Teléfonos de México, Mexico’s leading fixed-line telecommunications operator, spun off its wireless cellular phone business in February in a $15 billion listing of América Móvil on the New York Stock Exchange – the largest-ever such divestiture by a Latin American company. Separating Telmex’s Mexican fixed-line business and América Móvil’s growing pan-American wireless activities puts it on the fast track for acquisitions in the US and Latin America while maximizing shareholder value, says José Juan Olloqui, vice president of investment banking at JP Morgan in Mexico City, which advised Telmex on the transaction. “[América Móvil] was growing at more than 100% a year in Mexico and the spin-off will enable it to focus on another area of tremendous growth in South America,” says Adolfo Cerezo, chief financial officer of Telmex.
Making a Pan-Latin Play
The listing of 60% of América Móvil’s shares as American Depository Receipts on the NYSE valued it in March at $12.5 billion. As the region’s first pan-American telecom company, América Móvil can focus on increasing its presence in Latin America, Cerezo says. América Móvil has majority stakes in a variety of wireless and telecom companies in Mexico, Puerto Rico, Guatemala, Argentina, Uruguay and Ecuador and minority stakes in companies in the US, Brazil, Colombia and Venezuela.
Carlos Slim, the majority shareholder in Telmex and Carso Global Telecom, an affiliate of Telmex, remain controlling shareholders in América Móvil with 28% of the company. US-based Southwestern Bell owns 9% of América Móvil. In the February transaction, Telmex offered existing shareholders one share in América Móvil for each Telmex share. The new company lists on the same stock exchanges as Telmex: the Mexican Stock Exchange, Nasdaq and NYSE.
Telmex announced its plans to create an independent wireless company last September but the spin-off was delayed until February because of a dispute between Telmex and Mexico’s regulatory authorities over dominant carrier rules. Dividing Telmex’s businesses eased Telmex’s concerns that Mexican regulations would hamper América Móvil’s international growth.
América Móvil now has a strongly capitalized balance sheet with $2.5 billion in cash and a relatively low $810 million in debt. JP Morgan projects that the company will grow around 31% over the next five years, versus a 25% average for the region. América Móvil’s stock is trading around 12.5 times EBITDA (earnings before interest, tax depreciation and amortization) versus an average of eight times EBITDA for other Latin cellular companies.
Shares traded at $22 on the first day of trading in February and leveled off to around $17 a share following a global slump in telecommunications stock. Average daily trading volume of $100 million dropped to $50 million in March. But JP Morgan’s Olloqui points out that daily trading volume of a competitor, Telesp Celular, is only around $13 million.
Telecom Américas, a joint venture in South America between América Móvil (44.3%), Bell Canada International (44.3%) and SBC International (11.4%), already has holdings in Brazilian wireless companies ATL, Telet, Americel and Tess, and bid in March to acquire another 65% in Telet and Americel for around $750 million. Following the closing of the acquisitions, Telecom Américas will own and operate four B-Band wireless licenses serving 3.5 million subscribers in Rio Grande do Sul state and the central west region of Brazil.
América Móvil still has plenty of cash on its balance sheet but has committed to repay roughly $1.3 billion to Telecom Américas in 2003 for a promissory note.
Sticking to Core Business
Analysts say América Móvil should focus on acquisitions of wireless companies in South America and not stray by acquiring fixed-line assets in the US. Investors have been demanding more explanation and transparency from Telmex on its non-Mexico holdings, particularly its non-consolidated companies. Tracfone, now a subsidiary of América Móvil and a Florida provider of pre-paid phone cards and handsets, recorded operating losses of $78 million in the fourth quarter of 2000. Telmex investors complained and América Móvil is trying to accommodate investors. Tracfone’s chief executive officer gave a conference call in early March to explain the company’s growth plans.
It’s not the first time there has been less than full disclosure from Telmex and Slim. Last year Telmex failed to announce poorer-than-expected performance prior to a secondary listing on the New York Stock Exchange. Meanwhile, a Texas court this year fined Carlos Slim and other major shareholders of CompUSA $454.5 million when it determined that they breached a contract with Texas-based COC Services, which claims Slim had sought it out as a partner to purchase CompUSA. The computer company is appealing the ruling.