America Movil SAB investors are cheering Carlos Slim’s decision to break up his most prized asset, betting that the billionaire’s sale of $4 billion or more in assets will produce funds to spend from Latin America to Europe -- with some left over for shareholders.
The shares (AMXL:US) have jumped 14 percent since the telecommunications giant announced it would sell assets in Mexico, its biggest market, leading gains in Mexico’s benchmark IPC index. The breakup will satisfy regulations designed to reduce its revenue and dominance in the country, where America Movil serves more than half of phone users. Before the announcement, the stock had dropped 11 percent this year as investors braced for the regulatory crackdown.
Slim said in an interview last week that while he’s still bullish on Mexico, he also plans to invest more in countries where his companies already have communications networks, including Brazil, Colombia and Peru. By getting cash from America Movil asset sales in Mexico, he would be able to spend more in faster-growing markets like Brazil and Eastern Europe and could reward shareholders for their loyalty by reducing the amount of stock in circulation, said Gregorio Tomassi, a Banco Itau BBA analyst.
“There’s always a temptation to invest it in other markets -- consolidation scenarios in Brazil and Europe are still a focal point for America Movil’s cash,” Tomassi said in a phone interview from Mexico City. “But given the potential dimension of this, I would also expect some of this to go back to investors.”
America Movil is still determining which assets it will sell. The only requirement outlined is to shrink the company’s subscriber base, which includes 70 percent of Mexico’s wireless accounts and 80 percent of its landlines. An America Movil press official declined to comment on the company’s plans after the asset sales and any potential transactions.
To cut its market share, the company would have to sell 22 million mobile subscribers and 4 million fixed-lines, collecting about $4.1 billion, according to estimates by Lucio Aldworth, a Citigroup Inc. analyst based in Sao Paulo.
That would give America Movil an opportunity to gain a foothold in Brazil, its second-biggest market. Tim Participacoes SA, the No. 2 wireless provider in the country, may be split up and sold as Telecom Italia’s largest shareholder Telefonica SA seeks to sell the Rio de Janeiro-based asset, Kevin Smithen, a New York-based analyst at Macquarie Group Ltd., said in a telephone interview.
“What’s going on in Mexico will have a significant impact on Brazil,” Smithen said. America Movil could strengthen its investment in the country by participating in a joint consortium with Telefonica and AT&T Inc. to purchase Tim, he said.
Oi SA (OIBR4), Brazil’s biggest telephone company, was said to be exploring a plan to break up Tim with Telefonica in May, people familiar with the matter said at the time. Oi is merging with Portugal Telecom SGPS, and is unlikely to be in a position to spend money on Tim assets, Smithen said.
Earlier this week, America Movil said it would pay 743 million euros ($1 billion) to boost its stake in Telekom Austria AG to 50.8 percent, concluding a more than two-year quest to operate in Europe. Under a syndicate agreement between America Movil and Austria’s state holding company, they are committed to increase Telekom Austria’s capital by 1 billion euros.
America Movil wants to develop in Eastern European countries, Chief Executive Officer Daniel Hajj said in a February conference call. Telekom Austria already operates in countries including Bulgaria, Serbia and Belarus.
According to laws signed by President Enrique Pena Nieto this week, America Movil will have to share infrastructure with other operators and cut the fees charged to other carriers to connect calls to its networks as long as the company holds a majority of Mexico’s phone subscribers.
America Movil is set to report second-quarter results on July 21.
Tim declined to comment in an e-mail. An Oi press official didn’t respond to a request for comment.
Whether in Europe, or to reinforce something in Latin America, the company “will surely be investing this overseas,” said Manuel Jimenez, an analyst at Grupo Financiero Banorte SAB.
America Movil bought back almost 5.4 billion shares in 2013, or 7.1 percent of outstanding shares, as it struggled to prop up the stock price amid regulatory pressure and a failed takeover attempt of Dutch phone company Royal KPN NV after its bid was deemed too low.
The decision to increase buybacks last year is an example of how Slim may decide to make use of the incoming cash, Itau’s Tomassi said. Earlier this year, the company proposed to shareholders that it allocate 30 billion pesos as available resources for share buybacks.
America Movil’s low leverage and strong cash generation has historically allowed for cash distribution to shareholders via buybacks and dividends, Citigroup’s Aldworth said in a July 9 note.
“Lately, however, AMX has deployed cash instead to acquire minority stakes,” he said, “temporarily reducing cash dividends, but without bringing any immediate visible contributions” to sales or Ebitda, he wrote.
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