Why Entel is not pursuing Telefónica's assets

Chilean telco Entel has denied that it is interested in acquiring Telefónica's assets in Mexico and parts of South and Central America.

The statement came in response to a Spanish media report citing Entel among potential bidders for the Spanish telco's assets. Other supposedly interested parties mentioned were Millicom, Liberty Latin America and AT&T.

The sale of the Mexico unit could reportedly fetch up to 2bn euros while the sale of 60% of its operations in Costa Rica, Panama, Guatemala, Nicaragua, El Salvador could reach 700-800mn euros.

Whether Telefónica plans to sell those assets remains to be seen. Despite the lack of confirmation, the company has been seeking ways to reduce its debt burden and has been frustrated by its inability to grow its market share in Latin America's second-largest economy, Mexico.

The Spanish giant has also experienced difficulties repatriating profits from Venezuela, a crisis-stricken market that is becoming a liability.

A different media report last week said that US investment fund Cerberus Capital Management could be a potential candidate to acquire 40% of Telefónica's underperforming Mexican assets as well as part of Telefónica's Hispam Norte division, which includes Central America, Colombia, Venezuela and Ecuador.

In response to the most recent speculation, Entel said: "The company's strategy is focused on maintaining its industry leadership, which is based on consolidating itself as a relevant player in Peru and Chile and in growing its residential services both wireless over 4G and 5G and wired over fiber optics as well as corporate IT services over fiber."

WHY ENTEL IS AN UNLIKELY CANDIDATE

The speculation that Entel might be a potential candidate for Telefónica's operation appears to be based purely on the assumption that Entel's expansion in 2014 into Peru means the Chilean telco is seeking other expansion opportunities. The reality is that that expansion was more of an opportunistic move when the failing operations of Nextel came up for grabs.

That's not to say Entel hasn't been successful. The company has grown quickly in four years to an 18% market share and 7.4mn clients in the third quarter.

But a close look at Entel's balance sheet shows how the enormous investment needed to build out Peru has negatively impacted the company's earnings. That has combined with heavy subscriber losses in Chile from heightened competition.

The company posted a 5.3bn peso (US$7.82mn) loss in Q3, while revenues were flat. Meanwhile capex was up 12% in the first nine months of the year to 236bn pesos.

The company has announced investments of US$480mn for Peru by 2020. While the subscriber trend has been positive in that market, the company saw a net subscriber loss in number portability in October, suggesting the fast growth may be waning. And that is combined with falling prices due to competition in both Chile and Peru.

In other words, don't expect Entel to expand further afield in the short term.

OTHER CANDIDATES

Millicom and Liberty Latin America are much likelier candidates. Both are regional players with an established presence in Central and South America and, in Liberty's case, throughout the Caribbean.

The two telcos have been strengthening their presence in recent months - Millicom through the acquisition of Cable Onda in Panama and Liberty with Cabletica in Costa Rica - and expressed their intention to continue an inorganic strategy.

Most importantly, both have their debt under control and are growing.

With regards to other potential candidates, América Móvil is already present in all the markets that Telefónica could potentially be selling, and would therefore come up against regulatory obstacles.

AT&T has established a strong presence in Mexico and could be looking at other Latin American markets.

Digicel, an established player in the Caribbean and parts of Central America, is facing its own debt crisis.