America Movil merger targets Telefonica in Latin America - Proposed mobile/fixed-line merger to create integrated telco with 220M customers

America Movil's plan to merge with its fixed-line sister companies across Latin America will create a regional powerhouse with around 220 million customers, according to GSMA Intelligence research. America Movil – Latin America's largest mobile operator by subscribers – announced last week it was planning to acquire Telmex, Mexico's incumbent fixed-line operator, and Telmex Internacional, which was spun-off from Telmex in 2007 and provides similar services across Latin America. The deal is valued at around US$21 billion. America Movil is looking to make the deal via an all-stock offer for Carso Global Telecom, the holding company owned by Mexican billionaire Carlos Slim, who controls all three firms.

The merger – which still needs to be passed by regulators - would give America Movil a fixed-line customer base and infrastructure in 8 of its 13 mobile markets based on Q3 2009 (pro forma) data. This includes the fixed-line networks it already operates at its Central American and Caribbean subsidiaries. The merger will allow the newly-integrated operator to offer "triple-" or even "quadruple-play" bundles of services (mobile, fixed-line, Internet, TV) across the majority of its markets. It is also considered a strategy that will strengthen America Movil's position against its Latin American rivals, most notably Spain's Telefonica. According to Morgan Stanley estimates, the combined company would generate sales of US$48 billion in Latin America this year.

America Movil's home market of Mexico would remain the largest market in the integrated entity. Both America Movil's 'Telcel' mobile business and Telmex's fixed-line network are dominant market-leaders in Mexico, accounting for 70 percent and 80 percent market shares, respectively. However, both businesses are currently under threat from regulators and new competition. In Q3 2009, net income at Telmex dropped 10 percent year-on-year and revenues fell 4 percent as the former state-owned incumbent felt the effects of Mexico's economic slowdown. It continued to lose traditional fixed-line customers to cable companies and mobile firms, but managed to grow its overall customer base by just under 2 percent due to strong growth in broadband (it added almost half a million new broadband customers in the quarter).

Meanwhile, Telcel maintains a dominant 72 percent market share in Mexico's mobile market with over 58 million connections in Q3 2009 but is facing increasing competition from Spain's Telefonica. The two fierce rivals accounted for over 90 percent of the 1 million net new connections added in Mexico in the quarter, Telcel taking 30 percent and Telefonica 61 percent. Telcel is the only operator in the country to have rolled out 3G services to date and managed to increase revenues by 5 percent year-on-year on the back of strong data revenue and an increasing focus on postpaid subscribers. However, new WCDMA spectrum is currently being auctioned by the Mexican authorities, which could lead to a raft of new 3G players. As well as the existing mobile players, other potential new players could include rival fixed-line operators (Axtel and Maxcom Comunicaciones), broadcasters, and the cable TV operators.

Brazil is America Movil's second-largest market and would account for around a quarter of customers at the newly merged operator (based on Q3 2009 data). America Movil's 'Claro' is the number-two mobile player in Brazil behind Vivo, the Portugal Telecom/Telefonica joint-venture. However, the country's fixed-line market has been shaken up recently by the French conglomerate, Vivendi, which is looking to acquire a controlling stake in fast-growing broadband firm, GVT. The move has threatened the dominance of existing fixed-line players such as Telmex, Telefonica's Telesp, and locally-owned Oi. Telmex has focused recently on reducing its dependency on long distance revenues in Brazil and said in Q3 2009 that over 50 percent of revenues now originate from the local access, data, television and other services.

In Colombia, the third-largest market, America Movil (Comcel) is the country's leading mobile operator with a 69 percent market share. As was the case in Mexico, the Colombian subsidiary saw a strong rise in data revenues in Q3 2009 (growing 64 percent year-on-year), which helped offset weaknesses in the local economy. In fixed-line, Telmex Colombia grew accesses by 16 percent year-on-year.

Matt Ablott, Analyst, GSMA Intelligence:

The proposed merger between America Movil and Telmex will create a regional telecoms giant, but the deal appears less about scale and more of a defensive move. In Mexico, Telmex has been suffering for some time as the country’s fixed-line market has gradually been liberalised, while increased competition has emerged from the cable operators (which strongly oppose the merger plans). Meanwhile, Telcel may have two-thirds of Mexico covered with its 3G network, but the local regulator is determined to use the current spectrum auctions to provide fresh competition. Telefonica in particular has been waiting for years for 3G spectrum to become available in order to compete with Telcel on a level playing field. Indeed, the threat from Telefonica is a concern for America Movil across most of its Latin American markets; and America Movil’s proposed merger mirrors the Spanish group’s strategy of combining its mobile and fixed-line assets in markets such as Argentina, Chile and Peru. While the merger will make the deployment of triple- and quad-play services easier, the deal appears more motivated by cost-savings and other efficiencies in the short term; analysts have estimated initial cost-savings of around US$2 billion.