Telefonica Sees Mexican Growth in Markets Where Slim Isn’t

Telefonica SA (TEF), which has struggled to compete in Mexico against Carlos Slim, is seeking to boost sales in Latin America’s second-largest economy by identifying markets the billionaire has missed.

Expansion will come from smaller businesses and cities that have been under-served by Mexico’s wireless industry, said Juan Abellan, chief executive officer of the Madrid-based company’s local unit. While a regulatory reduction in fees pushed Mexican sales down 4 percent to 776 million euros ($999 million) in the first half of 2012, the changes Telefonica is making will help return the unit to growth, Abellan said yesterday in an interview in Mexico City.

Telefonica is investing in Mexico even as it sheds other assets, including stakes in its German and Latin American businesses, to help cut its debt of more than 58 billion euros. While it only has 20 percent of the Mexican wireless market after a decade of operations, compared with 71 percent for Slim’s America Movil (AMXL) SAB, Telefonica considers the country a key market, Abellan said.

“We know this path is the right one,” he said. “Our commitment is to Mexico, without question.”

Last year, Mexico’s government cut by more than half the fees that wireless carriers get to connect calls to their users, crimping Telefonica’s profit. The carrier’s operating profit margin in the country, leaving out depreciation and amortization, fell to 23.9 percent in the first half of 2012 from 26.8 percent a year earlier.

Venturing Outside

Telefonica is adding employees in Mexican cities with populations of about 1 million, venturing outside the nation’s three largest metropolitan areas, Mexico City, Guadalajara and Monterrey. In many of the smaller cities, only 50 percent to 60 percent of people have mobile-phone subscriptions, Abellan said.

Small companies, including sole proprietorships and businesses with five to 250 employees, have a similar lack of services in Mexico compared with multinational corporations, presenting an opportunity for Telefonica, he said.

America Movil’s press office didn’t immediately respond to phone and e-mail requests for comment.

Telefonica has 7 billion pesos ($544 million) budgeted for Mexican investments this year, while America Movil, which has wireless and land-line networks in the country, said in March it would spend 32.5 billion pesos on network improvements.

‘Market Dominance’

“Even if this move could bring some growth for Telefonica in Mexico, it’s going to be very difficult to see any meaningful impact on the parent company in the short term,” said Pedro Oliveira, an analyst at Banco BPI in Porto, Portugal. “It’s difficult to see that happening, without some regulatory changes in order to reduce America Movil market dominance.”

While Telefonica hasn’t completed its full budget for 2013, it will spend a total of 3.12 billion pesos this year and next to build speedier networks, Abellan said. A network using long- term evolution technology, or LTE, is already available in parts of Mexico’s three biggest cities, he said.

Telefonica also announced a wireless plan yesterday that gives users unlimited access to social networks such as Facebook Inc. (FB) and Twitter Inc. when they pay at least 200 pesos a month for voice calls.

Telefonica shares gained 0.1 percent to 10.72 euros in Madrid today. The stock has dropped 19.9 percent this year, which compares with the 8.5 percent decline by the benchmark IBEX 35 Index.

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

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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