Slim Seen Hunting in Europe to Brazil After KPN: Real M&A
Slim’s mobile-phone carrier America Movil SAB (AMXL) generated more cash than 99 percent of Latin American companies in each of the four quarters through June, according to data compiled by Bloomberg. Cash flow amounted to at least $2.83 billion in each of the past eight quarters, meaning even a transaction the size of Slim’s withdrawn $9.9 billion offer for Dutch phone carrier KPN could be funded from operations in as little as a year.
After the failed attempt to acquire KPN, the continuous flow of phone-bill payments into Slim’s coffers gives him flexibility to pursue alternative telecommunications assets as they become available. Telekom Austria and Telefonica (TEF) SA’s Czech unit may give Mexico City-based America Movil more ways to expand in Europe, while Telecom Italia’s struggles to pay down debt may put its controlling stake in Brazilian mobile carrier Tim Participacoes SA (TIMP3) up for grabs, according to Mitsubishi UFJ Securities Inc.
“The whole idea for AMX here appears to be to diversify away from the Americas and to take advantage of arguably low telecom valuations in Europe,” said Rick Mattila, Mitsubishi’s London-based head of strategy, referring to America Movil by its ticker symbol. “AMX could also opt to simply keep its powder dry for a while, pending any decisions with respect to Telecom Italia’s intentions on its Tim Brazil asset.”
A representative for America Movil declined to comment on the company’s acquisition plans.
Europe has gotten Slim’s attention because economic strife, intensifying competition and tight regulation have battered phone company stocks there. KPN shares have dropped 70 percent in the past four years through yesterday, while Telekom Austria (TKA) has fallen 48 percent.
European phone companies are valued at a median of 14 times their estimated earnings this year, 24 percent less than their U.S. peers, based on the Standard & Poor’s 500 and Stoxx Europe 600 telecommunications indexes. That gap has been narrowing in recent months, helped by deal flow and interest from international investors.
Slim, the world’s second-richest man, is betting that the industry will get a boost if regulators drop their resistance to letting carriers combine across borders, said Andres Bolumburu, a Madrid-based analyst at Banco de Sabadell SA.
“Europe still represents an opportunity,” he said in a phone interview. “It is more expensive now than it was three months ago, but it’s still cheaper that telcos in the United States. If the European regulator sets a more favorable regulatory framework for the incumbents and favors consolidation, it will be much more attractive.”
The tough part for Slim has been to gain a foothold. KPN executives rejected America Movil’s tender offer of 2.40 euros ($3.28) a share as too low, and Slim’s negotiators were unable to win the support of an independent foundation set up to protect stakeholders.
Slim’s company retains a financial stake of about 30 percent in The Hague-based KPN, which has declined 8.1 percent to 2.23 euros since the offer was withdrawn. Under Dutch law, he won’t be able to make another takeover attempt for six months.
Ward Snijders, a spokesman for KPN, declined to comment and referred to Chief Executive Officer Eelco Blok’s comments on a call with reporters Oct. 17. On that call, Blok wouldn’t give a specific acquisition price that would have been acceptable for KPN.
“There is of course a possibility that we’ll get back at the table again” in negotiations with America Movil, Blok said at the time. “It’s difficult to assess at the moment how that relationship will develop. To be clear: the company hasn’t been put up for sale. We will continue on the path we’ve taken.”
Today, KPN rose 0.7 percent to 2.25 euros. The company predicted its shrinking Dutch business will stabilize next year after reporting a third-quarter net loss. Telekom Austria slumped 5.7 percent in Vienna after the carrier paid 1 billion euros in an airwave auction that fetched more than analysts estimated.
Shares of America Movil fell 0.5 percent to 13.87 pesos.
While Slim contemplates whether to make a new offer for KPN or sell off his shares, he could turn his attention to his 26 percent stake in Telekom Austria, even though it’s been a money-loser so far, said Mattila of Mitsubishi. Vienna-based Telekom Austria has a market value of 2.6 billion euros.
Expanding the stake may be challenging, since the Austrian government is the company’s biggest shareholder, Mattila said. Peter Schiefer, a spokesman for Telekom Austria, declined to comment.
Slim may be better off turning his attention to an asset that is openly for sale in the region, such as Telefonica’s Czech Republic operations, he said. The unit of Madrid-based Telefonica has thus far only attracted one bidder, billionaire Petr Kellner’s PPF Group NV. Telefonica Czech Republic AS had a market value yesterday of about $5.2 billion.
A spokesman for Telefonica declined to comment.
It’s difficult to imagine Telefonica doing such a deal with America Movil, its biggest rival in Latin America, said Borja Mijangos, an analyst at Interdin Bolsa in Madrid.
America Movil may instead collaborate with Telefonica on an acquisition of Rio de Janeiro-based Tim, Mijangos said. Since Slim and Telefonica are already two of Brazil’s largest mobile-phone carriers, the government wouldn’t let either of them buy Tim outright, he said. Instead, regulators may allow them to split Tim up with Brazilian competitor Oi SA (OIBR4), he said.
Slim would be better off increasing America Movil’s presence in the growing Brazilian market rather than pursuing deals in Europe, according to Kevin Smithen, a New York-based analyst at Macquarie Group Ltd.
“What he’s saving money for is Tim Brazil,” Smithen said in a phone interview. “It wasn’t obvious to us or the market six months ago that there was anything else in Latin America that America Movil could purchase. There now appears to be a target coming on the market with a motivated seller, and the strategic logic of that transaction makes a lot more sense than expansion into Europe.”
Tim is controlled by Telecom Italia, which has said it hasn’t begun any process to sell the Brazilian company. The Milan-based carrier, which is trying to strengthen its balance sheet after being stripped of its investment-grade credit rating, is seeking at least $12 billion for its 67 percent stake in Tim, a person with direct knowledge of the matter said this month.
A spokesman for Telecom Italia declined to comment.
America Movil reported a minimum of $2.83 billion of cash from operations in each of the last four quarters, topping almost every non-financial company in Latin America, data compiled by Bloomberg show. Only oil producer Petroleo Brasileiro SA and mining company Vale SA typically generate more cash flow than America Movil, the data show.
Even with America Movil’s steady cash flow, Slim’s company has also drawn scrutiny from credit-rating companies for its forays into Europe. Moody’s Investors Service said last week it continues to review whether to downgrade America Movil because potential acquisitions may increase its debt leverage. The company is rated A2, five levels above junk.
While America Movil’s net debt has risen to about $33 billion, it’s still less than half its market value of $77 billion. Chief Financial Officer Carlos Garcia-Moreno has said the company’s priority is to maintain its rating.
While Europe shows no sign of being a source of profit or sales growth anytime soon, Slim is a long-term investor, said Emeka Obiodu, a London-based analyst at research firm Ovum.
“The good thing for them is that they’re cash rich,” Obiodu said in a phone interview. “They’re going to absorb those losses now in the hope that in the next five to 10 years things will turn around.”
Slim may want to strike as soon as possible to take advantage before the market values of European carriers increase, said Richard Dineen, a New York-based analyst at HSBC Holdings Plc.
“There is a window of opportunity, and I would be looking to strike or invest sooner rather than later,” he said. “You can just see the momentum building and the interest in the sector. It’s a good time to do something.”