Oct. 19 (Bloomberg) -- Grupo Televisa SA, Mexico’s largest provider of pay-television service, is snatching phone customers from Carlos Slim’sTelefonos de Mexico SAB.

Televisa’s cable business, luring customers with packages of TV, phone and high-speed Internet services, gained almost 25,000 phone lines last quarter from other carriers, government statistics show. Telmex, as Slim’s company is known, lost 75,000 lines, according to estimates from Michel Morin at Barclays Capital Inc. in New York.

Mexico’s government bars Telmex from offering TV, leaving the market for customers who want all three products in large metropolitan areas, such as Mexico City, to Televisa. The cable business has been its fastest-growing source of sales and profit, helping the largest Spanish-language broadcaster make up for slower growth in advertising sales during Mexico’s worst recession since the 1930s.

“The cable business now has become a focal point of future growth,” said Morin, who doesn’t own Televisa shares and estimates the stock will trade at 57 pesos ($4.35) within 12 months, implying a gain of 13 percent from the closing price on Oct. 16. “They should be able to expand their share of the voice market in Mexico.” He rates the shares “equal weight.”

Telmex Results

Televisa and Telmex are both scheduled to report results this week. Televisa’s revenue probably rose 3.6 percent in the third quarter from a year earlier to 12.9 billion pesos, bolstered by the cable unit, according to Morin, who joined Barclays in June after 16 years at Merrill Lynch & Co. He spent four of those years covering Latin American telecommunications.

The gains in cable have helped compensate for a slowdown in broadcast advertising, Televisa’s largest business. The company forecast little or no revenue growth in its broadcast unit this year, down from 4.7 percent growth in 2008.

Morin estimated that profit, excluding items such as interest and taxes, declined 1.4 percent to 5.05 billion pesos. The peso weakened about 19 percent against the U.S. dollar at the end of the third quarter from a year earlier, increasing expenses for programming Televisa buys in foreign currency.

While Televisa’s revenue expands, sales at Telmex are declining. The loss of phone lines for the fourth straight quarter probably pushed sales down 3.8 percent from a year earlier to 30 billion pesos, Morin estimates. Profit, excluding interest, taxes, depreciation and amortization, will drop 10.6 percent to 12.8 billion pesos, he said.

Stock Performance

A Telmex spokeswoman declined to comment on the company’s financial results. Mexico City-based Televisa has a policy against commenting on analysts’ opinions, the company said in an e-mailed statement.

Televisa added 85 centavos to 51.11 pesos on Mexico’s stock exchange. Telmex fell 14 centavos to 11.35 pesos.

Telmex is at a stalemate with Mexico’s government, which hasn’t granted a license for the phone carrier to offer TV. Hector Osuna, president of the Federal Telecommunications Commission, told reporters last month that Telmex hasn’t met the requirements for interconnecting with other carriers.

Arturo Elias Ayub, Telmex’s head of strategic alliances and a spokesman for Slim, told reporters in July that the company is complying with government conditions for the license.

A Telmex spokeswoman declined to comment further on the disagreement last week. A spokesman for the government agency reiterated Osuna’s comments.

Latin America provides a growth opportunity for cable and phone carriers because most people have yet to sign up for high- speed Internet, phone and pay TV. There were about 19 phone lines and 6.8 pay-TV subscriptions for every 100 Mexicans at the end of June, according to government statistics.

Latin American Growth

Three cable operators controlled by Televisa began a partnership in May with the nation’s largest cable carrier, Megacable Holdings SAB, to cut prices for a package of Internet, TV and phone services under the Yoo brand. That probably boosted their third-quarter customer gains, said Manuel Jimenez, an analyst at IXE Grupo Financiero SA in Mexico City.

The Yoo bundle “will drive the growth in the number of subscribers, although the average revenue of the company will fall because the packages are cheaper,” Jimenez said. Televisa gets about 17 percent of sales from cable, with 40 percent coming from broadcast advertising.

Telmex has used its alliance with satellite-TV carrier Dish Mexico, co-owned by MVS Comunicaciones SA and EchoStar Corp., to cater to customers who want TV. Telmex promotes the Dish service, which had more than 500,000 users through July, in its stores and allows clients to pay for it on their phone bills.

Dish Alliance

The cable companies’ Yoo package is “an important and very creative way to compete with Telmex-Dish,” said Gregorio Tomassi, an analyst at Banco Santander SA in Mexico City.

The cheapest Yoo package that includes Internet, phone and TV, sells for 499 pesos a month. Telmex’s least expensive phone- and-Internet bundle sells for 389 pesos a month, and Dish Mexico’s cheapest TV plan is 149 pesos. Because of the government’s restriction, Telmex can’t offer a discounted bundle for clients who buy Dish Mexico’s service.

Telmex and Televisa have both found room to grow via the Internet in Mexico, where there were 7.1 high-speed lines per 100 people at the end of 2008, according to the government.

Telmex ended the second quarter with 5.9 million high-speed Web subscribers, up 55 percent from a year earlier. Televisa’s Cablemas and Cablevision, which offer service in a more limited area, had more than 469,000 customers, an 18 percent increase.

Gross domestic product will contract as much as 7.5 percent this year, according to Mexico’s central bank. That would be the biggest drop since the Great Depression. Standard & Poor’s estimates Mexico will grow 3 percent in 2010 as the U.S. emerges from the recession.

Room to Grow

While Telmex’s growth in the Internet business has helped counter its land-line losses, it hasn’t been enough to overcome them and price cuts for long distance service, said Morin of Barclays, who expects the shares to perform worse than its Latin American telecommunications peers.

“They’re primarily a fixed-cost business,” he said. “It’s very painful to have to deal with this kind of negative operating leverage.”

Mexico’s Bolsa index rose 2.3 percent last week. Consorcio Ara SAB, Mexico’s fourth-largest homebuilder, rose the most on the index, climbing 11.9 percent. Bolsa Mexicana de Valores SAB, the operator of Latin America’s second-largest exchange, dropped 3.8 percent, the steepest decline.

The peso gained 1.5 percent to 13.1110 per U.S. dollar on Oct. 16 from 13.3070 a week earlier. Yields on Mexico’s 10 percent bond due 2024 rose 3.4 basis points to 8.090 percent, according to Santander.

The following is a list of events in Mexico this week:

Event                                  Date        Forecast
COMPARTO MM 3Q Earnings              Oct. 20       0.783
TELMEXL MM 3Q Earnings               Oct. 21       -----
Unemployment Rate (Sept.)            Oct. 21       6.25%
ARA* MM 3Q Earnings                  Oct. 22       0.160
BIMBOA MM 3Q Earnings                Oct. 22       1.110
OMAB MM 3Q Earnings                  Oct. 22       0.210
TLEVICPO MM 3Q Earnings              Oct. 22       0.710
Retail Sales (Aug.)                  Oct. 22      -3.6%
ASURB MM 3Q Earnings                 Oct. 23       0.850
Trade Balance (Sept.)                Oct. 23    -905.5M

To contact the reporter on this story: Crayton Harrison in Mexico City at tharrison5@bloomberg.net; Emily Schmall in Mexico City at eschmall@bloomberg.net

Last Updated: October 19, 2009 16:40 EDT