Slim Confronts Transition in Mexico as No. 2 Richest Person

Jul 10, 2014 7:16 pm ET

(Updates with closing share price in 14th paragraph.)

July 10 (Bloomberg) -- Carlos Slim is planning to spend more in countries such as Brazil while placing bigger bets on industries like energy, as regulatory pressure in Mexico splinters his most prized asset.

After two decades of investments in Mexico’s phone business added him to the ranks of the world’s richest people, Slim said this week that his America Movil SAB is bowing to antitrust legislation by selling assets in Mexico to reduce its dominant market share. Still, Slim said in a recent interview that he’s bullish on Mexico and the rest of Latin America. Slim plans to refocus his investments to take advantage of increasingly cheap borrowing costs.

“I’m optimistic that with the low-interest rates in the long term, the opportunities to invest in our countries is significant,” Slim, 74, said in an interview this week in his office in the Lomas neighborhood of Mexico City, before America Movil’s breakup announcement. “We have to take advantage of this great window while it lasts.”

While America Movil will be reducing dependence on its home market, the world’s second-richest man has been diversified beyond Mexico and telecommunications for years with holdings in banking, mining and construction. Now, Slim said he plans to put more money into energy, infrastructure and real estate. Outside Mexico, countries in Latin America of particular interest are Brazil, Colombia and Peru. Telecommunications also remains attractive outside of Mexico, he said.

“The money available makes the projects we’re working on viable, and we’re investing in that,” said Slim, wearing a cream-colored, monogrammed shirt and seated at a conference table, where his BlackBerry phone rested untouched.

Economics, Baseball

Slim works in the headquarters of financial-services firm Grupo Financiero Inbursa SAB, where a Salvador Dali sculpture greets visitors who climb the staircase from the lobby. Artwork from his personal collection adorns his office, and a bookshelf reveals his interests in economic theory -- and baseball. An early inspiration, J. Paul Getty’s “How to Be Rich,” is there, along with Michael Lewis’s “Moneyball,” Cyril Northcote Parkinson’s “Parkinson’s Law” and Margaret Coit’s “Mr. Baruch,” a biography of financier Bernard Baruch.

A believer in free trade and the private and public sectors working alongside for the development of infrastructure, Slim often promotes Latin America as a good place to invest as middle classes emerge and speed up the economic growth. He also touts the benefits of shorter work weeks, which aids employment levels, and later retirement ages to reduce the strain on pension funds and government support.

Father Julian

Slim, who recognized the depressed value of Mexican companies during the 1980s financial crisis and invested in assets from bottlers to cigarette manufacturers, sought similar opportunities in Europe in the past two years as constrained consumption and falling asset prices opened a window for him to invest cheaply.

He inherited his habit of taking advantage of economic lulls from his father Julian, who in the 1910s snapped up real estate in downtown Mexico City, when the country was engaged in a revolution in which the government battled several insurgent groups for more than a decade. A picture of Julian, a Lebanese immigrant to Mexico, hangs on the wall of Slim’s office.

Slim’s holdings have expanded to encompass seven public companies he controls in Mexico, including Inbursa, retailer Grupo Sanborns SAB and gold-and-silver miner Minera Frisco SAB. Outside of Mexico, he holds an 8 percent stake in New York Times Co., with warrants to acquire more shares, and shares of Argentine oil producer YPF SA. Inbursa acquired a small bank in Brazil this year to expand outside Mexico, and Grupo Carso SAB, Slim’s holding company, is exploring for oil in Colombia.

Less Dependent

America Movil has also expanded, with operations in 17 other countries, from the U.S. to Chile. It also holds stakes in two European phone carriers, Royal KPN NV and Telekom Austria AG, in which it extended a tender offer for outstanding shares that expires today. With about 60 percent of America Movil’s sales coming from outside of Mexico today, up from 29 percent in 2002, Slim’s fortune is less dependent on his home country than it used to be.

As Slim has gotten older, he has increasingly entrusted his children and their spouses with the day-to-day operations of his business, giving him time to think about long-term strategy. Slim had six children with his wife Soumaya Domit, who died in 1999. Carlos Slim Domit, his oldest, is the chairman of holding company Grupo Carso SAB and of Telmex. Marco Antonio, the second-oldest, is chairman of Inbursa, while Patrick, the younger brother, is chief executive officer of Sanborns.

1990 Privatization

Slim got into Mexico’s telecommunications business by acquiring control of former state monopoly Telefonos de Mexico in a 1990 privatization sale. America Movil was spun off a decade later and eventually acquired its former parent. Its market value is now $78 billion, after the stock rose 9.4 percent yesterday on the breakup news.

The shares fell less than 1 percent to 14.60 pesos at the close in Mexico City.

Slim was overtaken as the world’s richest person in May 2013 by Bill Gates, who is worth $83.5 billion, according to the Bloomberg Billionaires Index. The majority of Slim’s wealth comes from his 57 percent holding in America Movil, which before this week’s asset-sale decision had lost $17 billion in market value since President Enrique Pena Nieto took office in 2012 on promises to spark more competition to boost the Mexican economy.

America Movil’s stock gains yesterday helped boost Slim’s fortune by $4.3 billion to $75.8 billion, 41 percent of which comes from non-telecommunications investments, according to the Bloomberg Billionaires Index.

Monopoly Criticism?

By ranking among the world’s richest, Slim has been a source of pride for many Mexicans, who see him as a symbol of the nation’s emergence as an economic power.

At the same time, critics such as Televisa CEO Emilio Azcarraga and Organization for Economic Cooperation and Development Secretary-General Angel Gurria, have accused him of running a near-monopoly and pressed the government to enact legislation that would rein in his control of seven out of 10 mobile phone users.

Mexican lawmakers this week approved a bill to create more competition in telecommunications, placing restrictions on prices, requirements to share infrastructure and the option for dominant companies to propose their own breakups to reduce their market share below 50 percent. The law will need the endorsement of Pena Nieto.

Breakup Plan

To meet that threshold, America Movil will need to divest more than 20 million wireless users and 4 million landlines. The breakup plan is the culmination of years of frustrated efforts by Mexico’s government to contain America Movil’s dominance. When it was privatized, Telmex originally had a legal monopoly for local-phone service, with competition gradually introduced years later. Newcomers such as Axtel SAB and Maxcom Telecomunicaciones SAB found it difficult to compete with the vast network and brand recognition of Slim’s powerhouse.

When Slim acquired control of Telmex, the company’s tiny mobile-phone unit had 35,000 subscribers, trailing market leader Iusacell. Wireless telecommunications was considered the domain of the rich, not a major business for a developing market like Mexico.

Slim saw an opportunity, creating a market for mobile-phone service modeled after the prepaid cards Telmex users purchased at convenience stores to use payphones. He replicated that prepaid wireless model throughout Latin America, helping America Movil become the biggest carrier in the region, ahead of Telefonica SA.

Fox, Calderon

Regulators in Mexico tried to spark more competition in the phone market with little success. In 2006, President Vicente Fox struck a grand bargain with the nation’s telecommunications and television companies, giving them a legal way to enter each other’s markets for the first time. Cable companies owned by Televisa immediately started selling phone service. Fox and successor Felipe Calderon hamstrung Slim, though, requiring Telmex to adhere to certain conditions before it could offer TV service. The government has maintained that Slim’s company never met those conditions.

Slim’s lawyers made things tough for regulators, filing injunctions, nullification measures and motions for constitutional protection to keep agencies from enforcing their rulings.

The laws passed under Pena Nieto’s administration take away many of the tools America Movil has used to keep regulators at bay. They created a new telecommunications agency with stronger antitrust powers and a specialized court system to review decisions. What’s more, the new agency’s rulings can’t be suspended by an injunction while they’re being reviewed in the courts.

Slim acted quickly to adapt to Pena Nieto’s changes, said Marcos Martinez, CEO of Grupo Financiero Santander Mexico SAB, one of the billionaire’s bankers.

“You can become angry, you can become sad, but what they did is to react the same moment the thing was happening,” Martinez said. “That’s why he’s so successful.”

Margin Squeeze

Regulations have already had a financial impact on Slim’s company. America Movil’s margin based on earnings before interest, taxes, depreciation and amortization has declined in the past five years to 32.6 percent from 39.7 percent, from above the industry average to below it. Among the largest 10 global telecommunications carriers, America Movil was the second-most-profitable five years ago. Now it’s in fifth place, according to data compiled by Bloomberg.

While America Movil determines which assets it will sell to adjust to the new regulatory regime, it also can take the opportunity to evaluate new investments it could make with the proceeds, according to analysts at Royal Bank of Canada.

‘Additional Capacity’

“We would expect to see a large cash inflow from the disposals and would expect AMX to use the proceeds to ensure the balance sheet is robust and use the additional capacity to invest in further growth projects, both internationally and domestically,” the analysts said in a note yesterday, citing converged services such as TV as possible areas for more investment.

Interest rates remain a key incentive for investment, Slim said. While Fed Chair Janet Yellen has affirmed U.S. policy makers’ plan to hold their main rate near zero for a “considerable time” after ending monthly bond purchases that inject cash into the economy to stoke growth, Mexico’s benchmark rate is 3 percent, Colombia’s is 4 percent and Brazil’s key rate is 11 percent.

Foreign investors seeking to escape near-zero interest rates at home have driven down the average yield for the region’s dollar-denominated sovereign bonds by 0.88 percentage point this year to 5.6 percent, according to data from JPMorgan Chase & Co. Average corporate dollar borrowing costs in the region have tumbled 0.64 percentage point this year to 5.41 percent.

“To invest in infrastructure, real-estate, factories, businesses -- when you’re going to create a business you need to look at demand, but also at the financial costs and access to capital and financing,” Slim said.

--With assistance from Carlos Manuel Rodriguez and Ben Bain in Mexico City and Adriana Arai in Sao Paulo.