Mexican billionaire Slim plans breakup

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Carlos Slim1 Reuters. Mexican billionaire Carlos Slim.

Mexico City - Billionaire Carlos Slim is bowing to imminent antitrust legislation by planning a breakup of America Movil SAB’s phone operations in Mexico rather than risk profit-crushing restrictions if his company did nothing to curb its dominance.

America Movil, the Americas’ largest operator with 272 million wireless subscribers, decided to divest some assets to a newly formed independent company, reducing its market share in Mexican landlines and mobile phones to below 50 percent to appease regulators, America Movil said yesterday in a filing.

Slim’s carrier will also separate its wireless towers from the rest of the business and will renounce its rights to acquire control of satellite-TV provider Dish Mexico. Slim and his family hold 57 percent of America Movil.

Slim, the world’s second-richest man and the son of a Lebanese immigrant to Mexico, has been weighing options for America Movil as Congress considers a bill that would impose the harshest penalties the company has ever encountered, as long as its subscribers represent more than half of the Mexican market.

The carrier currently has 70 percent of Mexico’s mobile-phone subscribers and about 80 percent of landlines.

America Movil has lost about $17 billion in market value since President Enrique Pena Nieto took office in 2012 on promises to spark more competition to boost the Mexican economy.

“The message is clear: They’re reacting to the regulatory pressure,” said Julio Zetina, an analyst at Vector Casa de Bolsa SA in Mexico City.

“I’m surprised they have made a decision like this, and so quickly.”

 

Regulatory Approval

 

America Movil brought a special committee of board members together to study its options after the newly created Federal Telecommunications Institute, or IFT, declared it the dominant company in Mexico’s phone market.

Last year, lawmakers made constitutional changes to let regulators force companies to divest assets if they have too much control over the industry.

The board made the breakup decision based on the committee’s recommendations, America Movil said yesterday.

The measures require regulatory approval and may need the endorsement of shareholders, the company said.

America Movil’s American depositary receipts rose 2.5 percent to $21.25 at 8:45 a.m. New York time in early trading.

America Movil contacted the IFT with its plans to restructure, which will be subject to approval, the regulator said in a statement.

The IFT said it has yet to receive a concrete plan.

 

‘Direct Consequence’

 

“This decision is a direct consequence of the regulatory framework created by the telecommunications reform,” the Communications and Transportation Ministry, which reports to Pena Nieto, said in a statement yesterday.

“This decision may transform the conditions of effective competition in the telecommunications sector, with greater quality and better prices for services to end users.”

Pena Nieto’s press office declined to comment.

“The mere announcement by America Movil that it will divest assets to stop being dominant is already a major success of the telecom reform,” Javier Lozano, head of the Senate’s communications and transportation committee, said in a Twitter post.

America Movil didn’t specify which assets would be sold to the new independent operator. It said they would have to fetch market prices.

A press official for the company didn’t immediately respond to requests for more specific details.

 

Infrastructure Company?

 

One option would be to create a separate company that manages the national fiber-optic network and other infrastructure, assets that have served as the backbone for America Movil to deliver voice and data traffic around the country.

The independent operator could still work for America Movil while offering the same prices to its competitors for routing their traffic.

Selling the Mexican wireless towers, and leasing them to serve mobile-phone customers, would give America Movil cash to pursue new investments.

Phone companies from Dallas-based AT&T Inc. to Rio de Janeiro-based Oi SA have sold towers in the past year to raise funds.

If America Movil sold all of its 40,000 towers across Latin America, not just Mexico, it could raise $10 billion, Macquarie Group Ltd. said in a note last week.

 

New Restrictions

 

The laws being considered by Mexico’s Congress force America Movil to share parts of its network and eliminate the fees it charges other operators to connect calls to its customers.

All operators are banned from charging long-distance fees starting next year and have to stop making unauthorised promotional calls to users.

America Movil would have to abide by the rules for 18 months before it can request a license to offer TV service in Mexico.

The bill says Slim can loosen the restrictions by presenting a plan to regulators to reduce America Movil’s market share below 50 percent.

Under the proposed law, the company would have 365 days to implement a breakup plan, after which the regulator would review whether it has worked.

During that span, America Movil would still be subject to its restrictions as the dominant carrier.

The Senate approved the law last weekend, and the lower house of Congress voted yesterday in favour of the bill in general terms, allowing lawmakers to begin discussing potential amendments.

 

Family Holdings

 

America Movil was valued at $73 billion at yesterday’s close, making it Latin America’s fourth-largest public company.

Its operations in Mexico, the largest of its units in 18 different countries, make up almost half its profits and about one-third of its sales.

Slim, 74, and his family hold a 57 percent America Movil stake, representing more than half of his $71.5 billion fortune, according to the Bloomberg Billionaires Index.

His holdings include an 8.3 percent stake acquired from AT&T last month for $5.6 billion.

Depending on the assets it sells, an America Movil breakup may mimic previous efforts around the world to dismantle dominant phone carriers to create more competition -- a goal that has proven difficult to accomplish.

To settle an antitrust suit in the US, AT&T Corp. agreed in 1982 to split with its regional phone networks, which would provide local telephone service while the national company focused on long distance, manufacturing and research.

Many of those units are now part of the same company again, called AT&T, while Verizon Communications owns most of the rest.

 

Investment Incentive?

 

In Brazil, the government broke its telephone monopoly into 12 holding companies in 1998, including three regional landline carriers, eight mobile-phone companies and one long-distance carrier.

They have since joined forces to create four major telecommunications providers in Brazil.

A breakup of America Movil may not immediately lead to other companies filling the infrastructure investment gap left by Slim’s carrier, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.

“What is the incentive for any smaller companies to actually invest? Will they have the economies of scale to make it worthwhile?” Wood said.

“This in the short and medium term may actually slow down the transformation of the telecom sector in Mexico because there’s no actor big enough now to make investment decisions in infrastructure.”

 

24-Year History

 

America Movil has gone through various configurations since Slim acquired Telefonos de Mexico, the state phone monopoly, in a 1990 privatisation sale.

Telmex, as the landline carrier is known, spun off its wireless unit a decade later to create America Movil. Both companies grew internationally with acquisitions throughout Latin America, and America Movil acquired full control of Telmex, its former parent, in 2012.

In its statement yesterday, the company touted its investments in landlines and mobile phones as a driving force behind price reductions since it privatised Telmex.

“America Movil’s investments in Mexico and Latin America have been instrumental in the expansion of its telecommunications network and services, and have resulted in America Movil having the most advanced technology,” the company said.

The plan announced yesterday isn’t the first time America Movil has considered a restructuring to adjust to regulatory pressure. In 2011, Telmex said it would create a separate unit, Telmex Social, for its customers in rural and marginalised communities.

 

Telmex Social

 

With that proposed division, which represented about 10 percent of its subscribers, Telmex sought for regulators to view it as two companies -- a utility for customers who have no other phone provider, and an urban telecommunications provider engaged in fierce competition against cable and fiber-optic operators, analysts at Banco Santander SA said at the time.

The creation of Telmex Social required regulatory approval, which was never granted.

Last year, Telmex announced plans to split off its non- telecommunications divisions, which handled real estate and equipment logistics, into a new company.

In January, the company denied a report by newspaper El Financiero that the transaction was designed to circumvent the new telecommunications law. - Bloomberg News



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