Slim Losing Out on $1 Billion in Antitrust CrackdownPatricia Laya
America Movil SAB, the telecommunications giant that propelled Carlos Slim to the world’s biggest fortune, will lose out on $1 billion in profit over three years because of long-awaited regulations imposed in Mexico, said Sanford C. Bernstein & Co. and Banco Itau BBA SA.
Mexico’s government ordered America Movil last week to share parts of its landline and mobile networks with other operators, threatening a competitive advantage the operator has enjoyed for decades. The telecommunications agency will also regulate the prices America Movil charges and will eliminate national roaming fees, measures never before applied in Mexico.
As a consequence, the operator’s profits in Mexico will decline by 15 percent in the next three years, according to Robin Bienenstock, a Bernstein analyst. The company earned $9.3 billion before interest, taxes, depreciation and amortization last year in Mexico, where Slim gained control of the phone market in a 1990 privatization of the state-owned carrier.
“It was a historic day. We’ve been waiting for these laws, and most of them are just what we expected,” said Miguel Flores Bernes, a lawyer and former antitrust commissioner. “The regulator proved it’s been working. As a whole and applied correctly, I think the laws will be able to spur competition in the market.”
America Movil shares have fallen 30 percent from a May 2012 high, partly on concern the impending regulation would threaten profits. The company said last week it will review the rules to determine what actions it should take -- “legal, business, or otherwise.” Executives weren’t available to comment further, a press official said.
Mexican President Enrique Pena Nieto signed a telecommunications overhaul in June meant to tackle the lack of competition in the industry. For years, competitors have failed at matching the reach of America Movil’s network infrastructure and its investments. Slim’s company was declared dominant because it has seven out of 10 Mexican mobile-phone customers and 80 percent of landlines.
A new regulatory agency called the Federal Telecommunications Institute, or IFT -- born out of Pena Nieto’s overhaul -- was given more power than its predecessor, allowing for fines on companies it deems dominant. In some cases, the regulator can even require an asset sale or a breakup. An IFT press official didn’t immediately reply to requests for comment.
The new rules will squeeze America Movil’s Mexican profit margin, measured in Ebitda, to 36.9 percent in 2016 from 43.9 percent last year, said Gregorio Tomassi, an analyst at Itau, in a note published yesterday. While the company operates in 18 countries, Mexico is America Movil’s largest market by sales and has been one of its most profitable, outranked last year only by Colombia and Ecuador -- two countries where it has more than 60 percent of the wireless market.
America Movil’s margins in Mexico have already been shrinking as the company sells smartphones at a discount to lure long-term subscribers, even as expenses rise to purchase the phones. Last year’s margin was down 1.8 percentage points from 45.7 percent in 2012.
“Particularly ahead of more competition, prices will be pressured,” said Gabriel Vigueras, a senior analyst at Moody’s Investors Service in Mexico City. “We’re going to see long-term effects not just on revenues but on margins.”
While the rules are bad news for profits, America Movil shares have risen since the IFT’s announcement last week. Three analysts upgraded the shares to the equivalent of a hold rating from a sell in that span, saying the impact of the regulations was already reflected in the share price. Four analysts now recommend buying the company’s American depositary receipts, which are more widely covered than its Mexican shares. Fourteen say to hold the ADRs, and five advise selling.
The shares fell 2.4 percent to 13.09 pesos at the close today in Mexico City, their biggest one-day decline since Sept. 19. Their performance last year helped cost Slim his title as the world’s richest person, losing out to Bill Gates, and today he fell behind Warren Buffett to drop to third place on the Bloomberg Billionaires Index. Slim, 74, the son of a Lebanese immigrant to Mexico, has a net worth of $62.9 billion, down $10.9 billion this year, according to the index.
There are still unanswered questions that may affect America Movil’s profits and its stock. Congress has yet to fill in necessary details, called secondary laws, for the broad legislation it passed last year. And the IFT also hasn’t provided specifics about what prices it will let America Movil charge for some fees.
“We’re still waiting to see the numbers,” Vigueras said.
The IFT has several ways to enforce its measures, including fines, Gabriel Contreras, the agency’s president, told reporters last week in Mexico City. In an extreme scenario, the agency could choose to force the breakup of a dominant company if it doesn’t comply with the rules, he said.
“We’re not ruling anything out, but those measures are seen only as a last resort,” he said.
Regulatory changes may also open some new opportunities for Slim’s company. His rival Grupo Televisa SAB, which offers Internet and phone service over cable lines, was deemed dominant last week in the broadcast-TV market, where it gets 70 percent of viewers. The IFT approved an auction for two over-the-air networks, to conclude by March 25, 2015 -- potentially letting Slim enter the market.
Televisa could grow more slowly as it loses some of its audience and market share in its over-the-air TV segment, Monex analysts said in a research note this week. A Televisa press official didn’t immediately reply to a request for comment.
America Movil has said it wants to enter the pay-TV market as soon as it’s allowed. It could qualify for a license to do so if it complies with the regulator’s restrictions, IFT Contreras said last week.
While the pay-TV market is fast-growing, any possible investment by America Movil would require a heavy cost in capital, Vigueras said.
As dramatic as the regulatory changes are, they won’t change the landscape overnight, said Flores, the former antitrust commissioner. The measures should be reviewed in about two years to ensure they’ve had the intended effect -- reducing the price for smaller players to access America Movil’s network, while still giving Slim’s company a profit that’s reasonable enough to encourage investment, he said.
“It’s very good to regulate tariffs between competitors, not so much to regulate final fees to consumers,” Flores said. “It’s dangerous -- you could put the companies in a straitjacket.”