At first glance, it looked as if the condemned man had stolen the executioner's axe and cut off his own head rather than wait for the inevitable. Facing imminent antitrust legislation in Mexico aimed squarely at his telecom empire, Carlos Slim opted to act first with announced plans to break up America Movil (AMX). America Movil will spin off some of its fixed-line and mobile assets into a new, independent company, and it will also spin off its wireless towers.
Slim is no dummy; he knew the jig was up and he figured he could better shape the outcome if he acted early. America Movil controls 70% of the mobile phone market and 80% of landlines, and its dominance in the Mexican market and the lack of significant competition has led Mexico to have some of the most expensive communications costs in the world.
The OECD published a study last year that found Mexico to be the most expensive of twelve major markets for a basic talk, text and data mobile phone plan. And recent ranking of broadband internet costs by country had Mexico's service ranked as the 16th most expensive in the world, more than three times more expensive than that of the United States after adjusting for incomes.
AMX stock has been rallying on the news of the breakup; shares are up more than 10% since Tuesday. Investors have taken the view that the divestitures and subsequent competition - which will bring America Movil's market share to below the 50% threshold at which the Mexican government would impose penalties - will be less damaging than the potential punitive actions by the Mexican government.
So, what does this mean for AMX stock and for its largest single competitor in Latin America, Spain's Telefonica (TEF)?
To start, this will, by default, massively diversify AMX's revenue stream globally. Though AMX is the number-one or number-two mobile provider in nearly every Latin American country, its home market of Mexico is by far its biggest. Mexico currently accounts for about a third of sales and nearly half of profits. The new AMX will be a pan-Latin-American telecom giant based in Mexico rather than a Mexican telecom giant with operations in Central and South America.
Over the next year or two, I would expect AMX's restructuring to be a major distraction for management, which should - all else equal - be a boon to Telefonica. But the Mexican divestitures are likely to make Carlos Slim all the more aggressive in pursuing growth outside of Mexico once the dust settles.
Within Mexico, the picture is somewhat cloudy. AMX has indicated it prefers to sell the bulk of the assets to a single buyer in order to create a competitor strong enough to appease Mexican regulators. That could mean that Telefonica steps up and increases its presence in Mexico, though Bloomberg reported that broadcasting juggernaut Grupo Televisa (TV) could be the strongest contender.
More details on Slim's plans will emerge in the coming weeks. But one point should be immediately obvious. The biggest winner here will be neither America Movil nor Telefonica but rather the Mexican consumers who should soon be benefiting from increased competition and lower prices. That may mean lower margins for AMX and TEF in their Mexican operations, at least for a time. But if AT&T (T) and Verizon (VZ) can profitably coexist in the brutally competitive U.S. market, then investors in AMX and TEF should have nothing to worry about.
Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.
