Brazil consolidation: América Móvil buying Nextel

Mexico's América Móvil beat Telecom Italia's TIM Brasil and has reached an agreement to buy 100% of Nextel Brasil from NII Holdings and its subsidiaries for US$905mn less debt, the two companies said in statements on Monday.

The deal is subject to approval from Brazilian telecom regulator Anatel and antitrust watchdog Cade. It is also subject to the backing of NII Holdings' shareholders.

With the transaction, América Móvil's Claro Brasil "will consolidate its position as one of the leading telecommunication service providers in Brazil, strengthening its mobile network capacity, spectrum portfolio, subscriber base, coverage and quality, particularly in the cities of São Paulo and Rio de Janeiro, the main markets in Brazil," América Móvil said in a statement.

Nextel's assets include 4G networks in Rio de Janeiro and São Paulo and spectrum in the 1.8GHz, 2.1GHz and 800MHz bands. The company also has a RAN sharing deal with Telefónica's Vivo to cover the rest of the country.

In November, Anatel paved the way for Nextel to be acquired by a local competitor by increasing regulatory spectrum caps.

Nextel Brasil was the last operating asset of NII Holdings.

US-based NII will offload its 70% interest in the company via the sale of one of its Luxembourg-based subsidiaries, while NII's AI Brazil Holdings will sell the other 30%. The terms of the deal have been unanimously approved by NII's board.

In a statement, NII CFO Dan Freiman said the agreement is the "culmination of an extensive multi-year process to pursue a strategic path for Nextel Brazil and provides our best opportunity to monetize our remaining operating assets in light of the competitive landscape in Brazil and long-term need to raise significant capital to fund business operations, debt service and capital expenditures necessary to remain competitive in the future."

If the transaction is consummated, AI Brazil will be entitled to the first US$10mn and 6% of additional amounts recovered from the Nextel Mexico escrow, as a resolution to an outstanding disagreement regarding the characterization of any contributions to Nextel Brazil from future proceeds released from the Nextel Mexico escrow account.

5G

In a conference call with analysts on Monday, Freiman indicated that the future 5G auction pressured the company even more to find a buyer, as Nextel would not have enough cash to bid.

"If we did not bid in the auction and all the other telcos snapped up 5G frequencies, what would that mean in the long run for Nextel?" he asked.

Even so, Nextel was undertaking a network virtualization upgrade with Ericsson that ultimately had 5G in sight.

Ericsson's vEPC virtualization solution expanded the mobile data processing capacity of Nextel's 4G network, providing better data traffic experience, "while preparing Nextel for the cloud environment, which will bring more flexibility and agility to business," said the CFO.

RESULTS

The announcement comes at the same time that Nextel disclosed its quarterly and annual financials.

The company recorded consolidated operating revenue of US$621mm in 2018 and a consolidated operating loss of US$42mn. In Q4, capital expenditures were US$24mn and US$64mn in the year.

Nextel Brasil's funding sources totaled US$281mn including US$175mn of unrestricted cash and short-term investments and US$106mn held in escrow to guarantee eventual indemnification obligations related to the sale of the company's operations in Mexico.

The company ended 2018 with 3.3mn 3G/4G subscribers, up 14% from the year before. In the fourth quarter, Nextel said it added 99,300 subscribers.

The telco is the fifth largest mobile player in Brazil, but accounts for just 1.44% of the market. It is the only one to offer only mobile services - even TIM is now betting on fiber broadband.

If the deal were to go through today, Claro's mobile market share would rise to 26%, widening the tight gap with TIM.