Business News | May 2007
|Carlos Slim Moves From Telecommunications Into Real Estate|
Adriana Arai - Bloomberg News
Mexico City - When Carmen Moreno jogs by the Nezahualcoyotl open-air garbage dump in the working-class outskirts of Mexico City, she wears a surgical mask to block the stench.
But that is where Carlos Slim, who rivals Warren Buffett as the world's second-richest man, smells money.
Slim, 67, acquired the landfill last year for an undisclosed amount and plans to spend $150 million by 2010 to develop a shopping mall, two schools, a hospital and a park on the site. The project, located in a sea of concrete featured in the Denzel Washington film "Man on Fire," is part of Slim's new push into real estate and construction, which he is betting will be profitable as the Mexican economy grows.
Investors are not so sure. After making his fortune from telecommunications, Slim turned to construction two years ago. Shares of his infrastructure company, Impulsora del Desarrollo y el Empleo en América Latina, are flat this year, compared with a 12 percent gain in the Mexican benchmark Bolsa index. First-quarter net income fell 71 percent to 129.7 million pesos, or $12 million, after two consecutive quarterly losses.
"Though Slim is a renowned businessman, experience matters in the field of infrastructure," said Mauricio Brocado, head of research at Actinver in Mexico City. "There's a lot of expectation, but little is concrete."
Investors see more dependable profits coming from conventional projects, mainly toll roads, than from gentrifying a dump. Ideal, as Slim's infrastructure company is known, obtained two government highway concessions after its September 2005 initial public offering - one that month and one in December 2005. It has not won any toll-road auctions since then.
Slim's advisers say their infrastructure plan will eventually bear fruit.
"These are long-term projects," said Jaime Chico Pardo, who was named co-chairman of Ideal in September after serving as the chief executive of Teléfonos de México for almost 12 years. "One cannot judge its performance by its quarterly statements, especially because it's a newly created company."
The son of Lebanese immigrants to Mexico, Slim has amassed a fortune of $53 billion, according to Forbes magazine, by building Teléfonos de México and América Móvil into the largest telecommunications carriers in Latin America. That wealth makes Slim either the second- or third-richest man, about even with Buffett and behind Bill Gates of Microsoft.
Since the start of 2006, Mexico City-based Ideal has won three infrastructure contracts. That is fewer than its biggest local competitor, Empresas ICA. During the same period, Empresas obtained 18 Mexican projects valued at $1.09 billion, including airports, toll roads, hospitals and oil platforms.
Ideal also faces competition from international companies like Madrid-based Acciona and Barcelona-based Fomento de Construcciones y Contratas for the biggest and most profitable contracts in Mexico.
Next, the Mexican government plans to sell $25 billion of toll roads it took over from private companies following the December 1994 currency devaluation. Slim teamed up with Macquarie Infrastructure Group of Australia to bid for the first of four packages of highways this year.
Some investors believe Ideal will win part of those contracts, which could trigger gains in the stock.
"Ideal will do fine," said Christopher Palmer, who helps manage emerging-market equities for Gartmore Investment Management in London. "They're very good at structuring finance."
Still, shareholders complain there is not enough information available about Slim's construction ventures. Ideal is still building a Web site. The company has not sent statements to the Mexican Stock Exchange to inform shareholders of some projects, including the Nezahualcoyotl development, a water-treatment plant contract, and a partnership with the Mexican hospital chain Star Médica.
Slim is betting on one of the poorest zones surrounding Mexico City at Nezahualcoyotl. Workers there earn an average 37,426 pesos annually, 70 percent less than in Mexico City, according to a 2003 government study, the latest available.
The development may take 12 years to yield a return, compared with about eight years in a typical real estate investment, said Heberto Guzmán, partner at Gucahe Corporación Inmobiliaria Integral, which originally designed the project.
"They're trying to develop a poor area that isn't very friendly," said Carlos Hermosillo, an analyst at Vector Casa de Bolsa, a brokerage in Mexico City. "I don't think it's a problem for Ideal's stock as long as they keep on working on bigger projects."
While the bet on this landfill may seem risky, a decade of low inflation and growing access to credit is prompting a boom of consumer spending across Mexico, even in working-class enclaves like Nezahualcoyotl, which has a population of 1.3 million.
Grupo Elektra, Mexico's largest consumer electronics retailer, sells 2,000 flat screen televisions a year at its store in the area, making it the third-best-selling outlet in the metro area, said the regional manager, Oscar Arias Montiel.
"The people here work hard, they want to move up," said Guzmán, whose company owns a third of the landfill.
Slim's mall will have 178 stores, including Inditex's Zara fashion chain and Slim's Grupo Sanborns and the Mexican unit of Sears Holdings, said Manuel Martín, who manages mall rental contracts for Slim's companies. Wal-Mart de Mexico will set up shop next door, Ideal said.
Ideal will also collect rent from a university, a hospital and a school that will be built around the mall, said Adrián Pandal, the company's project manager.
The park, the first in Nezahualcoyotl, will include 34 soccer fields, 12 tennis, basketball and volleyball courts, a baseball court and a gym with a pool, according to Ideal.