Spain's New Empire Builder

CEO César Alierta puts Telefónica on top in Latin America's wireless market

With his cautious manner, César Alierta hardly seems an empire builder. Yet the chairman of tele-communications giant Telefónica is precisely that. Almost four years after taking over Spain's largest company, Alierta has made his first major acquisition -- and it's a doozy. In March, Telefónica agreed to pay up to $5.85 billion for 10 of BellSouth Corp.'s (BLS ) Latin American wireless companies. That's Telefónica's biggest buy since a spending spree in the 1990s. Assuming the deal goes through, Alierta will have secured almost 12 million new mobile-phone users, from Guatemala to Argentina.

Alierta will also have gained the top spot on Latin America's wireless ladder. Telefónica already dominates the region's largest wireless market, Brazil, with a 56% share. The BellSouth companies will consolidate its No. 1 ranking in Peru and give it the top position in Chile, Argentina, Venezuela, Nicaragua, and Panama. Analysts say Telefónica should have a 35% market share in the region. "This transaction arose from our policy of seizing growth opportunities," Alierta told shareholders in late April.

Indeed, as growth slows in the fixed-line business in Latin America -- which Telefónica already dominates -- the company predicts that wireless-industry revenues there will nearly double, to $35 billion, by 2008. Pyramid Research, a consultancy in Cambridge, Mass., says mobile users could soar from 118 million last year to about 180 million by 2008.

The BellSouth deal also reflects Telefónica's return to its core business. Alierta has dropped plans for 3G services in Germany, sold TV interests in Spain, and is shopping around Terra Lycos, the Internet portal it bought in 2000.

In Latin America, Alierta now faces only one big rival: Carlos Slim, the Mexican owner of Telmex, a fixed-line company, and América Móvil, a wireless operator. "He and Telefónica are giving each other a run for their money," says Javier Borrachero, an analyst at ING Financial Markets (ING ) in Madrid. Telefónica paid a record $556 for each BellSouth customer -- a sum too rich for both Slim and Telecom Italia Mobiles, which also bid. Alierta figured he could afford to overpay: After huge write-offs in 2002, Telefónica reported net profit of $2.6 billion for last year, on revenues of $33.8 billion. "Telefónica could not let BellSouth go to Slim," says Borrachero.

PREPAID CUSTOMERS. Alierta must now get more growth out of his new assets. Last year, BellSouth earned $867 million from the companies it just sold, on revenues of $2.5 billion. Its users are among the region's most profitable, thanks to a preponderance of well-to-do contract customers. But the big growth in the region is at the market's low end -- among prepaid-card users. That's where América Móvil operates, luring users with low prices and a big phone store network. Alierta's task is to hold on to BellSouth's upmarket position while pushing into the mass market. And Slim isn't sitting still. Last year, América Móvil made wireless acquisitions in Brazil, Argentina, and El Salvador. While the BellSouth deal makes Telefónica the region's leader, with 44 million wireless subscribers, América Móvil, which has 78% of the Mexican market, is close behind.

Although the BellSouth deal still needs regulatory approvals, Telefónica's only real antitrust worry is in Peru, a small market where it could control a 74% share. Still, the transaction may not be sealed before yearend. Telefónica could then realize $1 billion from a range of synergies, says Carlos Rodríguez, regional manager at Pyramid Research. These include cost savings on tower construction and more bargaining power with handset suppliers. If Alierta can draw new users, he may win against the mighty Slim.

By Juliane von Reppert-Bismarck in Madrid

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