America Movil Stock Buybacks May Slow as Slim Eyes Brazil

The record pace of buybacks at America Movil SAB, billionaire Carlos Slim’s mobile-phone company, is likely to slow as acquisitions pick up and earnings stagnate.

The company spent more than 80 billion pesos ($6.1 billion) repurchasing stock last year, including $2.1 billion in the fourth quarter alone, according to company filings. The buybacks helped keep America Movil shares from sinking in 2013, even after regulatory threats wiped out more than 20 percent of the stock’s value earlier in the year.

Chief Executive Officer Daniel Hajj has told investors the company will look at acquisitions in Brazil, its second-largest market, where sales growth accelerated last quarter at the fastest rate since 2012. America Movil, Telefonica SA and Oi SA will probably make a joint bid for Tim Participacoes SA, the Brazilian unit of Telecom Italia SpA, in the next three months, said Robin Bienenstock, an analyst at Sanford C. Bernstein & Co.

“It’s about keeping the share price up. This year that becomes a lot harder if they do go for a Tim Brasil deal,” Bienenstock said in a phone interview from London. America Movil has to substantially reduce buybacks “unless they’re willing to temporarily move outside of their debt ceiling,” she said.

America Movil fell 0.9 percent to 14.57 pesos at the close in Mexico City. The shares have dropped 4.3 percent this year after finishing 2013 with a 2.1 percent gain. A press official for America Movil declined to comment on whether the company would continue aggressive buybacks and whether it would seek to buy part or all of Tim.

Last year’s repurchases reduced America Movil’s total outstanding shares by 7.1 percent, the most in at least a decade, according to data compiled by Bloomberg.

Credit Rating

America Movil, based in Mexico City, will maintain its rating of A-, four levels above non-investment grade, as long as its ratio of fully adjusted debt to earnings is less than 2 times, Standard & Poor’s said in October. The ratio was about 1.7 at the end of September, with debt of $38.9 billion and cash of $5.5 billion.

According to the average of analysts’ forecasts compiled by Bloomberg, the carrier will earn $19.8 billion in 2014 before interest, tax, depreciation and amortization, little changed from an estimated $19.7 billion last year. It’s scheduled to report fourth-quarter results next month.

A potential offer for Tim Brasil could be worth as much as 12 billion euros ($16.3 billion), or 7.5 times Ebitda, Bienenstock said. America Movil could pay about a third of that amount, since Tim’s assets may be divided in even pieces among its rivals to make a transaction more palatable to regulators, she said.

“We would like to hold on to the ratings that we have,” America Movil Chief Financial Officer Carlos Garcia-Moreno said on a conference call in October. “We do not like to have a high leverage.”

Looming Regulation

Telecom Italia has said there’s no formal or informal process ongoing for disposing of its Tim stake. Tim’s and Oi’s press offices didn’t return e-mail messages seeking comment, and Telefonica’s declined to comment.

America Movil, which has about 70 percent of Mexico’s mobile-phone customers, is seeking to expand operations outside of Mexico as tighter regulation looms in its home country. The nation’s telecommunication watchdog has already identified it as dominant in a preliminary finding, singling it out for closer scrutiny. Laws passed last year could allow the agency to regulate prices, force network-sharing or even require a breakup of companies.

“Buybacks have intensified because they clearly see an undervalued asset,” Julio Zetina, an analyst at Vector Casa de Bolsa SA, said in a phone interview from Mexico City. “It was a combination of seeing regulatory pressures materialize along with a misunderstood strategy to go into Europe. America Movil’s cash flow generation is very good, but it’s limited.”

Wiggle Room

America Movil has regularly repurchased its own shares for years, Zetina said. The company spent about $1.4 billion on buybacks in 2012 and about $3.9 billion in 2011.

The mobile-phone operator will generate about $3 billion in free cash flow this year, which gives it enough wiggle room to consider acquisitions even if its level of repurchases continues, Martin Lara, an analyst at Corp. Actinver SAB, said in a phone interview.

“America Movil makes a ton of money,” Lara said. “We could see debt levels rise slightly with an acquisition, but it would be temporary.”

Still, subscriber growth is slowing in Mexico now that most people already have mobile devices, forcing America Movil to seek growth by promoting long-term contracts with discounted smartphones. Regulatory pressure is also building in markets such as Colombia, where the company was fined $1.22 million in November for ignoring customer complaints.

America Movil will be forced to consider whether it’s still worth paying to gobble up shares, Bienenstock said.

“The reality is that fundamentals of the company are going to deteriorate, notwithstanding the good news of consolidating Brazil,” Bienenstock said. “I think the stock is going to be pretty weak this year.”

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