Slim Forsaking Dutch Dream for Brazil Lifts Bonds: Mexico Credit

America Movil SAB bondholders who applauded the Mexican phone company’s decision to abort a takeover in Europe are welcoming the alternative: investing in Brazil, its second-biggest market, and paying down debt.

The $1.6 billion of bonds due in 2022 issued by Latin America’s biggest mobile-phone provider rose 3 percent last month, the most among the region’s similar-rated non-financial securities, which returned an average 1.9 percent. That reduced the extra yield investors demand to hold America Movil instead of Mexico’s government bonds to 0.41 percentage point, from a record 0.78 percentage point on Sept. 18. Barclays Plc said the gap may narrow 0.15 percentage point further.

Controlled by billionaire Carlos Slim, America Movil is regaining investor confidence with a plan to focus on the region it dominates, after the company’s offer in August to pay 7.2 billion euros ($9.9 billion) for Hague-based Royal KPN NV threatened to trigger a debt downgrade. Chief Executive Officer Daniel Hajj told investors Oct. 25 that the company will look at acquisitions in Brazil, where sales accelerated last quarter to the fastest since 2012. Standard & Poor’s raised the company’s rating outlook to stable from negative last week.

“The fact that America Movil now has a Brazilian company on its radar gives it a great objective,” said Alejandro Hernandez, who helps oversee about 50 billion pesos at Grupo Financiero Interacciones SA, including America Movil bonds. “It’s viewed as a strategic purchase for them because it’s a market they already know so well.”

America Movil has dropped 6 percent this year through yesterday. Shares rose 0.6 percent to 14.09 pesos in Mexico City trading today.

Excess Cash

A press representative for America Movil’s declined to comment on the company’s growth plans in Brazil.

The company plans to use most of its excess cash this quarter to pay debt, Chief Financial Officer Carlos Garcia-Moreno said during an earnings call.

While Hajj didn’t rule out possible reinvestments in Europe, he said consolidation in Brazil would be “good for everybody.”

Telecom Italia SpA, Italy’s biggest phone company, is seeking at least 9 billion euros for its controlling stake in Brazil’s second-biggest carrier, Tim Participacoes SA, a person with direct knowledge of the matter said last month. Telecom Italia said in a statement that there’s no formal or informal process ongoing for disposing of Tim stake.

America Movil is Brazil’s third-biggest wireless carrier, with a 25 percent share of the market through its Claro brand.

Tim Speculation

Since Brazilian law doesn’t allow one company to control more than 50 percent of the market or own more than one operating license, America Movil may partner with Telefonica SA to split up Tim with its Brazilian competitor, Oi SA, according to Madrid’s Interdin Bolsa analyst Borja Mijangos.

Slim could afford such a deal, Sanford C. Bernstein analyst Robin Bienenstock wrote in an Oct. 17 note.

“America Movil was clear it remains open to acquisitions in Europe and Latin America,” Christopher Buck, a Barclays analyst, wrote in the Oct. 25 report. “It was also clear the company will use cash to pay debt and reduce leverage in the short term,” he wrote, leaving “space for mild upside potential.”

Moody’s Investors Service revised its outlook on America Movil to stable from a review for possible downgrade in a statement yesterday.

“We believe America Movil will continue to pursue its growth strategy, which may include opportunistic M&A, in a prudent manner,” Moody’s analyst Soummo Mukherjee said in the statement, which confirmed its A2 rating.

Domestic Weakness

Investors are still concerned the company may seek to go back to Europe, Madeleine King, a bond strategist at Credit Suisse Group AG, said in a telephone interview from London.

“People don’t have a good understanding of what America Movil’s takeover strategy is,” King said. “Investors are having to assume that there will be more deals to come, but not really knowing what those deals are.”

The company is right to expand outside of Mexico as a weak economy in its home market slows down subscriber growth, Hernandez said. The company added 3.1 million mobile-phone subscribers across the Americas in the third quarter, missing the 4.3 million average estimate of five analysts polled by Bloomberg.

“Brazil is looking great to America Movil right now,” Hernandez said.

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