Telefónica 'Mexit' back in spotlight as group tries to cut debt

Spanish telecoms giant Telefónica could be looking to divest its Mexican and Central American operations as it looks to reduce its 43.6bn-euro (US$51bn) net financial debt, reported Spanish daily El Economista, citing sources close to the company.

The European company, with 339mn end users as of last June, has been the subject of periodic speculation in financial circles about the potential sale of all or parts of its northern Latin America or "North Hispam" unit, which includes its operations in Mexico, Ecuador, Venezuela, Colombia, Costa Rica, El Salvador, Guatemala, Nicaragua and Panama.

The unit accounted for 21.5% of the group's global final clients (73mn) and 8.2% of global revenues (1.99bn euros) as of the first half of 2018, according to the company's latest financial report. It also received only 2% (165mn euros) of all the company's capex during the first six months of the year.

On average the region is less profitable than the entire global group, with an Ebitda margin of 21.7% versus a global margin of 33.3%.

The company might be looking to "fully or partially divest" its Mexican and Central American units rapidly, according to El Economista.

"The telecommunications company has been working for 'many months' on the sale of assets that are not strategic for the group," the paper stated, citing sources close to the talks. Negotiations are "very advanced" and could lead to an agreement "in the coming weeks," the daily added.

When asked by BNamericas about the story, the Mexican unit of Telefónica replied via email that it does not comment on market rumors.

MAKING SENSE OF THE DEAL?

Analysts consulted by BNamericas lend credence to the story by pointing out that the company has been losing market share to AT&T and América Móvil in Mexico. The company's average of 88 minutes of use (MOU) a month per mobile voice subscriber during Q1 in Mexico is well below the country's 2017 average for the same period.

Telefónica "has been open to... any kind of merger or associated sale for a while," said Ernesto Piedras, CEO of local telecoms consultancy The CIU. "They're negotiating on several fronts," he added.

"They don't have same weight here... as in South America. There they're both fixed and mobile operators, whereas here they're mobile only," he pointed out. Also, the current move toward convergence of both distribution and content, such as with AT&T's acquisition of global content giant Time Warner, might find the Spanish company underfunded to compete, Piedras said.

Market speculation was temporarily calmed in mid-August when the company paid 700mn pesos (US$37mn) for two blocks of 20MHz each in the coveted 2.5GHz spectrum for 4G and 5G mobile broadband.

But Jorge Fernando Negrete, president of Mexican think tank Mediatelecom Policy & Law, said that even the purchase of spectrum might have been a move to increase the attractiveness of the company in the face of a potential sale.

"They have new spectrum, access to the incumbent player's infrastructure and they have recently been lobbying regarding lack of effective competition... That is to say, they are making the company more attractive to investors," he added. The company also faces the challenge of not having a US subsidiary to increase synergies, he added, as well as the need to lower its global debt.

The company has recently complained that spectrum policies in Mexico limit competition.

Telefónica's net financial debt to Ebitda ratio, at 2.68 times, is well above the 1.5 times that analysts deem healthy for telecommunications companies.

Despite remaining Mexico's number two mobile operator in the country in terms of voice subscribers, with 21% of total lines compared to América Móvil's 63% and AT&T's 13.4%, Telefónica is already the third largest operator of mobile broadband, with 12% of broadband lines to AT&T's 15% and América Móvil's 70%, according to official data.