Mexico - Sound Outlook for Telcel despite US$1bn Fine04 May 2011 • by Natalie Aster
The Mexican antitrust commission CFC confirmed the US$1bn fine for Telcel, the mobile operator owned by América Móvil, and revealed reasons for the fine on anticompetitive grounds. The regulator is charging the highest amount possible, which is equivalent to 10% of Telcel's assets. While Telcel previously found ways to avoid charges and restraints imposed by Mexican regulators, BMI regards this as a sign that the authorities are determined to wield increasing power over the dominant mobile operator. BMI welcomes this and believes the competitive environment in Mexican telecoms may improve as the company will also have to substantially lower interconnection fees. However, we do not expect to see an end to Telcel's dominance and the negative effects on the company's share and bond prices are likely to be short-lived. We doubt the full fine will be imposed, on the grounds that Telcel is determined to fight the charges.
Telcel dominates the Mexican telecoms market, with about 70% market share. The high interconnection fees make it difficult for smaller players to gain market share or enter the market. This resulted in an inefficient Mexican telecoms sector. The company persistently disregarded fee reduction calls from the regulators. BMI believes the collective submission in March 2011 of an official complaint against the telecoms giant by a group of alternative mobile operators provides greater back-up for the regulator and this allowed the commission to fine the firm such a substantial amount.
The operator has three options. Firstly, it can ask the commission to reconsider its decision, but BMI believes this will be ineffectual and the company is unlikely to make such a weak move. Secondly, it has 30 days to present a proposal stating how it intends to comply with the ruling and to end the alleged competitive practice. This may result in a lower fine, but BMI does not expect Telcel to admit defeat in such a way. Alternatively, the company can challenge the decision in court. This is the most likely move, and with considerable financial backing from América Móvil, Telcel does not lack the resources to exert hefty legal power.
América Móvil share and bond prices fell following the announcement of the US$1bn fine. However, BMI believes this may be temporary if the company is able to dodge the fine in court, which looks likely considering the company's considerable legal power. If the fine is imposed in full, shareholders are likely to be worse off than creditors as the company has US$9.24bn in cash and short-term investments to ensure payment of debt. However, dividends may be lower in such an event.
TELCEL RELATIONS WITH REGULATORS
|25/04/2011||CFC confirms the US$1bn fine, explaining it is on the grounds that Telcel used its market weight and interconnection fees to displace competitors|
|16/04/2011||Telcel revealed it received a fine of MXP11.989bn (US$1bn) for alleged monopolistic practices since November 2006, although no details were revealed.|
|23/03/2011||Telcel files a complaint with the CFC accusing Televisa as well as other cable and broadcast firms of manipulating the country's advertising and pay-TV markets. Telcel refuses to advertise with Televisa as it believes the rates are too high. BMI believes this is a reaction to the call for reduced interconnection fees.|
|18/03/2011||Regulator Cofetel ruled that calls made from the network of Telcel, part of the América Móvil (AM) group, to local alternative fixed-line provider Alestra should be connected at a cost of MXN0.39 (US$0.03) a minute|
|14/01/2011||Mexican telecoms operators Telmex and Telcel entered into interconnection agreements with Telefónica Móviles México (Movistar) to slash interconnection rates between their fixed and mobile networks in the country. Interconnect rates between domestic fixed and cellular networks were reduced to MXN0.95 (US$0.07), effective January 2011|
|24/12/2011||Telcel was fined for poor services in Mexico, because of reports that more than 50% of calls failed to connect.|
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