When Cesar Alierta became chief executive officer of Madrid-based Telefonica in 2000, he made Latin American growth a priority. Quickly adding to his company’s presence in Argentina, Peru, and Brazil, Alierta started Telefonica operations in Mexico, going head-to-head with the wireless business of Mexican billionaire Carlos Slim’s America Movil. The Spanish operator’s price-cutting strategy didn’t please Slim, the world’s richest man, who feared America Movil’s margins would be pressured, according to a person with knowledge of the matter. Now Slim is returning the favor by expanding in Europe in a way that could mean headaches for Alierta.
America Movil is bidding $3.4 billion for up to 28 percent of the former Dutch telecom monopoly Royal KPN. Among KPN’s assets are German mobile-phone carrier E-Plus, which vies for the country’s No. 3 spot with Telefonica’s O2, and the Simyo wireless brand, which competes with Telefonica in Madrid.
It’s not the first time the two Latin telecom tycoons have sparred on European shores. Slim last tried to acquire a major Western European operator in 2007 with an offer for a stake in Telecom Italia (TI), before he was beaten by Alierta—a move meant to block Slim from getting a foothold in Europe, according to another person with knowledge of the situation who was not authorized to speak publicly and asked not to be identified. That decision “turned out to be a disastrous investment for Telefonica,” says Sanford C. Bernstein (AB) analyst Robin Bienenstock. “Slim is buying an option to build incremental pressure and a growing headache for Alierta when it comes to a potential negotiation of KPN assets in Germany.”
Slim, who faces slowing subscriber growth in Latin America, is returning to Europe after the debt crisis has left the region’s phone assets at bargain prices. “There’s a lot of logic in consolidating Germany, for instance, into three players, with O2 or Vodafone (VOD) buying KPN assets there,” says Bruno Lippens of Pictet Asset Management in Geneva. “In today’s market, Slim has more financial flexibility than Telefonica.”
Back in Latin America, there’s been little love lately between the America Movil and Telefonica chieftains. Slim holds the upper hand in Mexico and Colombia, while Alierta rules Brazil and Chile. While the Spanish carrier boosted its share of Mexican mobile subscribers to 20 percent in 2009, it has since made little progress against America Movil’s 70 percent position. Telefonica has blamed this in part on regulators, saying they need to restrict Slim’s dominance.
This year, Telefonica sued Slim’s company, claiming it pulled out of a 2010 agreement on fees paid between phone network operators. America Movil says it’s only following Mexican regulations, and in turn says Telefonica is backing regulatory actions to reduce Slim’s 60 percent dominance in Colombia. In Brazil, the only Latin American economy larger than Mexico, Telefonica maintains its leading 30 percent market share while Slim struggles, slipping to No. 3 behind Telecom Italia’s TIM unit.
KPN says America Movil’s offer of 8 euros ($10.27) a share in cash to increase its current 4.8 percent stake in the Dutch company “substantially undervalues” its worth. Nonetheless, Mexico City-based America Movil says it expects to win approval from Dutch regulators and carry out the offer by early June.
After its New World expansion and its almost $10 billion buyout of Brazilian operator Vivo Participacoes (VIV) in 2010, Telefonica is struggling to cut debt and revive its Spanish business as the debt crisis prompts consumers to cancel subscriptions or switch to discount services. Alierta announced 6,500 job cuts last year and in December cut a dividend forecast for the first time in a decade.
If completed, America Movil’s alliance with KPN will pave the way for agreements such as roaming, marketing, and joint purchasing, Chief Financial Officer Carlos Garcia-Moreno told analysts. And it could presage more expansion on the Continent. “It clearly would be a possibility to continue to look at Europe,” Garcia-Moreno said, “but we cannot run before we walk.”
The bottom line: Carlos Slim and Cesar Alierta control 61 percent of wireless service in Latin America. Now they’re crossing swords in Europe.
With Cornelius Rahn and Jonathan BrowningBaigorri is a reporter for Bloomberg News in Madrid. Harrison is a reporter for Bloomberg News in Mexico City.
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