Telmex: Mexico's 800-Pound Gorilla

Its quasi-monopoly is a safe haven for investors

Almost 10 years after Teléfonos de México (TMX ) was privatized, Mexicans still find reasons to hate the phone company. Even though the days of snarled lines and surly staff have passed, consumers now fume over mystery charges and insistent dinnertime calls urging them to return to Telmex long-distance service.

None of that need worry investors. Telmex' strong performance pushed it to No. 13 on BusinessWeek's annual ranking of the top tech companies in the world. Although the Mexican market has been open to competition for four years, the company is still a quasi-monopoly. Telmex boasts 58% of the market for international calls originating in Mexico, 68% of the domestic long-distance market, and 97% of the local market. "Anyone who wants to do business in the telecom industry in Mexico has to do business with Telmex," says analyst Michel Morin of Merrill Lynch & Co.

Telmex' control over local phone lines means the company gets a cut of all the growth in Mexico's estimated $12 billion telecom market. Cellular-phone companies, Internet service providers, and long-distance rivals must pay Telmex to complete calls on its network. Interconnection traffic rose 43% in the first quarter thanks to Mexico's wireless boom. That helped boost Telmex's net income 25% last year, to $2.7 billion on revenues of $10.7 billion. Telmex' net margins of 25% are almost double the 13% average for full-service telecom companies around the globe, says Merrill Lynch.

Investors are taking notice. Telmex shares have risen 10% over the past year, to about $35, while the Standard & Poor's Telecom Index has dropped 50%. "Telmex has proven to be a real safe-haven stock," says analyst Josh Milberg of UBS Warburg.

Its execs have worked hard to keep it that way. Chairman Carlos Slim, Latin America's richest businessman, has aggressively fought off attempts to regulate the company more tightly. Last December, when a more independent government came to power, Slim quickly cut a compromise agreement with long-distance competitors Avantel, a WorldCom (WCOM ) joint venture, and Alestra, backed by AT&T (T ), to lower the fees long-distance rivals pay Telmex to complete calls on its local network. The move has taken the punch out of new regulatory efforts.

Slim is proving just as adept at boosting revenues. His focus is on data services, both connecting consumers and businesses to the Net and transmitting their data. Morin figures the company's data services, which account for about $1 billion now, will rise to $3.8 billion in 2005 as more Mexicans get onto the Web.

Certainly, Telmex is facing competitive pressures. The lower termination fees for long-distance calls will spur more players in that business, which now accounts for more than one-third of Telmex' revenues. And some rivals are beginning to enter the local phone market. "Competition is a real pressure," says Milberg. "It's not like the sky is going to fall on Telmex, but competitors are in a position to take 1% to 2% of market share a year." Still, as rivals are learning, it takes a lot to tackle Telmex.

By Elisabeth Malkin in Mexico City

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