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Telefonica Said to Seek Iusacell Mexico Merger to Fight Slim

Telefonica SA (TEF) is in talks to combine its Mexico operations with Grupo Iusacell SA to form a bigger mobile-phone competitor to billionaire Carlos Slim’s America Movil SAB, people with knowledge of the matter said.

The two sides have yet to decide which company would control the combined mobile-phone carrier, said one of the people, who asked not to be identified because the discussions are private. Iusacell is co-owned by Mexican broadcaster Grupo Televisa SAB and by billionaire Ricardo Salinas.

The talks indicate that Madrid-based Telefonica is closing in on its pursuit of a deal to challenge Slim’s dominance in Mexico, where America Movil has about 70 percent of mobile-phone subscriptions. Combined with Iusacell, Telefonica would control almost all the rest of the market, a result that may draw scrutiny from regulators seeking to offer consumers more options in the market.

Telefonica is being advised by Banco Bilbao Vizcaya Argentaria SA and Lazard Ltd., one of the people said. Press officials for those banks and for Telefonica, Salinas and Televisa declined to comment.

El Economista, a Spanish newspaper, reported today that Telefonica was in talks to buy Iusacell, citing unnamed sources familiar with the matter.

Iusacell, whose operations are only in Mexico, was valued at $3.2 billion when Televisa (TLEVICPO) acquired a 50 percent stake in the company in 2012. It hasn’t disclosed sales or profits since then. Mexico represents less than 3 percent of Telefonica’s revenue. At the Spanish company’s trading value of 13.9 times earnings, its Mexican unit would be worth about $6.4 billion.

Watching Congress

Phone companies are awaiting a bill by Mexican legislators that builds upon a law passed last year to boost competition in the telecommunications industry. The proposal, expected as soon as this week, will spell out the steps regulators can take to enforce new rules limiting the dominance of phone and media companies.

Both sides in Telefonica’s talks with Iusacell are monitoring how that legislation takes shape, since it will affect their decision on whether to combine the companies, one of the people said.

Telefonica had also considered a partnership with Megacable Holdings SAB, a Guadalajara, Mexico-based pay-TV company, when it began evaluating its options in the country a few months ago, people with knowledge of the matter said in November.

Network Sharing

Iusacell and Telefonica announced an agreement in 2012 to share their networks, cutting infrastructure costs to help them compete against America Movil. (AMXL) Telefonica, Televisa and Megacable also are co-investors in a company that operates a national fiber-optic network owned by the government.

Shares of Telefonica, which gets annual sales of about 1.6 billion euros ($2.2 billion) from Mexico, fell 0.6 percent to 11.11 euros at the close of trading in Madrid. Televisa slid less than 1 percent to 75.15 pesos in Mexico City trading.

Telefonica, which entered Mexico in 2001, had more than 19 million mobile-phone customers in the country at the end of September. Mexico City-based Iusacell had 7.4 million at the end of 2012, the last time Televisa provided a figure. America Movil boasted 72.5 million, while the smallest competitor, NII Holdings Inc., had 3.7 million.

Televisa, the world’s largest Spanish-language broadcaster, acquired its half of Iusacell from Salinas in 2012 after scrapping an earlier plan to take a stake in NII’s Mexican unit. The company, which also owns satellite and cable carriers in Mexico, agreed in August to acquire control of Cablecom in a $745 million transaction to strengthen its grip in Mexico’s growing pay-TV market.

‘Attractive Opportunities’

“There are very attractive opportunities in the cable sector and also other assets on the telecommunications front in Mexico -- so in order to be competitive we have to grow,” Televisa Executive Vice President Alfonso de Angoitia said on a conference call in April. “Clearly we are not dominant in that sector as a whole, so we believe that we should actively pursue the consolidation of the cable industry and of the telecommunications industry in Mexico.”

Telefonica Chief Executive Officer Cesar Alierta is moving his focus to Mexico this year after spending 2013 finding a merger partner for Telefonica in Germany, increasing the company’s indirect stake in Telecom Italia SpA, and shedding assets in Ireland and the Czech Republic.

Telefonica’s third-quarter revenue in Mexico slid 6.3 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. The Spanish carrier is scheduled to provide fourth-quarter results on Feb. 27, while Televisa reports earnings and updated Iusacell figures on Feb. 20.

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

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net; Aaron Kirchfeld at akirchfeld@bloomberg.net

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