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America Movil’s Mexico Decline Overshadows Brazil Growth

America Movil SAB’s Mexican profits are shrinking as competitors encroach on its home market, slowing earnings growth even as Brazilian results improve.

The Latin American mobile-phone company’s first-quarter earnings rose 1.7 percent from a year earlier to 64.9 billion pesos ($4.95 billion), leaving out interest, taxes, depreciation and amortization. Though that beat the 63.7 billion-peso average estimate of analysts, the profit margin in Mexico was the lowest since 2005 for the period from January to March.

Controlled by billionaire Carlos Slim, America Movil is facing a sluggish economy in Mexico, along with unprecedented government oversight thanks to a law enacted last year to boost competition. That’s putting more pressure on divisions in countries such as Brazil and Colombia to shore up growth.

America Movil said its profit margin expanded 1.5 percentage points to 26.1 percent in Brazil, its second-biggest market. Satellite and cable subscriptions, up 16 percent from a year earlier, led growth for the region as the company successfully cross-sells its products in the region, Chief Executive Officer Daniel Hajj said on a call with analysts today. The unit’s mobile service revenue climbed 3.8 percent.

“We don’t want a lot of quantity, but a lot of quality subscribers” in Brazil, Hajj said.

Latin America’s largest economy is playing a more prominent role in America Movil’s results. At the end of the quarter, Brazil accounted for 25 percent of all of America Movil’s mobile-phone customers, compared with Mexico’s 27 percent.

America Movil shares declined less than 1 percent to 13.16 pesos at the close in Mexico City. They have fallen 14 percent this year.

Mexico Squeezed

In Mexico, regulators have cut fees and forced the company to share the network infrastructure that has given it a competitive advantage for more than two decades. The profit margin slid 1.4 percentage points to 44.4 percent. It was once regularly above 50 percent before government regulation intensified in the last few years. Ebitda for Mexico fell 0.8 percent to 30.1 billion pesos.

Mexican lawmakers are considering a new proposal by President Enrique Pena Nieto that would cut even further into America Movil’s profits, eliminating some fees altogether.

“Regulation in Mexico is our key downside risk, as the new legal framework should be published soon,” Andres Medina-Mora, a Corporativo GBM SAB analyst with the equivalent of a hold rating on the shares, said in an e-mailed note. “Geographic diversification is a proper means to fend off regulation.”

Expansion Strategy

Mexico did show some signs of improvement. Mobile service revenue in the country expanded 4.1 percent, hinting that the economy is firming up, the company said. Economists expect Mexico’s output to grow 3.1 percent this year, up from 1.1 percent in 2013.

Hajj, Slim’s son-in-law, has sought to expand operations outside of Mexico, where regulators deemed the company dominant in its industry for controlling seven out of 10 mobile-phone accounts and 80 percent of Mexico’s landlines.

After a failed takeover of Dutch phone operator Royal KPN NV last year, the company entered an agreement last week to share control of Telekom Austria AG with the European nation’s government, triggering a bid of as much as 1.42 billion euros ($1.96 billion) to buy out minority shareholders.

M&A Flexible

The acquisition won’t put a burden America Movil’s credit profile or prevent it from studying other acquisitions, Chief Financial Officer Carlos Garcia-Moreno said on the call today. Net debt stood at 440 billion pesos at the end of March, or 1.6 times Ebitda -- down from 1.7 times three months earlier.

America Movil’s total first-quarter sales rose 1.3 percent to 195.4 billion pesos, in line with the average estimate of 195.7 billion pesos, according to a statement yesterday.

Net income tumbled 48 percent to 13.9 billion pesos in the quarter. The decline came in part because the company recorded a 17.4 billion-peso foreign-exchange gain in the first quarter of 2013, compared with only 91 million pesos in the same period this year.

The company added 1.2 million subscriptions for landline services including phone, Internet and television, compared with a 1.4 million average analyst estimate.

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