countries whose infrastructure is inadequate, but also in countries like the UK and the US. In a number of places in Europe a new operator in local telecommunications is operating using WLL."
"Globes": This is actually your first involvement in communications.
Shani: "Since the change in GVT, I have devoted most of my time to GVT and I have learned. GVT's current worth is estimated at several hundred million dollars, and we are discussing a share issue with investment banks. If we sign a provider financing agreement in Brazil, which is expected in two months time, GVT's value will increase to about $1 billion. Some companies, mostly cellular ones, specializing in the third world, have a achieved a worth of $2-$3 billion within 2-3 years. In Brazil, we have proven that it is possible to build a multibillion dollar business within a few years by combining the latest technology, business aggressiveness and readiness to invest on a very large scale."
What happened in Chile, and what is the state of the project?
"The reason for the disagreement in Chile was lack of imagination and drive concerning the franchise. When I became involved, I ran the installation program. Within 4 months starting in March 1999, we ran a large installation campaign. By July, we had installed over 1,000 units and achieved what had been expected to take until February 2000. Another change was more specific targeting of lines, instead of to an entire community. We began to sell lines to businesses and private parties - with packages tailored to the customer's traffic pattern. Today all lines are VSAT-based, but our intention is to create a critical mass and to convert to WLL. Every month we sell several dozen lines. In August we sold 70 new lines."
Are all the lines satellite lines?
"Every VSAT has three lines. One is near the dish, while the other two can be stretched to a distance of up to a kilometer. Wherever we have 3 or more VSAT points in an area, our current strategy is to leave one and attach telephones to it using WLL."
How much was invested in Chile?"The government invested about $8 million and GVT has invested $12-$13 million."
Will Israeli companies participate in the tender for the supply of WLL equipment in Brazil?
"All the large companies in the world will participate in the tender, such as Lucent, Nortel, Siemens, Electel, Nokia, Ericsson, Bush and apparently ECI as well. The deal is worth approximately $400 million, and apparently will involve more than one supplier. The problem is financial. Most of the financing will be by the supplier, so it's a game for large players. We are committed to difficult time schedules. It is possible that, for specific reasons, we will purchase WLL for the area of a small city from a small supplier, and small Israeli companies which sell WLL could be involved."
Besides Chile, Peru, Brazil and Columbia, do you have contracts in additional countries?
"In Guatemala, we have an international and a local license; in the US, we have a license to receive and transmit traffic with Florida, where our management is located, near Miami."
How do you intend to conquer the world in the era of global communications?
"Today we are creating critical mass in South America. We have received many offers to participate in consortiums in various countries in Southeast Asia and Africa. We want to create a regional Pan-American network to transfer voice and data from one country to another. In Chile we are receiving a license for international communications at the beginning of 2000. An international network will reduce costs."
Is there any strategic significance to the involvement of RSL COM from the Lauder group in the Brazilian project?
"We were looking for an experienced operator. They want to be very involved in international traffic."
Are you currently involved in any other tenders?
"We are competing in a tender for 2,300 points in Peru. Presentation of bids is expected on October 16, and the deal is worth an estimated of $20 million. The technologies we are offering are VSAT, WLL, and normal radio. I believe we have an advantage, because of our interconnect agreements with Telefonica Del Peru and our general national license."
Up to now, you were in the Gilat Building in Ramat Gan.
"True.That was another source of friction with Gilat. The management is currently moving to the US to Ford Laudbel near Miami, Florida."
Are you planning to move into new areas?
"We are entering the field of private networks. We already have initial clients in Chile and Peru. In Chile we are cooperating with a local company in creating a network of cash machines using VSAT satellite communications."
What about the Israeli market? Your experience with WLL and in operating will constitute a significant advantage here.
"You're right. We haven't seriously thought about it. We have had talks with Deutsche Telekom and with Bell Canada about it, and a large local entity asked for a meeting. We are thinking about entering the Israeli market."
Published by Israel's Business Arena October 7, 1999