AT&T-DirecTV Deal Tests 24-Year Slim Alliance: Corporate Mexico

May 19, 2014 6:26 pm ET

May 19 (Bloomberg) -- AT&T Inc.’s acquisition of DirecTV also ends its investment in America Movil SAB, while building a stronger competitor to the mobile-phone provider that gave it access to the fast-growing Latin American market for more than two decades.

DirecTV competes with Mexico City-based America Movil in selling pay-TV and Internet services in countries including Brazil and Colombia, with 18 million subscribers across Latin America. To help ease regulatory approval for the $48.5 billion takeover, AT&T said it will divest its 8 percent stake in America Movil and have its two members on America Movil’s board step down immediately.

The transaction will test a relationship dating back to the 1990s between America Movil’s billionaire owner, Carlos Slim, and AT&T Chief Executive Officer Randall Stephenson. While Stephenson said they remain on good terms, they’ll be fighting for users in the region’s biggest markets, including Mexico and Brazil. The deal also probably puts on the backburner Stephenson’s ambitions of joining Slim as an ally in Europe, said Walt Piecyk, an analyst at BTIG LLC.

“This not only ends a long and close relationship, but given how conservative DirecTV was with their Latam strategy, Slim may now face incremental challenges in key markets,” Piecyk said. “The deal would also seem to indicate that AT&T will not be joining America Movil in their European aspirations.”

Shares Drop

An 8 percent stake in America Movil would be worth about 71.9 billion pesos ($5.58 billion), as of today’s close. The bid for DirecTV values its Latin America business, which represents about 25 percent of DirecTV’s adjusted operating profit before depreciation and amortization, at about $12 billion.

America Movil dropped 4 percent to 12.69 pesos at the close of trading in Mexico City, the biggest decline since Aug. 9. AT&T slipped 1 percent to $36.38 in New York, while DirecTV fell 1.8 percent to $84.65.

America Movil, committed to sticking with its current targets for debt leverage, is unable to acquire a major part of AT&T’s $5.76 billion stake, a person with direct knowledge of the matter said.

While its repurchase program lets it acquire shares once owned by AT&T once they’re in the open market, America Movil has no plans to buy any significant portion of AT&T’s stake, said the person, who asked not to be identified because the matter is private.

Debt Impact

While acquiring and canceling all of AT&T’s shares would give America Movil investors an 8 percent return, it would boost America Movil’s net debt to twice its annual earnings before interest, taxes, depreciation and amortization, said Carlos de Legarreta, an analyst at Corporativo GBM SAB in Mexico City. The ratio was at 1.6 last quarter, and America Movil has said it plans to reduce it to 1.5.

Slim could also opt to buy shares directly, Legarreta said.

“It would send a positive message, of his trust in the business and the opportunities he’s seeing,” Legarreta said. The companies haven’t said whether America Movil will acquire those shares.

AT&T’s America Movil holdings include 24 percent of the Mexican company’s AA shares, which carry special voting rights and aren’t publicly traded. AT&T could now convert its AA shares into L shares and sell them to the market, Legarreta said.

Close Friends

AT&T, based in Dallas, has maintained an America Movil stake for about 24 years. Its predecessor, Southwestern Bell Corp., helped back Slim’s privatization of Mexico’s state-owned phone company in 1990. Years before he became CEO, Stephenson was an SBC executive in Mexico City, overseeing the Mexican investment and working directly with Slim, creating a close personal friendship.

“Together we have created a lot of value for our shareholders down there,” Stephenson, 54, said today on a conference call. “We have changed commerce and changed the welfare of the countries in Latin America by deployment of broadband. America Movil has invested at a level that’s in excess of anyone else in that region.”

In an interview yesterday, Stephenson said he visited recently with Slim to discuss his plan to do the DirecTV deal and reaffirmed they had a strong relationship. Arturo Elias, a spokesman for Slim, didn’t respond to requests for comment. An America Movil press official declined to comment.

Market Share

America Movil says it has 19.7 million pay-TV subscribers. Together, DirecTV and America Movil control about 83 percent of Brazil’s cable and satellite customers, and about 62 percent of Colombia’s, according to data from the Latin America Multichannel Advertising Council. Such a concentration would have been unlikely to be allowed by regulators if AT&T had retained its stake in Slim’s company, Piecyk said.

A press official at Brazilian telecommunications regulator Anatel said the agency hasn’t yet been notified of the transaction. It would need to approve a transaction between AT&T and DirecTV and would examine any remaining relationship between AT&T and America Movil, the official said. Press officials at Colombia’s and Mexico’s telecommunications regulators didn’t respond to requests for comment on whether they will review the deal.

TV in Latin America has been one of the fastest-growing businesses for both America Movil and DirecTV. America Movil’s video sales climbed 7.6 percent last year to 60.8 billion pesos, outpaced only by 17 percent growth in mobile data. DirecTV’s Latin American operations climbed 9.6 percent to $6.8 billion.

Steeper Competition

To lure more subscribers, DirecTV has purchased rights, some of them exclusive, to broadcast soccer’s World Cup games this year, Bruce Churchill, head of new enterprises at DirecTV, said in a conference call in May. America Movil won the rights to broadcast the Olympics across Latin America, except for Brazil, this year and in 2016.

Slim, 74, has been counting on the pay-TV business for growth as sales decline for wireless and landline phone services, subsumed by communications on the Internet. Steeper price competition in Brazil and Colombia would cut into that growth.

In Mexico, Slim doesn’t have a government license to offer TV service, and regulators have said he’ll have to wait at least 18 months to get one. America Movil does have a marketing partnership with Dish Mexico, a satellite service co-owned by Mexico’s MVS Comunicaciones SA and by EchoStar Corp., the sister company of DirecTV’s U.S. rival Dish Network Corp.

The companies compete against Grupo Televisa SAB, whose satellite-TV unit, Sky Mexico, is 41 percent owned by DirecTV. A Televisa press official didn’t respond to requests for comment on its reaction to AT&T’s deal with its partner.

Deep Ties

America Movil’s ties to AT&T go beyond an investment. The companies announced a network-sharing partnership last year that spans the Western hemisphere to serve corporate clients. America Movil has paid $10 million for consulting services from AT&T for the past two years, according to company filings. Slim’s low- cost mobile-phone company in the U.S., Tracfone Wireless Inc., buys airtime from AT&T, along with other U.S. carriers, since it doesn’t own its own network there. The two companies also joined forces in a failed attempt to buy an indirect stake in Telecom Italia SpA in 2007.

America Movil would hurt from losing AT&T’s expertise, as Latin America’s market conditions simulate the U.S. in the future, said Alejandro Gallostra, an analyst at Banco Bilbao Vizcaya Argentaria SA, in an interview before the deal was announced. Jaime Chico Pardo, an AT&T board member, is the former CEO of America Movil’s Telmex unit.

Slim’s company said in a statement today that two board members appointed by AT&T, Jeffery McElfresh and Mike Viola, had handed in their resignations.

‘Off We Go’

Slim is also losing a potential partner in Europe, where he is acquiring control of Telekom Austria AG and holds a minority stake in Dutch phone carrier Royal KPN NV. AT&T was said to be interested in acquiring Vodafone Group Plc since at least last year, a deal that would have given it networks across Europe to complement Slim’s holdings.

“I learned a lot from Carlos. Obviously Carlos and I have spoken and he’s a very dear friend,” Stephenson said today on a conference call. “And now he’s going to be a competitor, and we recognize that, and off we go.”

--With assistance from Scott Moritz in New York and Jonathan Levin in Sao Paulo.