Telmex Says Mexico Rural Rules to Cut Investments, Plans Appeal

Telefonos de Mexico SAB, the nation’s largest land-line phone carrier, said it won’t invest in rural zones of the country if the government doesn’t overturn new rules cutting its fees to connect calls to those areas by 95 percent.

The company will ask the Communications and Transportation Ministry to overturn the Federal Telecommunications Commission rate cut, Regulatory and Legal Affairs Director Javier Mondragon said on a conference call yesterday. The reduction is legally unfounded, he said.

Telmex and its parent company, billionaire Carlos Slim’s America Movil SAB, are contending with a series of government decisions to reduce their dominance of Mexico’s phone market. The telecommunications commission in March more than halved the fees America Movil can charge rivals to complete calls to its Mexican wireless unit.

“We can’t invest just to lose money,” Arturo Elias, Slim’s son-in-law and Telmex’s communications director, said on the conference call. The government-set fee “is way, way below our costs,” he said.

The rate cut reduces the fee Telmex can charge to complete calls in areas where it is the only phone provider to 4 centavos (0.34 cent) from 75 centavos, the telecommunications agency said in a statement yesterday.

Telmex is still calculating how the new rules would affect the company financially, Elias said.

‘Material’ Impact

The fee reduction could have a “material” impact on the revenue Mexico’s biggest phone company gets from charging other carriers to connect calls, Gregorio Tomassi, an analyst at Banco Santander SA in Mexico City, said in a research note yesterday. He said the price cut would hurt shares of Telmex, which he rates “underperform.”

While fees to connect calls from rivals last year represented 9.7 percent of profit excluding interest, taxes, depreciation and amortization, it’s unclear how much of those earnings came from places where Mexico City-based Telmex is the only provider, Tomassi said. Telmex had 1.5 million lines in such areas at the end of last quarter, out of a total of 15.6 million in Mexico, where it has 80 percent of the fixed-line market.

Slim, 71, visited the commission’s offices last week to present his case against the rural-fee rule change to officials, said a person with direct knowledge of the matter who could not be named because the meeting was private. America Movil represents about 61 percent of Slim’s $68.4 billion in publicly disclosed holdings, according to data compiled by Bloomberg.

Telmex gained 10 centavos to 10.01 pesos yesterday in Mexico City trading. America Movil rose 14 centavos to 28.88 pesos.

Telmex has concluded that a Supreme Court decision in May, which denied the company the ability to halt implementation of lower phone connection fees with rivals by filing legal injunctions, doesn’t apply to the rural-line decision, Mondragon said. This means Telmex can seek to block the rural fees, he said.

The government made the reduction in rural fees by changing the way calls to rural lines are defined legally and technically, according to the telecommunications agency.

The fee cuts would mostly benefit U.S. carriers, whose clients make 90 percent of the calls to Telmex’s rural lines, mostly from immigrants calling family, Elias said.

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

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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