Megacable Gains as Pena Nieto Pushes for Competition

Megacable Holdings SAB is outperforming all other Mexican telecommunications stocks on bets that the nation’s largest cable-TV company has the most to gain from proposals to make the industry more competitive.

The Guadalajara-based cable company is benefiting from rules that force broadcasters Grupo Televisa SAB and TV Azteca SAB to offer their most popular channels for free and that keep billionaire Carlos Slim’s America Movil SAB out of the pay-TV market for at least a 1 1/2 years. Megacable shares have gained 37 percent in the past year, compared with the 14 percent average of Mexican telecommunications stocks.

Competitive prices for packages of TV, landline phone and Internet services have put Megacable in position to round up new clients in a market that’s ripe for growth, since about half of Mexico’s households don’t yet pay for cable or satellite plans, said Andres Audiffred, an analyst with Grupo Financiero Ve Por Mas SA. Analysts on average are projecting sales growth of 12 percent this year, similar to 2013, when the company had its biggest revenue increase in four years.

“Now and for a long while, Mexico will be a great growth opportunity for them,” Audiffred said in a phone interview from Mexico City. Getting Televisa’s and Azteca’s channels for free is “important because it could allow them some cost reductions,” he said.

America Movil shares have gained less than 1 percent over the past year, while smaller phone carrier Maxcom Telecomunicaciones SAB has jumped 15 percent. Mexico City-based Televisa, which also has equity stakes in three Mexican cable companies, has climbed 34 percent.

‘Extremely Positive’

President Enrique Pena Nieto pushed through the telecommunications laws last year to increase competition. This year, he has asked Congress for a new bill that would cut phone fees and phase out long-distance charges. The proposal would be “extremely positive” for Megacable over the next few years, Chief Executive Officer Enrique Yamuni said in a call with analysts last month.

While Megacable is the largest single cable company in Mexico with 2.2 million subscribers, it’s not the biggest carrier in the pay-TV market. Televisa has 5.2 million customers across its satellite unit and the three cable companies in which it holds stakes, and Dish Mexico has about 2.5 million.

“It is clear that the current administration’s intent is transforming Mexico’s telecom sector and will give greater accessibility to more people and promote infrastructure investments that will vastly improve connectivity in our country,” Yamuni said on the April call. He didn’t respond to requests for an interview.

Stopping Payments

Megacable immediately took advantage of the new telecommunications rules in September by stopping payments to Televisa and Azteca for their major broadcast networks. That contributed to a 25 percent increase in its cable operations’ fourth-quarter adjusted profit to 1.17 billion pesos ($90 million).

Mexico’s Federal Telecommunications Institute, meanwhile, has declared America Movil dominant in the phone industry. The regulator said the company must comply with requirements such as network sharing for at least 18 months before it can get a license to sell TV service. Pena Nieto’s bill would extend that wait to two years.

In either case, Megacable’s phone-TV-Internet bundles won’t face tougher competition from the world’s second-richest person anytime soon, since Slim can only offer phone and Internet.

Less Competitive

“Just like every other pay-TV operator in Mexico, Telmex’s delay to offer pay-TV implies less competitive pressure for its bundled offers,” said Jose Otero, an analyst at Signals Telecom Consulting, referring to America Movil’s landline unit.

America Movil believes the prohibition of its pay-TV services limits competition that could result in better prices, quality and diversity of programming for consumers, a company press official said in a statement.

Megacable, which purchased technology-services firm Ho1a for less than $10 million last year, has a strong enough balance sheet to consider further acquisitions in Mexico or Central America, Yamuni told analysts. While the company has been openly interested for years in acquiring Telecable, owned by closely held carrier Grupo Hevi, it’s unclear whether the company is still for sale after the death in March of its founder and CEO Hector Vielma, he said.

A Grupo Hevi representative didn’t respond to an e-mail message, and phone calls to its office weren’t answered.

Acquisition Target?

Megacable could turn into an acquisition target itself, said Alejandro Gallostra, an analyst at Banco Bilbao Vizcaya Argentaria SA. Televisa, Telefonica SA or a U.S. cable provider may seek to buy the company to tap into its growth prospects, he said. Press officials for Televisa and Telefonica didn’t respond to requests for comment.

Megacable’s sales increased by 12 percent to 2.7 billion pesos in the first quarter, as net debt fell 21 percent to 755 million pesos. As of yesterday’s close, the company’s market value was about $3.6 billion.

Some analysts are losing enthusiasm for Megacable as its stock price has soared. About 36 percent of analysts recommend buying the shares, down from 70 percent at the end of last year.

While Andrew Campbell, a Credit Suisse analyst, raised his target price for the shares to 56 pesos from 36 pesos on April 30, he maintained a neutral rating on the stock, saying in a research note that it had “fairly limited upside.” Megacable’s price-to-earnings ratio of 21 is in line with the industry average in Mexico, according to data compiled by Bloomberg.

Still, the company is in good position as Mexico pushes for a more competitive industry, Campbell said.

“Mega is on the favorable side of the government’s telecom reform initiatives by avoiding a preponderance label due to its small size and benefiting from lower content and lower interconnection costs,” he said.