Axtel Takes Aim at U.S. Businesses as Cross-Border Ties Grow

  • Regulatory obstacles `coming down every day,' CEO Zubiran Says
  • Alfa's Alestra unit completed merger with Axtel last week

Axtel SAB, the newly acquired telecommunications unit of Mexico’s Alfa SAB, created a niche for itself in the local enterprise market. Now it’s hoping the strategy will make sense for businesses stretching north of the border.

“The North American market is a fact, and the first step was taken by mobile companies with roaming-free plans,” Axtel Chief Executive Officer Rolando Zubiran said in an interview from San Pedro Garza Garcia, Mexico, a suburb of Monterrey where the company is based. “There is a very important community of Latin Americans in the United States that we can’t dismiss.”

Alfa, which agreed in October to buy Axtel in a stock deal, completed the acquisition last week for about 51 percent of the combined entity. Terms weren’t disclosed. The new company has annual sales from its business customers of about 11 billion pesos ($607.9 million), according to an estimate from Itau BBA. The old Axtel focused on residential customers, offering fiber-optic lines with high-speed video and Internet in large cities, while Alfa’s Alestra unit, in recent years, zeroed in on business services including data centers, cloud computing, backup solutions and integrating systems.

The new company will use the Axtel name, though both brands will continue at a time when new federal laws in Mexico seek to stimulate competition in the industry. While Axtel hasn’t yet deployed fiber-optic networks in the U.S., it has provided telecommunications services there to businesses such as Alfa’s subsidiaries, Zubiran said. There could be an opportunity to expand services in the U.S., he said.

Moody’s Investors Service raised Axtel’s corporate family rating three levels to Ba3 from B3, saying the combination provides a stronger credit profile and capital structure. The Ba3 rating is three notches below investment grade.

“The larger size of the newly formed entity will also increase both companies’ competitive capacity in Mexico’s fragmented telecommunications industry,” Moody’s analyst Alonso Sanchez said Monday in a statement.

Enterprise Boost

Exposure to enterprise markets will fuel growth for the combined company, Fitch Ratings analyst Alvin Lim said in an interview. “There are some synergies to be made, in terms of networks, coverage, and the overall commercial platform. It’s a good strategic move.”

While traditional services like phones will see moderate growth at best or possibly declining sales for the business segment, enterprise cloud-computing services will post double-digit growth in Latin America in the coming years, Pyramid Research analyst Marcelo Kawanami said in a e-mail. And these services are set to reach 14 percent of telecommunications sales in the region by the end of 2019, up from 5 percent in 2014.

Axtel shares have jumped 87 percent in the past 12 months, partly fueled by acquisition rumors. Shares of America Movil SAB, which competes against Axtel to offer phone and Internet services, have fallen 22 percent in the same period.

‘Significant Value’

“The merger represents a key strategic action that strengthens Axtel’s competitive position and creates significant value,” Itau BBA analyst Gregorio Tomassi said in a note to clients earlier this month. It also bolsters coverage and network capacity, he said.

The combined unit will see synergies of as much as 1 billion pesos in earnings before interest, taxes, depreciation and amortization, and $20 million in capital spending a year, Zubiran said.

Last year, wireless carriers America Movil, AT&T Inc., T-Mobile US Inc. and Telefonica Mexico all introduced plans that ended cross-border roaming charges and took advantage of a two-country region with more than 400 million people. The lowering of telecommunications costs in Mexico, helped by laws signed in 2014, gave operators legroom to offer the roaming-free plans.

“Whereas before there were regulatory obstacles, or artificial borders, these are coming down every day,” Zubiran said.

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