American telco AT&T has agreed to acquire Mexico’s third largest wireless operator Iusacell for US$2.5bn, including an estimated US$ 600m in debt, in a deal it contends will create the first-ever North American mobile service area covering more than…
American telco AT&T has agreed to acquire Mexico’s third largest wireless operator Iusacell for US$2.5bn, including an estimated US$ 600m in debt, in a deal it contends will create the first-ever North American mobile service area covering more than 400 million consumers and businesses in Mexico and the United States.
The acquisition, expected to close in the first quarter of 2015, will take place after Iusacell’s co-owner, Grupo Salinas, which holds a 50% interest in the Mexico City-based operator, finalises the previously announced purchase of the remaining 50% stake from Mexican broadcaster Televisa, the companies said in separate statements on Friday.
In September, Grupo Salinas’ chairman, Mexican billionaire Ricardo Salinas, said it would acquire Televisa’s 50% stake in Iusacell for US$717m.
At the time, the company also noted that it was in the process of selecting a “world-class strategic partner” to boost Iusacell’s growth and expand its product offering.
In recent years, Iusacell, which currently serves about 8.6 million subscribers, has been struggling to compete with America Movil‘s (AMX) Telcel, which controls 70% of the market, and Telefonica’s Movistar, which holds a 20% market share.
AT&T said it intends to expand Iusacell’s network to cover millions of additional consumers and businesses in Mexico.
“Our acquisition of Iusacell is a direct result of the reforms put in place by president Peña Nieto to encourage more competition and more investment in Mexico. Those reforms together with the country’s strong economic outlook, growing population and growing middle class make Mexico an attractive place to invest,” AT&T chairman and CEO Randall Stephenson said.
Earlier this year, Mexican president Enrique Peña Nieto carried out a number of regulatory changes aimed at boosting competition in the country’s telecoms sector and attracting foreign investments.
As a result, incumbent America Movil, owned by Mexican tycoon Carlos Slim, was forced to dispose of around US$ 17.5bn worth of telecoms assets to reduce its market share to below 50%.
AT&T has been rumoured to be among the potential suitors for the assets, along with Japan’s SoftBank, Bell Canada and China Mobile and others.
In mid-September, AT&T chief strategy officer John Stankey said the telco, which is still awaiting regulatory approval for its planned US$48.5bn takeover of pan-American DTH operator DirecTV, which holds a 41.3% stake in Sky Mexico, was “intrigued” by Mexico and Latin America and would not dismiss M&A opportunities in those markets.
Analysts have said the Iusacell acquisition makes AT&T’s potential bid for AMX assets even more likely.
“We have seen AT&T as the most likely buyer of AMX’s Mexican assets which it is attempting to sell, and acquiring Iusacell can be seen as complementary to this strategy,” New Street Research analysts wrote in a note.
They argued that the investment is too small to be meaningful on its own, although there could be synergies from bundling DirecTV’s video product with a wireless broadband and voice offering in Mexico. However, by combining Iusacell with AMX assets, the companies would maintain the existing four-carrier market structure in the country.
According to Credit Suisse analyst Joseph Mastrogiovanni, the transaction gives AT&T a foothold in Mexico that it could use to expand in the region.
“We do not think it precludes AT&T from bidding on America Movil assets that are expected to come to market,” he said.
He argued that the deal could allow AT&T to purchase AMX assets at a better price, as a result of increased competition. Potential bidders for the assets should take that into consideration and could assign a lower value or decide not to bid, he said.
For Jennifer Fritzsche, senior analyst at Wells Fargo, the Iusacell announcement offers tangible evidence that AT&T is serious about the Latin American market.
However, to fully utilise the Iusacell assets, as well as those it might acquire from AMX, additional infrastructure investments might be needed.
In her view, this should bode well for tower companies with a presence in Mexico such as American Tower (AMT) and Digital Bridge, given that Iusacell accounts for 25% of AMT’s Mexican revenue.
As part of the deal, Salinas will retain the residential triple-play business Totalplay as well as the corporate internet service, networks and fixed telephony operations of another subsidiary, Enlace.
Totalplay, which has over 130,000 users, provides broadband internet, fixed telephony and pay-television services in Mexico City, Guadalajara, Cuernavaca and Toluca.
The company claims it doubled its number of subscribers over the past year, and expects to expand to an additional 24 cities and 7.5 million households in the country over the next five years.
“After more than a decade of strengthening the positioning of the Iusacell and Unefon brands, the commercial performance and business management, we are leaving Grupo Iusacell with pride and satisfaction in the hands of a highly regarded world-class operator for the generation of superior value in the market,” said Salinas.
Iusacell operates a 3G wireless network based on the global GSM/UMTS technology that AT&T uses in the United States. It owns between 20 and 25 MHz of 800 MHz spectrum, primarily in the southern half of the country, including Mexico City and Guadalajara, and an average of 39MHz of PCS spectrum nationwide.
Following the deal, which is still subject to regulatory approval, Iusacell will continue to be headquartered in Mexico City.
On Friday, AT&T also announced that it would reduce its 2015 capex budget to US$18bn, down from US$21bn in 2014.
