The world is a rapidly changing place, and when it comes to technology, this simple fact of life becomes even more apparent. Years ago, Telefonica S.A. (TEF) seemed poised to create a telecommunications empire that would span the globe. Their ambitions led them to Germany, Britain, and Ireland, yet the crown jewel of their empire would be Latin America. Just like the conquistadors before them, the Spaniards left home in search of greater profits in a Latin America that was quickly rising to become a major player in the world economy. They created subsidiaries all over the continent and then consolidated their gains by acquiring many of BellSouth's operations in Central and South America. They became one of the largest telecommunications companies in the world and their flagship Movistar brand could be found in just about every country where Spanish was spoken. Telefonica was on top of the world, but in order to get there they borrowed some money to finance their operations. The problem was the amount they borrowed. To say that they went over budget is an understatement.
Meanwhile America Movil (AMX) was on its way up also. The company, owned by Carlos Slim (If you're familiar with Forbes' Rich List, you know who he is), conquered the Mexican market with ruthless efficiency. Their market share is over 60% and with the billions in profits, Slim turned his attention south. Colombia, the second most populous Spanish-speaking country in Latin America (Mexico is first), was ripe for the picking and in 1999 he purchased Comcel. Today, America Movil also has over 60% market share in the wireless communication sector in Colombia through their subsidiary Claro (formerly Comcel). To put things into perspective, AMX has a market share of over 60% in the two most populous Spanish-speaking countries of Latin America, Mexico and Colombia, as well as in Ecuador. They are also a major player in Brazil, Chile, Argentina, Peru, and many other Spanish speaking countries.
The Fall Of TEF
Telefonica's decline began in a way already too familiar to many European companies. Their expansion had been enormous during the boom years but once the Great Recession hit they saw profits nosedive. The problem is they got hit by a double-whammy of recession and changing technology. In Spain their landline business was hit hard by a switch to mobile devices and their mobile devices business was hit hard by competition. In order to counter this, they brought in Guillermo Ansaldo as CEO and Federico Rava to head up the landline division of the company. Both were Telefonica veterans at the Argentine subsidiary of the company. This was to no use and the slide continued unabated as the recession worsened and more people switched from landlines to cell phones and those with multiple cell phones downsized to just one. Last year saw the loss of 2 million cell phone lines of which 870,000 belonged to Telefonica (article in Spanish). This was the biggest loss of any cell phone provider in the country. To make matters worse, Telefonica's market share dropped below 40% in 2012 for the first time in history. As their home market shrinks TEF has been forced to cut 6,500 employees in Spain (Link again in Spanish) alone. The carnage is all but guaranteed for this year also since austerity will keep Spain in recession throughout 2013. The only positive news are some minor gains in market share in Latin America due to competitive pricing, however these gains are far too small to get TEF out of the hole they are in.
The Rise Of AMX
AMX has seen their business model rake in massive profits all over Latin America and there is no end in sight. They started with landlines in Mexico, then cell phone service across Latin America, and now they are also one the largest internet providers in the region and even more impressive, they recently surpassed DirecTV (18% market share) to become the largest pay-TV provider in Latin America with a 22% market share. To top it all off, AMX's business has no exposure to the European crisis.
TEF Vs. AMX
Despite the fact that America Movil only has operations in the Americas and their operations in the United States are miniscule compared to ATT and Verizon, they have already surpassed Telefonica in market capitalization. AMX is worth $90 billion while TEF is only worth $61 billion. Another critical point here is debt. TEF has a total debt of $86 billion while AMX's debt comes in at $32 billion. Among other factors that sway me towards AMX are the following:
- TEF is highly exposed to the recession in Europe while AMX is not.
- The diversification factor, AMX provides TV and internet services in addition to their core telecommunications business. While TEF does the same, in terms of market share they are a distant second in the internet race and even farther down the list when it comes to television.
- Net profit Margin - AMX=12.8%, TEF=10.5% (2012 estimates)
- Lastly there is also the dividend, while AMX pays out a small amount (30 cents per share or roughly 1.2%), TEF can't even afford to do that so you won't get anything for holding Telefonica.
To sum it all up, America Movil is a much stronger company than Telefonica when it comes to the Latin American telecommunications sector and a better buy for long term investors. High debt, a shrinking market in Europe, not enough diversification, and no dividend, make Telefonica a losing deal. AMX on the other hand will continue to grow while paying out a dividend for your patience.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.