Telefónica On Sale

Telefonica’s CEO recently announced its intention to spin-off all its Latin America business, except Brazil. It will focus only on Spain, the UK, Germany – and Brazil. Although it has been a surprise for some, there were warning signals that this may happen.

Telefonica has an accumulated debt of USD $42 billion and was recently pressured by large investors, to decrease its exposure in Hispanic Latin America. In the last two years, Latin America’s social-economic environment has been more volatile. This has spooked investors, who now want to reduce their exposure. Telefonica also sold all its Central America business at the beginning of 2019.


Telefonica’s Business in Hispanic Latin America

Telefonica Latin America is currently divided into three subregions: HISPAM Norte, HISPAM Sur, and Brazil. In terms of countries, Hispanic Sur includes Argentina, Chile, Peru, and Uruguay. HISPAM Norte includes Colombia, Ecuador, Venezuela, and Mexico.


Exhibit 1: Share of Telefonica Mobile Connections in Key LATAM Markets

Source: AMX 3rd Q 2019 Financial results, TEM Ene-Sep 2019 Financial results, IFT, Mintic, Osipitel, Subtel, Enacom

Telefonica had also struggled in countries like Mexico and Colombia to increase share and profitability. Both of these countries’ subscriptions are mostly prepaid.


Early Warning Signals of Telefonica’s intention to quit Hispanic speaking LATAM

In addition to the sale of its Central America businesses, other signals have included:

  • The CEO promising to do anything to return the company to growth and profitability
  • Venezuela has a big impact on Hispanic Norte’s overall success. Until 2008, it was the most profitable market in HISPAM Norte. But after less than 10 years it is now a burden, though given the country’s dire political and economic situation, it may prove difficult to find a buyer.
  • In October 2019, Telefonica Mexico signed an eight-year deal to use AT&T’s last-mile infrastructure. Hence Telefonica does not need to build its own network.Immediately after the agreement, Telefonica Mexico solicited IFT (Mexican regulator) to allow it to return not used spectrum, so it can be released to pay for the unused spectrum. As there is no regulation about the returning spectrum, IFT is analyzing how to implement it.


Securing the 80% of the Business

Spain, UK, Brazil, and Germany accounts for around 80% of Telefonica’s global revenue, while Hispanic LATAM represents just 20% (Exhibit 2). Furthermore, the Hispanic LATAM market contribution to total revenue and EBITA has been declining in the last two years, affected by economic uncertainty and downturns in several main markets.

Exhibit 2: Hispanic Latin America’s weight Over Telefonica’s Total Business Results 2019

Source: TEM Ene-Sep 2019 Financial results


Hispanic LATAM represents almost 40% of Telefonica’s total lines which means the operation consumes a lot of the company’s resources. Telefonica is determined to increase its focus on parts of the business that generate the 80% of the revenue and that are also the most profitable. Telefonica also expects this part of the business to provide most growth opportunities.


Potential Buyers

It will be difficult to sell all seven countries business in a block, unless it is a new player to the region; only a player that is not currently in the region could make it through the antimonopoly regulations. For example, the sales of Telefonica’s business in El Salvador to Claro has not yet been approved.  Possible buyers include:

Liberty Latin America: recently bought AT&T Puerto Rico. This operator is financially solid and looking for growth through acquisition but prefers to stay in small countries such as those in Central America and the Caribbean. The only outlier is Chile with VTR.

Millicom: purchased Telefonica’s Costa Rica, Panama, and Nicaragua businesses. These were markets most in line with Millicom’s target market. Similar to Liberty, the Luxembourg-based operator prefers to do business in smaller and less developed countries.

America Movil: is the biggest operator in the region. It is already the dominant player in almost all markets that Telefonica is selling its business (Exhibit 1). It bought the Guatemala and El Salvador businesses from Telefonica at the beginning of the year. And El Salvador’s transaction is still pending regulatory approval. It will be difficult for America Movil to get regulatory approval to buy any of Telefonica’s businesses this time.

Chinese operators: China Mobile is the world’s largest mobile operator. It established an office in Brazil in 2017. This generated attention from many players in the region. But the office is mostly dedicated to supporting enterprise customers. Telefonica’s sales may be attractive as an expansion opportunity, but it doesn’t look likely.

Telefonica’s announcement could also be a way to attract strategic partners and to subsequently launch a local IPO. At present Hispanic LATAM region will report to Telefonica’s CFO, a sign that this business is becoming a financial package.

Telefonica share price increased more than 5% following the announcement suggesting the sale will be accretive in value to investors.

Whatever type of sale is undertaken, Telefonica’s exit will change the Latam telecommunication landscape. We’re not sure it will be a positive change in the short run, but may lead to less concentration and more competition in the long run.

Telefonica Begins Scaling Back in Central America in the Hunt for Profitability

Telefonica announced at the end of January of 2019 that it sold its Guatemala and El Salvador mobile business to America Movil-Claro (AMX) for a combined sum of US$ 646 million.  America Movil will pay US$ 333 million for the Guatemala business and US$315 million for the El Salvador operations. While the Guatemala transaction is a done deal, the El Salvador sale is still subject to regulatory approval.

But why did Telefonica exit a country like Guatemala, the largest market in Central America with a population of 17 million and 20 million mobile connections? Well, the answer lies in the new group strategy of Telefonica where it seeks to improve the return on capital with new strategic positioning.

The strategy started to take shape ever since José María Álvarez-Pallete López, took charge as the CEO of Telefonica in 2016. Lopez, who was earlier the CFO, has a strong financial background being an economist. At the beginning of 2018, he made it clear that the company will do everything to “bring growth and profitability”.

Except for Panama, Telefonica has been struggling across Central America. We expect the company to exit other markets in Central America: Costa Rica, Nicaragua and finally Panama. Telefonica might even let go of Mexico, where the company has struggled since it entered the market in 2000. Despite heavy investment, Telefonica’s subscriber base has remained over 90% prepaid. Like Guatemala, Mexico has struggled to deliver profits for Telefonica.

Over the past two years, Telefonica has systematically decreased its portfolio, sales and inventory of mobile handsets across all its markets. It’s subsidiary Movistar has started to offer a wide range of refurbished mobile devices in Argentina and Chile. Movistar may also start offering refurb devices in Peru and Brazil.

Overall, Telefonica is focusing less on traditional mobile services revenue income, such as selling devices and instead switching attention to offer new services. Recently, it launched IPTV in Brazil and Argentina for which it’s accelerating FTTH deployment in both countries.

Meanwhile, Telefonica’s exit from Guatemala and El Salvador also reinforces AMX’s long-term strategy. The Mexican operator is always seeking a dominant position either by acquisition, organic growth or a mix of both. As Telefonica is selling, AMX will most likely to continue with its shopping spree.

By purchasing Telefonica’s business in Guatemala, AMX will gain infrastructure, spectrum and other licenses that will help it surpass Tigo (Millicom).

Claro (AMX) Guatemala Will Reach 46% Share of Subscriptions After Purchasing Movistar

Source: Counterpoint Market Monitor 2018


So far, Guatemala has had three carriers. Tigo is the absolute leader with more than half the subscriptions.  Claro (AMX) is second while Movistar (Telefonica) is the smallest with around 19% market share. After the acquisition of Telefonica’s business, Claro’s share will jump to 46% and though it will remain behind Tigo, it will close the gap significantly. Postpaid accounts are 4.8% of Movistar’s subscription base in Guatemala, this percentage is much smaller than the countries’ average of 6.6%.

Claro El Salvador Will Lead this market after acquiring Movistar

El Salvador Mobile Subscription Share of Market

Source: Counterpoint Market Monitor 2018

Meanwhile, in El Salvador, Claro will become the dominant player with a subscription share of more than 54%. Therefore, the deal is still awaiting regulatory approval. El Salvador is a much smaller market than Guatemala. It has a population of 6.4 million people and 11 million connections. However, there are five carriers operating in the market. It was the latest country in LATAM to launch LTE.  Top three carriers are, Tigo (33% share), Claro (31% share), and Movistar (24% share).

4G-LTE at the Top of the Wave in Latin America

By the end of 2018, the subscriber base for 4G-LTE had surpassed 3G in LATAM.   Although 4G subscriptions surpassed the 3G subscriptions by only 5M subs, this scale will continue to tilt towards 4G-LTE until 5G comes around. 4G-LTE smartphone sales surpassed those of 3G smartphones by the end of 2015, however, it took three years for LTE to become LATAM’s leading technology in terms of subscribers.

Exhibit 1: LATAM Subscription Share by Technology

LATAM Subscription Share by Technology

Source: Counterpoint Market Monitor 2018

Chile and Brazil lead the 4G-LTE penetration with more than 50% of their subscriptions. Colombia and Peru both have 4G-LTE penetration below 30% and will likely have the highest growth amongst major LATAM countries during 2019 and beyond. All Central American countries also offer ample growth opportunities in LTE technology. El Salvador was one of the countries to launch 4G-LTE most recently. It launched its 4G-LTE network at the end of 2016. By the end of 2018, its LTE subscription penetration remained below 13%.

Exhibit 2: 4G-LTE Penetration and Growth (2018)

4G-LTE Penetration and Growth (2018)

Source: Counterpoint Market Monitor 2018

2G has shrunk to represent around 20% of the subscriber base. Brazil and Mexico have the lowest 2G participation, while Central America countries and Peru have the highest. However, in Colombia, Claro (AMX) expanded its 2G network at the beginning of 2018 mainly to serve the bottom of the pyramid users that can’t afford a smartphone device and smartphone data plan.

A few carriers in the region are considering shutting their 2G networks off so they can reuse the spectrum for 4G-LTE. This is to respond to the exponential growth of data demands or potential demands of 5G.  AT&T Mexico has already announced that it aims to shut down its 2G network starting April 2019. This task might not be that easy as AT&T will have to clean the frequency before it is usable to build a new network. This means not only moving 2G mobile users to 4G technology, but also those 2G M2M devices, which could complicate the shutdown.

LATAM has a population of 650M but more than 710M subscriptions. With 430 unique subscribers, there is an average of 1.68 SIM cards per user.  In many countries regulators and operators have been pushing to decrease the number of lines. There are more subscriptions than people due to many reasons, but the main reason is because many users have more than one mobile line and multiple devices.

As 4G-LTE is already the dominant technology–now what is next?  Currently, 18 carriers in the region have already launched VoLTE (voice over LTE), and at least 21 more have already announced their plans to launch it.  Additionally, AT&T announced the launch of its LTE-M network in Mexico and TIM Brazil announced the launch of an NB-IoT network.  In both cases, they will soon be offered commercially.

Many operators have also announced 5G trials and testing.  Brazil regulator, ANATEL, announced that it will be auctioned 5G frequency by the end of 2019. However, as we learnt from 4G, it might take at least two years between the auctioning of the frequency and the commercial launch of the technology.  5G frequencies most likely will have to be cleaned before it can be used, so it will take some time.  Many LATAM carriers, megacarrier or small, have said publicly that they need to work on recovering the investment of LTE technology before they can move to the large investments of 5G. LTE technology is now at the top of the wave, in LATAM, to prepare the region for the 5G wave that will unload full starting 2024.

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