Telefonica faces tougher competitive landscape in Mexico, sources say
The Spanish mobile phone carrier Telefonica (BME: TEF) could find itself battling to maintain its position as Mexico’s second largest cell phone operator, said a source close to the company, an industry lawyer, and two industry analysts.
AT&T’s recent acquisitions of Mexico-focused mobile phone carriers could pose a significant threat to Telefonica’s market share, said Mony de Swaan, the former head of the Comision Federal de Telecomunicaciones (Cofetel), the predecessor to Mexico’s current telecom regulator Instituto Federal de Telecomunicaciones (IFT).
“We’ll see who ends up being Mexico’s second largest mobile phone carrier,” he said.
AT&T (NYSE: T) announced in November it would acquire Mexico City-based mobile phone carrier Iusacell for USD 2.5bn and, in January, it agreed to acquire Mexican subsidiary Nextel Mexico from Virginia-based NII Holdings for USD 1.9bn, less outstanding debt.
In less than three months, AT&T acquired 12 million Mexican mobile subscribers, according to the company’s press releases. It took Madrid-based Telefonica six years and more than EUR 2.6bn (around USD 2.9bn) to achieve that feat.
“(AT&T) is entering the Mexican market very aggressively,” said a source close to Telefonica. “It will be interesting to see how they do in Mexico.”
Telefonica entered the Mexican market in 1999, and in 2002 it became the country’s second largest mobile carrier, behind America Movil (NYSE: AMX). Although the Spanish operator has never had more than 20% of the Mexican mobile phone market, its position has not been threatened — until now.
Consolidating market
Mexico’s mobile phone market, which together with Colombia is Telefonica’s top priority, will consolidate, said an industry source familiar with the Spanish cell phone carrier. The Spanish carrier needs to work out what it needs to do in this new context, he added.
But there are not many mobile phone assets available in Mexico, said the source close to Telefonica.
The only assets currently available are America Movil’s, which last month AT&T CEO Randall Stephenson characterized as “too uncertain.”
America Movil is selling some of its Mexico-based assets to reduce its market share and avoid antitrust measures that would require it to share infrastructure and lower the service fees it charges its competitors, including Telefonica and AT&T.
According to the source close to Telefonica, the Spanish mobile phone carrier is not considering buying America Movil’s assets. Telefonica fought hard for Mexico’s telecom regulator to impose antitrust measures on America Movil, and the Spanish carrier is not willing to help America Movil escape that predicament by buying their assets, he said.
To be sure, Telefonica’s growth in Mexico’s mobile phone market hinges on the regulatory situation of the country’s telecom industry, added a person familiar with the company.
The Spanish mobile phone carrier will be analyzing telecom targets that could help it provide converged services, said another person familiar with Telefonica’s thinking. In fact, he said, the company could probably surprise everyone with an unexpected deal.
“But every day there are fewer options,” said the source close to the company.
Mexico’s telecom reform, approved last year, allows mobile phone carriers like Telefonica to use America Movil’s network for free, said De Swan, who now runs a telecom consultancy firm. It also allows foreign companies, like Telefonica, to acquire up to 100% of fixed-line telecom operators.
Five or six years ago, the Spanish mobile phone carrier was interested in buying a fixed-line telephone company but was prohibited from doing so by the Mexican constitution, said Ernesto Piedras, director of the Mexico City-based telecom consultancy The Competitive Intelligence Unit.
However, De Swan said he believed Telefonica had spent more time lobbying and challenging regulations than exploring other options to grow market share.
In 2011, Telefonica’s Mexican subsidiary lost EUR 124m (USD 140m) — almost 8% of its revenue that year — when the country’s then telecom regulator decided to reduce mobile phone service fees by 60%.
The regulator’s decision prompted Telefonica to submit a Request for Arbitration against the Mexican government before the International Center for Settlement of Investment Disputes (ICSIC), an international arbitration institution sponsored by the World Bank. The Spanish mobile phone carrier demanded compensation of USD 992m, according to Mexico’s government officials.
A spokesperson for Telefonica declined to comment.
“AT&T, on the other hand, has not yet complained about Mexico’s telecom regulator, its regulatory situation or service fees,” said De Swaan. “They came (to Mexico) to invest and compete.”
Missed opportunity
Up until last year, Telefonica was looking to form a joint venture with Mexico City-based Televisa (NYSE: TV), said the source close to the Spanish mobile phone carrier. “Telefonica would have had a majority stake,” the source added.
Mexico’s Televisa, which is family controlled, owns or hold stakes in four cable companies; a satellite provider; and a telecom service company. Up until September 2014, it also owned 50% of Iusacell.
The deal with Televisa, however, hinged on its ability to acquire control of Iusacell, the source explained.
The deal fell through when Televisa was unable to convince Ricardo Salinas, a Mexican media tycoon, to sell the other 50% of Iusacell. Instead, Televisa sold its stake in the Mexican mobile phone carrier to Salinas for USD 1.6bn.
“That was the end of that,” said the source close to Telefonica.
Telefonica may have lost its chance to offer multiple telecom services in Mexico, said an industry lawyer. Its Mexican subsidiary might end up only offering mobile phone services, he added, at a time when most major providers are pursuing strategies to offer bundled services.
The Spanish mobile phone carrier, however, is still looking to expand its telecom services offerings in Mexico.
One possibility, said De Swaan, is for Telefonica to buy a fixed-line telephone company, “taking advantage of the telecom reform that now allows foreign investors to acquire telecom operators.”
But the Spanish mobile phone carrier currently does not have the liquidity to buy a fixed-line company in Mexico, said an industry M&A advisor.
Telefonica generated EUR 2.8bn (USD 3.2bn) of free cash flow from January to September 2014. AT&T, in contrast, generated USD 8.6bn, according to financial filings.
AT&T could also be looking to buy a Mexico-based fixed-line telecom operator, added the industry lawyer and Piedras.
“The truth is Telefonica could have bought the two (Mexican) mobile phone carriers that AT&T ended up acquiring,” said De Swaan. “We are discussing the chances of AT&T overtaking Telefonica in the Mexican market simply because Telefonica decided not to buy these two mobile phone carriers.”