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).