Global Insight Perspective | |
Significance | Telmex will spin off international operations and its Mexican yellow pages business to a new holding company, to be called Telmex International. |
Implications | The operation is subject to approval by the shareholders and in compliance with Mexico's regulatory and legal framework. |
Outlook | The spin-off will create value by allowing each company to operate more efficiently and at the right scale. |
According to the company announcement, the proposed spin-off is subject to approval by the shareholders, whose meeting will be called after a detailed implementation plan is completed. In addition, the operation will also be subject to compliance with regulatory requirements in Mexico. As a result, the company will prepare and publish a full description of the proposed spin-off, including—among others—tax consequences. The new company will trade on the Mexican and U.S. stock markets.
As of September 2007, the number of Telmex lines in service in Mexico reached 18.2 million, located in more than 22,880 communities. Of these lines, Telmex reports that approximately 9.8 million are in competitive areas, where numerous competitors have offered telecommunications services for the last 11 years. In contrast, 8.3 million lines are located in communities in which no competition exists or are rural areas located in more than 20,930 communities. These customers generated revenues of approximately 5.8 billion Mexican pesos (US$534.24 million) and an operating loss of 780 million pesos in the third quarter of 2007. As a result, Telmex has also decided to separate the operation and marketing of its services in these communities, to address their particular needs and monitor their development.
Outlook and Implications
This is not the first time that Telmex's boss, Carlos Slim, has spun off a rapidly expanding unit from a slow-growing parent company. In 2000, he separated Telmex's mobile operations, creating América Móvil, which is now classified as Latin America's largest-in-size mobile player with 143.4 million subscribers in 14 markets.
Despite Telmex's presence in Argentina, Brazil, Chile, Colombia, Ecuador, and Peru, the international businesses, which include fixed-line operators, pay-TV companies, and internet service providers, only account for around 30% of Telmex's total revenue figure. In September 2007, Telmex Mexico reported a mediocre year-on-year (y/y) growth of revenues of 0.7%, a lower EBITDA (earnings before interest, tax, depreciation, and amortisation) by 3.9% y/y to 16.8 billion pesos, and a lower operating margin of 36.9%.
According to the announcement, goals of the proposed spin-off are
- To allow each company to operate more efficiently and at the right scale, in Mexico and abroad, to allow each of them to operate autonomously for administrative, commercial, and financial purposes;
- To improve the competitive position of each company; and
- To tailor further the operations of Telmex in the Mexican telecommunications market, distinguishing its operations in the middle- and high-revenue markets, in which there is competition, from the low-revenue and rural markets, in which there is no competition.