2 Giants Likely to Weather Mexican Telecom Reform
Telecom reform in Mexico—set to introduce competition—will not necessarily end the dominance of the two big players.
"We expect that the Mexican telecommunications market will continue to be dominated by America Movil and Grupo Televisa, the major competitors in the residential business in Mexico," Moody's senior analyst Nymia Almeida said in a statement.
The reform aims at leveling the playing field of the telecom industry in Mexico by giving a newly formed regulator the power to crack down on monopolistic practices and keep companies from controlling more than half the market.
It's part of a wider effort of the Mexican government to push through an aggressive reform agenda.
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The new telecom regulators plan to issue decisions on pricing, network unbundling and interconnection rates. Even though the reduced interconnection costs will benefit the smaller telecom providers and help new entrants, it will also affect their revenues and limit cash generation, Almeida said.
Reliability of service is another hurdle the smaller companies must overcome, and smaller providers in the region have "disappointed subscribers in terms of service quality or customer service," according to Moody's.
America Movil, mainly owned by Mexican tycoon Carlos Slim, dominates Mexico's wireless market and is vulnerable to the new law.
But it may be well placed to beat back emerging competitive threats.
The obstacles smaller players face in the market "could extend the time that America Movil would be able to fend off increased competition," but it is only a question of time how long will it take for the regulation to hit the operating results in Mexico, which contributes more than 35 percent into the company's consolidated revenue, Almeida said. "We don't think cost controls will be enough to avoid a negative effect on the company's operating profits in the future."
For the past years America Movil has been generating "margins that are among the highest of wireless operators globally," Morningstar analyst Imari Love said in a note. The company used the cash flow to break into new countries and become the largest wireless provider in the region. America Movil has posted in-line first-quarter earnings in April, with 6.1 percent revenue growth and an expended operating margin of 33 percent, Love said.
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Since the reform announcement in February, investors have been selling off—America Movil shares have dropped 20 percent. But now the stock presents an opportunity trading at $20, below its fair value of $26, according to Morningstar. That implies 30 percent upside from the current level.
Another big telecom player, Grupo Televisa, may actually "gain market share," benefiting from lower market prices after the new regulation comes into effect, according to Moody's Almeida.
Televisa's 55 percent share in the pay-TV market will be threatened if America Movil's Telmex gets permission to offer video services. But the growth opportunities for the new companies are limited as the most profitable customers have been already served, according to Moody's.
Another threat to Televisa's earnings is the clause addressing the sale of over-the-air content. Televisa sells its telenovelas soap operas and other content in Mexico and abroad, contributing 5 percent to the company's revenue, said Almeida.
The Mexican government plans to auction up to four TV chains in the next few years creating an opportunity for new entrants, but Almeida does not see bidders rushing into auction because of the huge upfront investment requirements.
Televisa owns four of Mexico City's 10 TV stations and various repeater stations, which retransmit the programs to the rest of the country. Its major rival TV Azteca owns two TV stations.
Grupo Televisa reported weaker-then-expected first-quarter results in April, driven by decline in advertising business, but analyst Michael Corty with Morningstar expects the growth to resume in the second half of the year.
"We would not put new money to work in Televisa today as the stock is currently trading just under our fair value estimate," Corty said in a note. Televisa's ADR traded last around $26.
After passing the telecom reform, congress has to work on the secondary laws that will detail its implementation. "Still, it is not certain how the new telecom law will affect the telecom industry," said Almeida.