Telefonica's Struggles in Mexico Could Get a Lot Worse Soon

(Bloomberg) -- Telefonica SA, the Spanish telecom giant whose 16-year push into Mexico has been marred by price wars and lagging investments, is bracing for a fresh blow.

Mexico’s top court is set to rule on an injunction as soon as this month that would walk back a key provision in the nation’s 2013 telecom overhaul. A loss could force Telefonica, AT&T Inc. and smaller rivals to pay more than $800 million in back fees to market leader America Movil SAB. That could be the final straw for the Madrid-based company, which has periodically evaluated leaving Mexico altogether during its decade and a half of struggle.

Four years after Mexico’s government passed the landmark telecom reform, hope that it would help Telefonica gain ground has slowly eroded. The company has boosted its market share by about 3 percentage points to 23 percent since then, but AT&T conquered just as much ground in half the time. Meanwhile, the percent of Telefonica’s revenue from the world’s biggest Spanish-speaking country has slowly dwindled to 2.8 percent in 2016 from 3.9 percent two years earlier, as Europe sales make up a bigger share.

Billionaire Carlos Slim is leading the charge to water down the law that allowed smaller competitors to stop paying his America Movil a fee for every call that ends up in his network. Mexico’s Supreme Court could vote on the injunction as soon as this month following its summer recess.

“This is dangerous for the whole country,” said Miguel Calderon, Telefonica’s vice president for regulation in Mexico, in a phone interview from Mexico City. “A change of this magnitude would hit us all -- not only the operators but it would also increase prices for consumers, lower investments and put legal certainty in doubt.”

Telefonica shares rose 1.6 percent to 9.64 euros at 4:10 p.m. in Madrid. The shares had gained 7.6 percent this year through Thursday.

Calderon said America Movil will use every technique it can to keep its market share as high as possible. America Movil didn’t return a request for comment. The company said last month that a court decision in its favor wouldn’t hurt consumers because prices are determined by competition.

Tougher Regulations

Mexico has been a rare stumbling block for Telefonica, which is neck and neck with America Movil as the top wireless provider in most of Latin America’s other top markets, from Brazil to Chile.

In the past, Telefonica has blamed a lack of regulatory scrutiny on America Movil for its inability to gain traction in Mexico, and the Spanish company has continued to call for tougher regulations even after the telecom reform was implemented. America Movil has said Telefonica simply doesn’t spend enough on its network. Annual investments of about 4 billion pesos ($229 million) come in at less than a third of its biggest rivals.

“We re-invest 13 percent of our Mexico income,” said Calderon, adding that other measures that the company follows closely, like its share of revenue in the market and earnings before interest, tax, depreciation and amortization, have been doing well. “We are growing -- sustainably.”

Final Straw

The court case has raised speculation among local newspapers and investors whether Telefonica may quit Mexico. But an exit could prove just as tricky.

Mexico “is a consolidated market with a very complicated environment,” said Javier Mielgo, an analyst at Mirabaud & Cie in Spain. “Exiting wouldn’t be easy. Who’s going to buy that asset?”

When asked about whether the company would be willing to leave Mexico, Chief Executive Officer Jose Maria Alvarez-Pallete has said previously that he’s willing to look at all options. There are opportunities of “doing different things with different players in Mexico” as part of Telefonica’s attempt to seek partnerships through network-sharing agreements, he said on the company’s first-quarter earnings presentation.

“We don’t answer hypothetical questions,” Calderon said. An unfavorable outcome in court “would have a strong impact in the entire industry, not just Telefonica,” he said.

The company saw “some improvements” in the Mexican unit’s performance in the second quarter, Chief Operating Officer Angel Vila said. The carrier returned to year-on-year growth for both revenue and operating income before depreciation and amortization, a key measure of profit.

Going forward, “there may be a slight improvement,” Mielgo said. Still, “the tendency is likely to continue to be negative, even if it eases a bit.”

To contact the reporters on this story: Andrea Navarro in Mexico City at anavarro30@bloomberg.net, Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net.

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net, Anthony Palazzo at apalazzo@bloomberg.net, Crayton Harrison