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Slim Defends Mexico Turf as Telefonica, Televisa Step Up Fight
 Crayton Harrison - Bloomberg
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August 19, 2010
| | Mexican billionaire Carlos Slim whose stake in America Movil now makes up almost three-quarters of his $57 billion in publicly disclosed holdings. (Daniel Acker/Bloomberg) | |
Carlos Slim is facing the Mexican government’s biggest effort in years to bring more competition to the wireless market dominated by his America Movil SAB. The billionaire is likely to turn back the challenge, analysts say.
Grupo Televisa SA and Telefonica SA plan to offer wireless high-speed Internet across Mexico for the first time after winning airwaves in a government auction, the nation’s first since 2005. The companies also won the right this year to use public fiber-optic lines to fortify their networks and compete against America Movil.
While those new assets may bring Mexicans lower prices for mobile phones and services such as Web access, they’re unlikely to do real damage to Slim’s profits in Mexico, said Richard Dineen, an analyst at HSBC Holdings Plc. America Movil’s Mexican division is its most profitable and the fourth most profitable carrier in the world, according to Merrill Lynch & Co.
“Their budget for various activities, whether it’s engineering, investment, marketing, is often equivalent to the summed budgets of their competitors,” Dineen said in an interview. “That is a formidable competitor.”
Through March, the Mexican unit, called Telcel, had 71 percent of Mexican phone subscribers, while Telefonica, its next-biggest rival, held 21 percent. Telcel’s share of the market was the largest of operators in 50 countries studied by Merrill Lynch in a report released in April.
America Movil is the foundation of Slim’s wealth, helping make him the richest man in the world according to Forbes magazine. His stake in the company now makes up almost three- quarters of his $57 billion in publicly disclosed holdings, according to data collected by Bloomberg.
Slim’s Control
The company’s shares have increased 166 percent over the past five years, compared with a 122 percent increase in Mexico’s IPC index.
America Movil acquired a stake of 59 percent this year in Telefonos de Mexico SAB, Mexico’s largest land-line phone carrier. Through last quarter, the Mexican wireless unit represented about half the profits of America Movil.
While the companies operate separately and Telmex must accept traffic from America Movil rivals, having Telmex under its control can help America Movil plan investments, such as where to put its equipment to align with Telmex’s network, said Tomas Lajous, an analyst at UBS AG.
“What’s going to be key for this war is infrastructure,” Lajous, who recommends buying America Movil shares, said in an interview. “It now becomes about execution and investment, and that’s where it’s really tough to compete.”
An America Movil spokeswoman declined to comment.
Benefits of Scale
Telcel also benefits from government rules for phone calls. Mobile-phone carriers are allowed to charge their rivals a fee for calls connected to their users. That rule means it’s cheaper for people who use the same carrier to call each other than to call people who use a rival carrier. Since Telcel has the most users, it has a cost advantage.
NII Holdings Inc., which bid for airwaves with Televisa, has pushed Mexico’s government to reduce such interconnection fees. The company, which operates the Nextel brand in Mexico, also has access to network infrastructure at competitive rates, said Gustavo Cantu, a vice president of NII’s Mexican unit.
“There is no doubt that Nextel will impact the market,” Cantu said in a phone interview.
More 3G Choices
The Federal Telecommunications Commission signed off Aug. 16 on a bid for airwaves from Televisa and NII that will allow them to enter the 3G market across Mexico for the first time.
Telefonica began investing in its third-generation, or 3G network, even before it officially acquired new airwaves last month. The company is offering 3G services in 32 cities, including Mexico City, said Sergio Chueca, deputy director of value-added services for Telefonica’s Mexican unit.
“Telefonica believed and bet strongly on this project,” Chueca said. “In a country like Mexico, price can’t be a barrier. It has to be an accessible price.”
Telefonica may also add assets in the country. Maxcom Telecomunicaciones SAB, Mexico’s fifth-largest phone carrier, is for sale and seeking bids from Telefonica and France’s Vivendi SA, two people with knowledge of the situation said last week.
Telefonica has nicked Telcel’s market share. Slim’s company’s portion of customers has fallen three percentage points from 74 percent in 2007 while Telefonica added five percentage points to reach 21 percent.
In the same span, Telcel’s profit margin has climbed to 59 percent from 53 percent, leaving out interest, taxes, depreciation and amortization. The margin for wireless service in Mexico, leaving out equipment costs, hit a record 70 percent last quarter, said Walter Piecyk, an analyst at BTIG LLC.
Telefonica’s Defense
“Even though there’s some competition coming, they’re not dramatically new operators in the market,” Piecyk said. “I don’t think it’s enough to change the trajectory of where their margins go.”
Telcel’s head start in offering 3G in Mexico has given it more time to build a nationwide network, and further investments would improve the speed and reliability of its coverage. Telefonica and NII, meanwhile, are starting from scratch with their 3G networks.
“As long as America Movil keeps its foot on the gas and maintains a base-station count advantage over rivals, it will enjoy superior service,” said Dineen, who has a neutral rating on the shares. “It would be a decent strategy, it seems to me, to keep those high-end 3G data users loyal.”
To contact the reporter on this story: Crayton Harrison in Mexico City at tharrison5(at)bloomberg.net
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