Sir Richard Branson has announced plans to enter Mexico's telecoms market - a market that has been largely governed by billionaire Carlos Slim 

Never one to shirk a business opportunity and adopt the role of corporate underdog, UK billionaire entrepreneur and self publicist Sir Richard Branson recently announced plans to enter Mexico’s telecoms market – a market where local billionaire businessman Carlos Slim holds sway, largely to the exclusion of any serious competition (see Fig. 1).

Branson may have an estimated $4.6bn fortune according to Forbes, but it’s chump change compared to the $73bn amassed by Slim (as of early-2013) – much of it through his company, América Móvil, which dominates the Mexican telecoms sector – making him one of the world’s richest men, alongside Bill Gates.

Branson is no stranger to Latin America, however, having already rolled out his company’s Virgin Mobile Latin America (VMLA) brand there through a company formed in 2010 backed by investors, including Juan Villalonga, former CEO of Spain’s Telefónica.

Indeed, in June 2011 VMLA announced ambitious plans to become Latin America’s leading mobile virtual network operator (MVNO). Since then the company has commenced operations in Chile (through Virgin Mobile Chile in Q2 2012), having received regulatory approval from Chile’s Subsecretaria de Telecomunicaciones. In December 2012, meanwhile, VMLA confirmed the closing of a second debt funding agreement with IFC, the World Bank Group unit, to fund Virgin Mobile Colombia.

The Colombia debt facility of $14m increased IFC’s support for Virgin Mobile in the Latin American region to $25m, including its strategic funding for Chile, which has now signed up almost 200,000 subscribers and is set to break even this year. The Chilean and Colombian operations augment an existing network of Virgin Mobile operations in seven countries (Australia, Canada, France, India, South Africa, the UK and the US) serving approximately 20 million mobile subscribers.

Billionaire underdog
Befitting his corporate underdog image, Branson has already said that there is room in the market for his Virgin Mobile Mexico operations – due to be rolled out in 2014 – and that América Móvil would unlikely suffer much from Virgin’s presence in the country.

Unsurprisingly, Virgin Mobile Mexico will tread a well worn model used elsewhere and trade as an MVNO, thus obviating any need for massive capital investment such as the building of masts. Instead, it will buy airtime wholesale from América Móvil’s rivals and use the Virgin brand to differentiate itself in the market.

For Branson, the recent liberalisation of the Mexican telecoms market – ostensibly aimed at loosening Slim’s stranglehold on it by promoting more competition – presents an opportunity.

New regulations passed in May impose a 50 percent market share limit on the domestic market. For Slim, whose wire line Telcel network serves more than two thirds of Mexico’s 100 million mobile users and provides 80 percent of the nation’s landlines, they may yet force him to offload some of his assets.

Telmex, the country’s dominant fixed line provider – also owned by Slim – was fined $50m by the Comision Federal de Competencia (CFC) back in March for engaging in what the regulator described as anticompetitive practices. The fine came after an investigation on wholesale lines Telmex sells to other service providers operating in Mexico, such as Axtel. In Axtel’s case it was found that Telmex had failed to provide services for a period of two years.

Cofetel, Mexico’s then telecoms regulator, had previously announced (in March 2012) new rules requiring Telmex to incorporate price and quality controls on wholesale services sold to competitive service providers, in order to prevent dominant service providers (like Telmex) from indulging in conduct that would hinder the development of equal competition. Or hurt consumers through the fixing of arbitrarily high prices for the services offered. Moreover, Telmex would have to deliver these services to competitors with the same quality it would have provided its own subsidiaries and that service orders would need to be completed punctually. Seemingly, Cofetel’s edicts fell on deaf ears.

Regulatory strength
Yet it remains to be seen how strong the new telecoms reform bill – which also prescribes changes for the broadcasting industry – will be, given any company either fined or told to sell off its assets will retain the right to lodge appeals suspending those decisions, in effect amounting to corporate stalling tactics commonly used when fighting competition rulings.

However, proponents of the market reforms argue the new regime will strip away around 80 percent of the legal cover firms have previously been able to employ to thwart regulators.

As part of the liberalised framework, a new and autonomous regulatory body, the Federal Telecommunications Institute (Ifetel), which came into being in September 2013, has been given powers to grant and revoke broadcast and telecommunications concessions. It has taken over responsibilities from Cofetel. The bill also ends the current 49 percent limit on foreign investment in fixed-line telephony and raises the foreign ownership cap for television to 49 percent. It also creates a state-owned ‘carrier of carriers’ telecom network that would allow rival companies to bypass Slim’s existing network.

Previous requirements that only Mexican nationals could beneficially own a majority of voting shares in companies engaged in telecommunications services acted as a deterrent to new investment, even though foreigners had been permitted to hold additional shares of capital stock to reflect a larger economic participation. By dispensing with this policy, it should eliminate distortions and inefficiencies in the market, as well as make it easier for new entrants to acquire and recapitalise existing market participants who’ve thus far been unable to compete effectively with the incumbents.

Meanwhile, Ifetel’s plan to issue decisions on pricing, network unbundling and interconnection rates will, on the face of it, promote competition and drive down prices. But it could prove to be a double-edged sword for smaller domestic providers and would-be entrants, given revenues may be negatively impacted and, by extension, cash generation.

Issues needing to be addressed over the coming months include not only which players are market dominant, but also so-called ‘unbundling’ that would allow rivals cheaper access to the dominant player’s network.

Another possible solution is asymmetric price caps on Telcel or Telmex that would penalise companies run by Slim, but no one else. Unusually, the measures have been incorporated into Mexico’s constitution instead of simple enabling legislation, thereby shielding them, in theory, from constitutional challenges. Meanwhile, secondary laws have to be in place by December 9. The regulator is expected to have until early March to determine which companies are dominant in their markets and take the necessary measures to guarantee competitive conditions accordingly. It shouldn’t prove too difficult a task; given Slim’s América Móvil operation continues to be the veritable ‘beast in the jungle’. That isn’t to say he has no competition, even though his competitors could best be described as also-rans when it comes to market share.

Limited competition
Significant opposition is limited, but does include Mexican broadcaster and mass media company Grupo Televisa. It controls roughly 60 percent of Mexico’s broadcasting market, with rival TV Azteca – part of the Grupo Salinas conglomerate and headed up by CEO Ricardo Salinas Pliego – controlling most of the rest. While Televisa’s core market remains in broadcasting, it does have a six percent share of Mexico’s mobile phones market, through its Grupo Iusacell unit in which its broadcasting rival TV Azteca has also invested.

The elephant in the room though, insofar as Slim is concerned, may well be Spanish telco giant Telefónica. Acknowledging the changing regulatory landscape, Telefónica’s Mexican unit (Telefónica Mexico) recently said it wanted to triple its local market share by revenue; largely through selling more smart phones and Wi-Fi services and targeting small businesses to add to the estimated (end-March 2103) 20.5 million landline, wireless and data subscriber base it already has.

On an industry revenue basis, the company currently has a wireless market share of 12 percent, but a customer base market share of 20 percent. Respectable numbers, yet hardly earth-shattering when set in the wider context.

As the OECD noted in its January 2012 Review of Telecommunication Policy and Regulation in Mexico, lack of competition in the Mexican market had led to inefficient telecommunications companies imposing significant costs on the Mexican economy and burdening the welfare of its population. It further noted a sector characterised by high prices – among the highest within the OECD countries – resulting in poor market penetration rates and low infrastructure development, leading to a loss of benefit to the economy estimated at $129.2bn over the 2005-09 period alone, or 1.8 percent GDP per annum.

While there had been growth in mobile, fixed, broadband and pay-television markets, Mexico compared unfavourably with other OECD countries that had developed more open and competitive markets and distributed the ensuing benefits to consumers. In addition, profit margins of the incumbent (América Móvil) were much higher than the OECD average, while investment per capita was lower than in any other major country.

Underperforming monopoly
Aside from Slim’s potential mounting pressures on the domestic front he has very real issues to deal with now – not least a consistent thumbs-down from the stock market reflecting, among other factors, disappointing investments, principally in Europe. Unsurprisingly, the company’s share price has, more often than not, underperformed Mexico’s benchmark IPC index of late.

It isn’t difficult to see why. The company witnessed a 46 percent profit slump in Q3 2013 to MXN 16.384bn ($1.25bn) from MXN 30.45bn pesos in the same period a year earlier, as customers made fewer phone calls and the company’s financing costs soared.

Almost half of the company’s core profit comes from Mexico, where service revenues, or income from customers’ phone calls, dropped 1.4 percent. Total revenue, though, rose 0.7 percent to MXN 194.221bn, helped by gains from selling more expensive mobile phones.

Another galling thing for Slim has been the company’s seemingly faltering European strategy, as he has sought to diversify away from the home market. Investors had already voiced concerns that América Móvil’s near-23 percent investment in Telekom Austria could follow the same path as its KPN investment, where a rights issue earlier in 2013 forced the company to buy more shares at a lower price to maintain its participation. Many thought that América Móvil, which had accumulated nearly 30 percent of KPN, was outmanoeuvred when its holding was effectively chopped in half after a foundation set up to protect the interests of KPN shareholders executed an option to acquire almost 50 percent of KPN’s voting stock. Slim had accumulated his 30 percent stake, paying an average €8 per share, while his subsequent €7.2bn ($9.5bn) €2.40 a share offer in August this year (for all remaining stock he didn’t already own) was deemed too low. Having walked away after the bid was rejected Slim ended up sitting on a loss estimated at around €850m-900m. The ball firmly remains in Slim’s court, however, and he may yet come back in with a revised offer.

Despite this setback Slim has deep pockets and won’t be deterred from seeking other European opportunities, though not necessarily at any cost. Ratings agency Fitch expects América Móvil’s net debt-to-EBITDA to remain stable during 2013 and to trend slightly downward in 2014. While its expectations for the long-term net debt-to-EBITDA is approximately 1.2x – a level slightly higher than its previous expectation of 1.0x – Fitch still considers this within the limits of the company’s current rating category.

Digital media research group eMarketer estimated (in a December 2012 report: As Mobile Gains Ground in Mexico, Advertisers Take Note) that the number of mobile connections in Mexico was 98 million in 2012, equal to 85.2 percent of the total population. By contrast, the number of mobile connections as a percentage of population in Brazil was 134 percent, according to its estimates. If these numbers suggest the Mexican pie can become larger, the big question remains as to whether it will amount to anything more than a few crumbs for new market entrants such as Sir Richard Branson – even after factoring in the long standing political pressure that has been heaped on Carlos Slim. Much will depend upon the political and economic will of regulators.

For his part, Slim remains comfortable, saying in a recent interview that he doesn’t think profitability in the newly liberalised domestic landscape will be any problem, arguing it is coming from productivity, efficiency, management, austerity, and the way the business is managed.

He also probably has bigger fish to fry than Richard Branson.