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Weekly UpdatesIf Mexican billionaire Carlos Slim Helu wanted to consolidate the position of his company. Telefonos de Mexico (Telmex), in Latin America before stepping clown, he picked the perfect time to do so.
Slim passed control of Telmex, Mexico's dominant fixed-line operator, to his eldest son Carlos Slim Domit in late April, a week after the company bought Brazilian long-distance operator Embratel Participacoes and two smaller South American telecom assets. Telmex, along with Slim controlled wireless company America Movil, already owns operations in Argentina, Brazil, Colombia, Chile, Guatemala, Ecuador, Peru and Venezuela.
Embratel seems to be the missing piece of the puzzle in Telmex's plan to thee off with Spain's Telefonica as the region's top telecom. In late April, Telmex paid US$111.5 million for control of Techtel, an Argentine data transmissions company, and it bought for an undisclosed sum a 40% stake in Chilesat, a Chilean data transmission company and the country's No. 3 long distance carrier. It also confirmed plans to buy remaining 60% stake from Chilesat's minority shareholders. Slim also owns a slice of Global Crossing, the undersea fiber optic cable company.
But it was buying Embratel, which reported $654 million in revenues in the first quarter of 2004, from U.S. telecom MCI that is crucial to Telmex's plans to expand beyond Mexico. It was also the most difficult step.
The first signs that the Brazilian deal might be contentious appeared March 15, when Telmex beat out other bidders, including Calais, a consortium of Brazil's three fixed-line carriers--Brasil Telecom, owned by Telecom Italia and investment fund Opportunity; a Brazilian unit of Spain's Telefonica; and Telemar Notre Leste--plus Geodex, a Brazilian communications firm. Telos, Embratel's pension fund, also bid on the company.
Calais had bid $550 million for Embratel, yet MCI picked Telmex's $360 million bid--eventually raised to $400 million--because it believed the Calais bid faced huge, perhaps insurmountable, regulatory hurdles.
In late March, Calais challenged MCI's decision in a New York bankruptcy court. "We challenged the deal because we made a firm offer of $550 million for Embratel, $190 million more than Telmex, and because we don't believe our buying control of Embratel would have met with regulatory difficulties" said Calais spokesman Otavio Azevedo, president of Telemar's board of directors, shortly after filing the challenge.
Calais then took several steps to mollify MCI. The consortium agreed to guarantee $470 million of its $550 million offer, even if the deal failed to receive regulatory clearance in Brazil.
Calais' courting of MCI and its court challenge forced Telmex to raise its bid. On April 26 U.S. Bankruptcy Court Judge Arthur Gonzalez cleared the sale to Telmex on the grounds that the most attractive bid isn't necessarily the highest one.
It was a victory not only for Telmex but Embratel as well, according to Embratel executives. "Had Calais bought Embratel, the cunsortium would have cut the company into pieces, which is why we became dismayed at the thought it would win the bid" says Embratel's Vice President for Marketing Purificacion Carpinteyro
"We believe that investing in and financially cleaning up Embratel, while keeping it intact as a company, is more important to Embratel minority share holders than a slightly higher price offer for the company," says Arturo Elias Ayub, Telmex's communications director. Telmex expects to take control of Embratel before the end of 2004.
Strategy. Telmex's growth strategy for Embratel does not mean a price war is coming among fixed-line telephone providers in Brazil, Ayub says. Instead, he says, Telmex seeks to reduce operational costs and increase productivity, "synergies that will, over the medium term, gradually reduce phone call prices," including with America Movil's Claro wireless brand in Brazil.
More synergies will come from combining operations of Embratel and Telmex Brasil, one of the companies born out of Telmex's $210 million purchase, in February of 2004, of AT&T Latin Americas assets, including fiber-optic networks for data transmission services in major Brazilian cities.
"The Telmex purchase of Embratel creates administrative synergies and allows joint purchases with Claro, thus reducing costs for both companies," says Claro President Carlos Henrique Moreira. Slim's trademark style--buy low and grow--seems set just as his son takes the reigns of his empire.
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