Carlos Slim, the world’s richest person, is confronting a mounting backlash from the same Latin American countries that made him wealthy as authorities rein in his expanding mobile-phone empire.
A wave of telecommunications regulation has swept Latin America in the past four months, and Mexico’s new president pledged last week to stimulate competition against Slim. In Brazil, institutions that monitor the phone industry are also gaining teeth, while populist politicians in countries such as Argentina and Colombia are spurring rule changes.
The result has been a series of rulings and orders that have cut into profitability at America Movil SAB (AMXL), Slim’s biggest company and the most widely used wireless carrier in the Western Hemisphere. Slim, 72, has personally fought back against the trend, saying it will hurt his ability to invest in new technology -- an argument that’s holding less sway with government officials in light of his company controlling more than a third of the market.
“We’ve barely had any regulation in this sector in this region for the past 10 years,” said Richard Dineen, an analyst at HSBC Securities Inc. in New York. “There’s probably only one way for it to go, and it’s going to get tougher.”
America Movil, which operates in 18 countries across Latin America, the U.S. and the Caribbean, has seen its stock slump 16 percent since July 23, when Brazil’s government barred the company from selling new wireless plans in some states, signifying it was taking a more aggressive regulatory approach. The MSCI Emerging Markets Latin America Index (MXLA) has gained 2.9 percent over that time span, and the Mexican benchmark IPC index has risen 3.4 percent.
Shares of America Movil slid 0.8 percent to 15.12 pesos at the close today in Mexico City.
In his inauguration speech on Dec. 1, Mexican President Enrique Pena Nieto said there should be more competition in the nation’s telephone industry, where America Movil has 80 percent of landlines and 70 percent of mobile-phone subscriptions.
The following day, Mexico’s three major political parties signed a pact to introduce legislation next year to strengthen antitrust and telecommunications regulators and to regulate the dominant carrier’s network and prices “according to international best practices.” The parties also agreed to auction airwaves in the 700-megahertz band to a wholesaler that could resell capacity to create more competition in wireless services.
“For telecoms, the new regulation should result in a decrease in margins in most of the services, with mobile and broadband being the most affected,” Andres Medina-Mora and Jose Pablo Vallejo, analysts with Corporativo GBM SAB in Mexico City, said today in a research note. They cut their price target for America Movil to 19.59 pesos a share from 21.21 pesos.
Some of the new regulatory moves in Latin America unfairly target America Movil, said Carlos Slim Domit, the billionaire’s eldest son and co-chairman of the company.
“We need regulations that stimulate investment, that promote coverage, that promote competition in all services,” Slim Domit said in an interview before the inauguration. “We don’t need regulations that just penalize companies for their size.”
The wireless carrier, based in Mexico City, represents about 53 percent of Slim’s $73 billion net worth, according to the Bloomberg Billionaires Index. The new regulatory fervor in Latin America has also squeezed margins for Madrid-based Telefonica SA, the region’s second-largest carrier, and Telecom Italia SpA (TIT), the third-biggest.
America Movil is outspending competitors on investments that will provide faster Internet speeds and better coverage, Slim Domit said in the interview. The company has been spending about $10 billion a year on network infrastructure improvements. In contrast, Madrid-based Telefonica (TEF) spent 5.3 billion euros ($6.9 billion) last year in Latin America, including wireless airwave purchases.
America Movil holds about 38.6 percent of wireless subscribers in Latin America and the Caribbean, according to Signals Telecom Consulting. In addition to its Mexican dominance, the company has 70 percent of the market in Ecuador, 61 percent in Colombia, 25 percent in Brazil and about a third of Argentina.
Anatel, the phone regulatory agency established by Brazil in 1997, followed its eight-day sales ban with a plan to more quickly cut the fees that mobile-phone companies can charge to connect calls from competitors. Mexico’s Federal Telecommunications Commission, which more than halved the connection rates last year, will review in January whether to get rid of the fees altogether.
The 16-year-old Mexican agency, known as Cofetel, has won rulings by the nation’s Supreme Court this year. That’s helped confirm that it has the power to regulate the industry, solidifying its authority after years of court battles.
The regulatory actions in Mexico and Brazil, which together make up 65 percent of America Movil’s revenue, have compressed profitability for Slim’s company. In Brazil, the carrier’s profit margin through the first three quarters of this year was 24.6 percent, down from 26.2 percent in 2011. The figure in Mexico fell to 45.6 percent from 48.6 percent.
Regulations and mounting competition are forcing the company to provide more service for less money. In Mexico last quarter, the average America Movil wireless customer’s monthly minutes of use shot up 22 percent from a year earlier, while the average bill only rose 10 percent. In Brazil, monthly bills fell 16 percent, even as minutes of use rose 14 percent.
Even as margins shrink, a stronger peso in Mexico will probably contribute to a 29 percent boost in net income this year, according to analyst estimates compiled by Bloomberg. Leaving out the effect of currency changes, interest, taxes, depreciation and amortization, analysts predict that profit will rise just 7 percent this year, followed by a 5 percent gain in 2013 and 4 percent in 2014.
Slim’s biggest rivals aren’t faring better. Telefonica’s Latin American profit margin in this year’s first nine months has shrunk to 35 percent from 36.3 percent a year ago. Telecom Italia’s slipped to 26.1 percent from 26.7 percent in Brazil and to 29.4 percent from 32.7 percent in Argentina.
The tightening grip of regulators extends to smaller countries. In September, El Salvadoran antitrust officials refused to let America Movil acquire a smaller competitor unless it gave up valuable licenses for mobile-phone airwaves, a deal Slim’s company was unwilling to accept.
Other countries are taking more extreme measures to promote competition. In September, Argentina canceled an auction of mobile-phone spectrum licenses, instead handing them over to a government-run company that will compete directly with America Movil and local units of Telefonica and Telecom Italia.
In Colombia, the government announced plans last month to partially exclude America Movil from an airwaves auction, only allowing it to bid for spectrum that, because of its characteristics, requires more spending to build a functional wireless network. Colombian lawmakers also have proposed a market-share cap of 30 percent for mobile-phone companies, which would require America Movil to shed operations accounting for about half of its revenue there.
“In some countries, the decisions have been pure populism,” said Jose Otero, an analyst at Signals Telecom Consulting in Montevideo, Uruguay. “In these cases, the consumer is the one who is affected.”
Regulations that withhold airwaves from the largest mobile- phone carriers deny those companies the capacity they need to upgrade their networks, Otero said. That means longer waits for new technology such as fourth-generation service, he said.
Slim himself objected to the Colombian proposals, holding a news conference in the country on Oct. 26 to pledge $1 billion in network investments if America Movil is able to bid in the auction.
“What those types of initiatives do is penalize the ones that are providing services and investing in the most marginal communities,” said Slim Domit, the billionaire’s son. “By seeking to detain investment, they leave many people out of service simply because of a regulation that’s not based on the facts.”
While regulators are seeking to push prices lower for consumers, their rules still have to provide incentives for companies to invest with the expectation of profitable returns, said HSBC’s Dineen. Bringing technologies such as 4G networks to consumers will require more network spending, he said.
Colombia is being mindful of that balance by allowing America Movil, which operates under the Claro brand, to participate in bidding for some airwaves, said Information Technology and Communications Minister Diego Molano.
“Since Claro has a dominant position, we have to regulate,” he said. “But we have to keep promoting investment in the country, and with the scenario we’re proposing, we think we’ll meet those objectives.”
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