Traveling to the beat of a different drum

Posted on Monday, January 28, 2019

Last week, Telefonica announced it was selling its Guatemala and El Salvador properties. No surprise there. But to America Movil! Big surprise. These two operators definitely travel to the beat of a different drum.

This Telegeography article gives the details: US$333M for Guatemala and US$315M for El Salvador. The Guatemala deal closed already because the combined properties would still not be as large as market leader Millicom. No regulatory intervention is expected.

In El Salvador, the situation is different. America Movil leads the market with over 30% share and Telefonica is not close behind. An essentially four-player market with a relatively flat distribution will be come a three-player market with one having nearly 60% share. Recognizing this – and perhaps having heard from the regulator itself – the closing is subject to approval.

The driver for America Movil is the acquisition of Telefonica’s customers (often with a higher percentage of postpaid) and, the consequent jump-up in share. No subscriber numbers were published and neither TEF nor AMX break out their Central American statistics by country so it was not possible to easily calculate very precise ‘figures of merit’. The El Salvador price / sub looks like it is nearly US$100, Guatemala looks like US$75 which, at first glance, seem expensive compared to AMX’s reported Central American ARPU of US$7. (Frankly, it was too much work to try and ‘unpack’ Telefonica’s HispaNorte results to get their ARPU. I’m not a stock price analyst and my readers do not expect me to be.) AMX’s Carlos Slim is not known for overpaying for assets so I assume he is happy with the price.

Telefonica has been wanting to sell non-core assets to pay down its considerable debt for years and has made no real secret that it would entertain proposals for its Central American properties, including Mexico. (Especially Mexico?)

But the challenge with these kinds of deals is regulatory, as the El Salvador conditions suggest.

You will get no argument from me that consolidation is in the long-term interest of these countries given their small base and low ARPU. On many occasions, I have written that regulators’ desire for more players only assured that few/none would be able to invest in coverage or new technology and encouraged ‘winner-take-all’ outcomes that caused skewed market share distributions.

But I recognize that this is not how competition laws are written in most countries. Even the Guatemala deal – which I presume has been pre-cleared or it would not be closing – would get scrutiny in countries like the US simply because it was taking a major player out of the market. Millicom will still be the biggest player in the country after the purchase but the market is going from three players to two, normally a big red flag.

I will even venture to say that with 5G looming on the horizon, we are going to see more of this. On the one hand, many lower-market share players in Emerging Markets are going to wonder how to justify 5G investments and will conclude they had better get out while the getting is good. On the other hand, regulators and policy makers should recognize that only the strongest players will be able to afford to get into 5G. Forcing everyone to remain weak (Sorry! ‘Balanced’) will only delay the next technological wave.

There is still unfinished business for Telefonica. Initial press reports talked about selling everything in Central America. That did not happen. Or did not happen this time. Or did not happen yet. As mentioned previously, Mexico is still (apparently) on the block. It would be impossible for America Movil to buy that even if Carlos Slim has suddenly become best buddies with the country’s populist new President Andrés Manuel López Obrador.

Finally, I have to marvel at the fact that Telefonica and America Movil did a deal together.

These companies do not like each other. At all. At a visceral level. This is not gentlemanly competition where we all meet for drinks in the bar afterward. This is a street fight.

I cannot think of two companies that have such different approaches to almost everything, from management philosophy to corporate strategy, from marketing tactics to investment planning, from R&D to regulatory and political approaches.

How did one reach out to the other? (I have no idea who called who first.) Even if (as seems logical) it was via a neutral third party like a bank, the first conversation must have been difficult to say the least. And the first face to face meeting? And when the transition teams get together for the handover? And the lawyers working together in El Salvador on the regulatory filings?

Awkward.

Still they respect each other as competitors and they did find common ground to do this deal.

Amazing!

You and I travel to the beat of a diff’rent drum.

Oh, can’t you tell by the way I run

Ev’ry time you make eyes at me.

Title Reference: A 1967 top-20 hit by the Stone Poneys, at the distance of more than 50 years, this seems like just another of the thousands of one-hit-wonders from that time. But Different Drum was, in fact, the first top-charting single by Linda Rondstadt who went on to become one of the biggest artists of the Country Rock movement of the 1970s and 80s. (Nobody but their mothers – and Wikipedia – remember who the other members of Stone Poneys were.) The song was written by Mike Nesmith, who was the only member of TV-show-constructed band, The Monkees, that mattered musically. The talents of songwriter and singer are apparent in the catchy tune and lyrics. It is easy to see why it was a hit, as well as why it stuck in my head for all these decades. Given the surprising nature of these two completely different operators – that oppose each other on so many levels – the song seemed to be a natural choice. As the song says, “We’ll both live a lot longer if you live without me.”

Different Drum lyrics © Sony/ATV Music Publishing LLC

 

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