Telefonica is in the process of narrowing its regional focus to markets where it has the heaviest presence or highest growth potential. It is offloading units in the Czech Republic and Ireland in order to become the number one cellco in Germany by merging its O2 unit with KPN’s E-Plus, and has increased its indirect stake in Telecom Italia even while encouraging that firm to exit Brazil and Argentina (see separate item). And it is reported to be seeking partners in Mexico to challenge the dominance of the incumbent, America Movil.
Telefonica and Carlos Slim’s America Movil are locked in a head-to-head right across Latin America and the Spanish group wants to step up the pressure in Mexico, the region’s second largest mobile market. It has held discussions with potential partners, including Grupo Iusacell, a smaller rival, and pay-TV providers Televisa and Megacable, sources told Bloomberg, and it might consider an acquisition despite its ongoing efforts to reduce its debt.
Telefonica, beset by the deep recession in its Spanish homeland, has been reliant on its Latin American markets for much of its growth in recent years, but it is tough to challenge the incumbent in Mexico, and in the third quarter, Telefonica’s revenue in the country fell 6.4% year-on-year to €373m, while operating income was down 41% to €67m.
‘It makes perfect sense for Telefonica to boost its presence in Mexico, a market which has great growth potential,’ Alberto Espelosin, an analyst at Abante Asesores in Madrid, told Bloomberg. ‘The company hasn’t done a great job there so far as it’s proved to be a highly competitive market.’
The Mexican government recently passed important new telecoms laws designed to curb the powers of monopolies or dominant providers in phone and TV segments. Secondary legislation will come next month, governing areas such as interconnection fees and even requiring large players to divest assets. Slim’s America Movil group stands to be the biggest loser. The Federal Telecommunications Institute will publicly notify the companies it considers to be dominant this month.
Telefonica has over 20m mobile customers in Mexico but that only equates to about 20% share, while America Movil has about 70% of the wireless market and 80% of landlines. Tying up with a cable or wireless firm would narrow the gap between the two, potentially adding Iusacell’s 10% mobile share. Televisa, the world’s largest Spanish language broadcaster, is acquiring Cablecom in a $745m deal to increase its pay-TV presence and challenge leading cableco, Megacable.
Earlier this year, Telefonica put on hold plans to mount an IPO of its Latin American businesses. Meanwhile, in Europe, its latest move has been to agree the sale of the majority of its stake in its Czech subsidiary to investment group PPF Group for €2.467bn.
The idea behind this is to help fund its proposed bigger €8.6bn acquisition of KPN subsidiary E-Plus, which is Germany’s third largest mobile operator with 24m subscribers (after T-Mobile on 38m and Vodafone on 34m). Telefonica’s O2 itself has 19.3m subs, so combined with E-Plus it would become number one cellco.
For this reason the deal requires agreement from the European Commission, which Telefonica has applied for, with a decision expected at latest within six months. Given that it stabilizes the German mobile economy with three similarly placed players, it is unlikely that it would run into problems.
EU regulators have already launched an in-depth probe of Telefonica’s earlier agreed sale of its O2 Ireland mobile division to Hutchison Whampoa for €850m, again as part of the strategy to free up cash for the German adventure. This probe is for the same reason, but in reverse, since here the O2 sale would create a player similar in size to number one Vodafone. It is all getting very incestuous.