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An overhaul of Mexican telecommunications regulations aimed at sparking more competition continues to driveconsolidation in the sector, with the Oct. 1 merger of Axtel SAB and Alestra SA just the latest in a series of moves by companies looking to boost their market positions.
Axtel SAB, a fixed-line services company, said its merger with data services provider Alestra — itself a unit of Alfa SAB, one of Mexico's largest conglomerates — would make it more competitive by improving commercial operations and and creating economies of scale, according to an Axtel press release.
“These deals are the result of the changes in the regulatory environment,” said Gabriel Vigueras, a telecommunications analyst with Moody’s Investor Services, Inc. “Companies are trying to get ready before the real competition in the next couple of years – they are trying to prepare. That is why they are committing these important investments.”
The merger, which is expected to close at the end of 2015, is the latest of many deals in the Mexican telecommunications sector in the last year, as large and small companies alike try to increase market share under the new regulations.
The regulatory overhaul was designed to ease market access for new competitors by lessening the power of two dominant companies, America Movil SAB and Grupo Televisa SAB, in the telephone, television and Internet sectors.
Among the changes was a requirement that America Movil, which has about 70 percent of Mexico's mobile-phone subscribers and 80 percent of its landlines, reduce its market share to below 50 percent to avoid penalties as a monopoly. The company has also been required to give other providers access to its lines without charge. Both of these requirements have sparked new investment, as competitors see an opportunity to boost market share.
The changes have also attracted foreign investment. AT&T Inc. announced in late 2014 that it would buy two Mexican wireless companies, Nextel Mexico and Grupo Iusacell. AT&T has since said that it would invest another $3 billion in upgrading the two companies' networks.
The need to become more competitive in the new market has also pushed smaller players to up their game. Analysts say the possibility of multiple competitors drove the Axtel-Alestra merger.
“The deal makes a lot of sense,” said Martyn Roetter, a telecommunications management consultant. “When they see what is happening with the liberalization of the market and AT&T coming in, these little guys who have been struggling to survive realized that they need to get to some minimum size if they are going to have a chance to succeed in a more competitive market.”
The merger, analysts say, is the latest of several business moves within the industry that indicate that the new laws are working, creating more motivation for both new entrants and existing companies to realign.
“What the regulatory overhaul was trying to do was to aim for a more level playing field in telecoms,” said Carlos Legarreta, a telecoms analyst with Grupo Bursatil Mexicano, a Mexico-based financial services firm. “What these regulations have done is to create incentives for companies to basically consolidate and create a more efficient landscape. The entrance of AT&T is a sign of that, just as this merger is.”
The merger will be reviewed by Mexico’s Federal Telecommunications Institute (Ifetel), where it is expected to win approval.
And, while the entrance of AT&T shows the tremendous interest in the wireless market, the Axtel-Alestra mergerspotlights an area where smaller Mexican companies see growing opportunities: data services. Alestra has built its business on providing data centers, networks, cloud and consulting services to corporate customers. Adding Axtel's network power to these services could help the combined company go up against bigger competitors for this specialized market, according to Vigueras.
“These companies are obviously pursuing a particular niche,” Vigueras said. “Small operators are a tough position versus the better and much larger companies with more possibilities to invest in the sector. Given the companies that are starting to enhance their IT services, the potential that Mexico has for this particular market creates sufficient interest for companies to target it.”
The new regulatory climate has made Mexican telecom companies more desirable acquisition targets for foreign companies.
“The joint companies present a better position than they did individually,” said Sergio Legorreta, a Mexico-based partner with Baker & McKenzie LLP, which worked on the merger. “They have a stronger presence in the market, and it also presents an attractive opportunity for players outside of Mexico, including, perhaps, AT&T.”
Under the new regulations, Mexican companies have more maneuvering room to finance deals with foreign financing. For example, fixed-line company ownership, and foreign financing of fixed-line companies, used to be capped at 49 percent, but the cap was removed as part of the regulatory changes.
“One of the effects of the reform is that, given that a license will now allow for 100 percent foreign ownership, it also provides for 100 percent foreign financing,” Legorreta said. “It might be a result of the reform that the companies were able to secure financing that they could not have accessed previously.”
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