Telefonica Said to Seek Partner in Mexico to Challenge Slim

Telefonica SA (TEF) has approached potential acquisition targets and partners in Mexico, where it’s seeking to challenge billionaire Carlos Slim’s dominance, according to three people familiar with the matter.

Spain’s biggest telecommunications operator has held discussions with companies including Grupo Iusacell SA, a smaller rival co-owned by Ricardo Salinas and pay-TV provider Grupo Televisa SAB, said the people, who asked not to be identified because the deliberations are private. Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) are working with Madrid-based Telefonica, another person said.

Other potential partners being evaluated include Televisa itself and Megacable Holdings SAB, although a transaction with those companies is less likely because their owners are unwilling to cede control of the assets, the people said.

“It makes perfect sense for Telefonica to boost its presence in Mexico, a market which has great growth potential,” said Alberto Espelosin, who helps manage about 1.3 billion euros ($1.8 billion), including Telefonica shares, at Abante Asesores in Madrid. “The company hasn’t done a great job there so far as it’s proved to be a highly competitive market.”

Shares of Telefonica, which gets annual sales of about 1.6 billion euros from Mexico, was little changed in Madrid trading, closing at 12.28 euros. Televisa (TLEVICPO) fell 0.5 percent to 76.90 pesos at the close of trading in Mexico City.

New Regulations

As Telefonica ponders its next steps, it’s watching for regulatory changes in Mexico, which passed landmark telecommunications legislation earlier this year. Secondary laws, or supplemental rules to the legislation, are set to be announced early next month. The measures, meant to rein in phone and broadcasting monopolies, could regulate how much the companies can charge for interconnection rates or force them to divest assets.

“We are all expecting the details of the constitutional reform,” Santiago Fernandez Valbuena, Telefonica’s top Latin American executive, said in a call with analysts last week. “This is going to be substantial for the future developments of the Mexican market.”

Mexico’s Federal Telecommunications Institute will publicly notify the companies it considers as dominant this month, the regulator’s President Gabriel Contreras said earlier this week.

Playing Catch-Up

Telefonica, which entered Mexico in 2001, has more than 20 million mobile-phone customers in the country. A linkup with a wireless rival or a cable company would narrow its gap behind America Movil SAB, the Slim-owned company that controls about 70 percent of the country’s wireless market and about 80 percent of its landlines.

Representatives at Telefonica and Iusacell declined to comment. Press officials at Televisa and Megacable did not respond to requests for comment. Representatives at Santander and BBVA also declined to comment.

Telefonica has about 20 percent of the wireless market, and Iusacell less than 10 percent. Televisa, the world’s largest Spanish-language broadcaster, agreed in August to acquire control of Cablecom in a $745 million transaction to strengthen its grip in Mexico’s growing pay-TV market. Megacable is the nation’s largest cable company.

Telefonica Chief Executive Officer Cesar Alierta is moving his focus to Mexico after finding a merger partner for Telefonica in Germany, increasing the company’s indirect stake in Telecom Italia SpA (TIT), and shedding assets in Ireland and the Czech Republic.

Telefonica’s third-quarter revenue in Mexico slid 6.4 percent to 373 million euros, while operating income before depreciation and amortization slumped 41 percent to 67 million euros. The profit margin, at 18 percent, was the narrowest in any of the markets where Telefonica operates.

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net; Patricia Laya in Mexico City at playa2@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net

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