TheChek News Flow

Telefonica [BME:TEF] could struggle to win regulatory approval if it decides to offload its Mexican wireless unit Telefonica Moviles Mexico (Movistar) to a local competitor, according to several sources.

The Spanish telecom giant, whose share price has dropped 25% in the last year, continues to review its portfolio as it focuses on return-on-capital, said a person familiar with the company. It has received many pitches to leave Mexico but there are no concrete plans to do so yet, the person said.

Telefonica, which declined to comment, has 24.6m subscribers in Mexico, which represent about 21% of all the country’s wireless users.

On 25 September, Spanish newspaper El Economista reported (citing sources privy to the process) that Telefonica was considering selling its units in Mexico and Central America to raise between EUR 1.9bn and EUR 2.7bn and cut its debt. At the end of June, the company’s net debt stood at EUR 43.6m.

While it has long been rumored that Telefonica could sell Movistar and its Central American business, the talks seem a little bit more serious than previous times, said a sector banker.

Ignacio Cepeda, a local telecom consultant, said Telefonica’s Mexican unit could be worth about USD 1bn.

By taking over Movistar, AT&T would expand its subscription base to 40.7m from 16m and reach a 35% market share. Incumbent AmericaMovil [BMV:AMX] controls a 64% market share, according to Mexico’s telecom regulator (IFT)'s data.

According to Cepeda, it is unlikely that IFT would approve a deal that would see the number of wireless carriers operating in the country reduce from three to two.

Legislation introduced in 2014, however, might allow AT&T to takeover Movistar without needing regulatory approval, said Mony de Swaan, Mexico’s former telecom regulator czar.

A transitory article in the law states that as long as there is a so-called “prevailing economic agent” in the country’s telecom sector that controls a market share of more than 50%, competitors could merge together without needing the regulator’s blessing if, among other things, the deal does not hinder competition.

Local media giant Televisa used this provision of the law to take over private cable operator Cablecom in August 2014 without requesting authorization from the IFT. The regulator would have to determine if an AT&T-Movistar deal falls under this category, said de Swaan. The IFT did not respond to requests for comment.

In 2014, the regulator labeled America Movil a prevailing economic agent in Mexico’s telecom sector and imposed asymmetric measures to try and level the playing field.

But even if AT&T were to successfully acquire Movistar, it would surely go beyond the country’s spectrum-holding limit and would be forced to give back some of it to the Mexican state, said Cepeda.

AT&T, which declined to comment, currently controls 201.8MHz, or 33.7% of Mexico’s radio frequency spectrum. Movistar, for its part, controls 103.9MHz, or 17.4%. Mobile phone carriers like AT&T use radio frequency spectrum to transmit wireless data to cell phones.

According to Cepeda, it would not be in the IFT’s best interest to take spectrum back from AT&T. “Who would they sell it to?,” he asked, noting that America Movil (the only other carrier operating in the country) is already near the spectrum-holding limit.

De Swaan disagreed and said the regulator could use that spectrum to entice new cellular carriers to venture into Mexico.

Millicom declined to comment. Sprint and Novator did not respond to requests for comment.

It is no secret that Movistar is struggling, said Pavon. In 2016, the Spanish company wrote down the value of the unit by EUR 91m.

“The results of Telefonica Mexico continue to be affected by regulatory changes and increased commercial aggressiveness on the prepaid market,” the company said in its 2Q18 earnings report.

Movistar was particularly hit by the IFT’s November 2017 decision to allow America Movil to resume charging mobile termination rates (MTRs), said Cepeda.

Mexico’s Supreme Court had ruled a provision in the country’s telecom legislation that prevented America Movil from charging MTRs unconstitutional.

MTRs are fees paid by carriers every time one of its subscribers places a call to a subscriber of another carrier. Local brokerage Intercam estimates America Movil will receive between USD 45m and USD 55m from MTRs in Mexico in 2018.

Movistar is also beset by shrinking wireless traffic and rising operating costs, Cepeda said.

The company’s share of the country’s wireless traffic has dropped to 8.5% in June from 20.8% in September 2008. And its annual operation costs could grow by about USD 100m as it will start paying for the right to use the 40 MHz in the 2.5 GHz band it secured in August and to renew concessions for 140 Mhz in the 1.9 GHz band, said Cepeda.