Telefónica, the largest telecom company in the Spanish-speaking world, has posted its “All Sold Out” sign in Latin America , acquiring Bell South’s mobile telecom assets in the region at a cost of 4.7 billion euros ($5.85 billion). This marks the crowning moment for its policy of growth through large-scale strategic acquisitions. The move makes Telefónica the leader in the American mobile market and the fourth-largest company in that sector worldwide, according to the company. The question now becomes whether Telefónica will be able to shut its front door rather than make further acquisitions. According to experts interviewed by Universia-Knowledge at Wharton, that is not going to be easy, given the fact that the sector is undergoing a consolidation process that will continue to involve corporate acquisitions.
“While it’s possible that we will consider another isolated move of lesser importance, with this operation we’ve consolidated our non-organic growth in Latin America ,” said César Alierta, Telefónica’s president, when he announced the news two weeks ago.
With this purchase, the Spanish company almost doubles its revenues in the region, from $2.9 billion to $5.4 billion. Moreover, its net profits rise from $867 million to $1.52 billion. BellSouth’s 10,800 workers in Latin America will hook up with the 8,700 workers that Telefónica already employs in the region.
One of the most appealing aspects of the deal is the big increase in customers that Telefónica will enjoy as a result. Their numbers will grow from 30.3 million to 41 million in 14 different countries. The jewels in BellSouth’s crown are Venezuela and Colombia , which will open their doors to Telefónica for the first time. Moreover, the Spanish telecom firm will have a presence for the first time in Ecuador , Paraguay , Panama and Nicaragua . Overall, the company is acquiring a market share of 35% in terms of customers. That makes it the largest mobile phone operator in the region, and the world’s fourth-largest behind only “the two Chinas” (China Mobile and China Unicom) and Britain ‘s Vodafone.
“If I had to rate this deal on a scale from 1 to 10, I’d give it a 9, since it is very consistent with the strategy Telefónica is following in order to guarantee growth, and not fall into a short-term approach,” notes Julián De Cabo, an assistant director general of the Instituto de Empresa and a telecom specialist. “At the moment, the mobile telephone market is growing at a solid pace. That means they’re betting on something that is going to provide them with stable growth,” adds De Cabo, who was director-general of Terra, Telefónica’s Internet portal, until 2002.
The major ratings firms have reacted in various ways. Standard & Poor’s is reconsidering its A rating for the telecom operator because of the group’s additional exposure, especially in Venezuela . Meanwhile, reports from Moody’s and Fitch indicate that Telefónica will absorb the purchase without any major change in its financial condition.
Financial analysts have responded by adjusting their projections. Credit Suisse First Boston has raised its target price for shares of Telefónica Moviles from 8.7 euros up to 9.1 euros, while maintaining its “neutral” recommendation. Lehman Brothers has raised its target price for each share from 9.5 euros to 9.7 euros. Lehman is most optimistic about shares of Telefónica, the parent company, issuing an “overweight” recommendation. It projects that share prices could rise by as much as 25%.
Nevertheless, it didn’t take long for some fears to surface. On March 8, shares of CTC, Telefónica’s subsidiary in Chile , plummeted on the Santiago exchange, following a “sell” recommendation issued by business banks. The key factor was the negative impact, over the next five years, of expected price cuts amounting to about 20%.
Digesting Their Acquisitions
The sale of BellSouth’s mobile assets in Latin America takes place in the context of another deal – Cingular’s $41 billion acquisition of AT&T Wireless. Cingular, the second largest mobile phone company in the United States , is jointly owned by SBC and BellSouth. Cingular had to search for enough cash to finance the deal. In an article in Universia-Knowledge at Wharton, Gerald Faulhaber, professor of public policy and former chief economist of the Federal Communications Commission, recalls that observers have been predicting consolidation in the mobile telephone sector for quite some time. “The reason these companies are having trouble making money is because competition is very tough,” he said.
With the merger, Cingular has achieved several goals, according to Faulhaber. It cut the number of payers in the mobile phone sector down to five. The disappearance of AT&T Wireless eliminated an aggressive competitor when it came to pricing. Moreover, Cingular – which was the third-largest provider of mobile phone services (in the U.S.) – rose to the number-one position.
De Cabo agrees that the market is moving toward further consolidation. “We are going to see a lot more acquisitions in the marketplace. Eventually they are not going to be so inbred; they will open out to other sectors that are not traditional telephony. The natural market is gradually becoming saturated and needs to open outward.” That means Telefónica may not be able to satisfy itself with the purchases it has already made. If the major groups all become involved in a race to make acquisitions, sooner or later Telefónica can become the target of one of those deals. Or it can lose market positions when mergers and acquisitions heat up. “The only question regarding Telefónica is whether it will lead in the merger process – or will wind up being devoured by someone else.” For the moment, it doesn’t seem likely that Telefónica will be bought out.
Revenues from mobile services have risen from one-quarter of telecom operators’ overall total, just five years ago, to one-third today. However, the future of the mobile sector is not at all certain. Faulhaber is concerned about the relative youth of the sector in the United States . “When it comes to mobile telephony, this country is significantly behind the rest of the world, especially Southeast Asia . I don’t know of any other technology where we are a generation behind. It shouldn’t be that way, but it’s a reality.”
Now that the sector is starting to mature, Faulhaber believes that the next challenge is to find new opportunities for growth. Some experts view information as the great opportunity. “I have my doubts about that strategy,” says Faulhaber, “but it’s clear that mobile phone companies need something to give them a push forward.”
An Easy Integration
On the other hand, Telefónica enjoys a comfortable position in the Latin American mobile phone market. In that region, the telecom operator saw the growth potential of mobile telephony, given that fixed-line service was not as well developed as in other countries. “In this sense, fixed-line telephony is going to be another option worth assessing,” De Cabo emphasizes. Morever, the Spanish firm has always bet on emerging markets in its strategy for boosting growth, as its leadership in Latin America demonstrates.
Telefónica’s purchase of BellSouth’s assets fits into both those approaches. As a result, De Cabo notes, “Telefónica will have no problem integrating [the new acquisitions]. Nor will it have any problems managing them, since they fall within their traditional business, which is technology.”
Telefónica’s approach to managing expatriates suggests another reason why absorbing the BellSouth assets will be a relatively smooth process. Traditionally, when a company enters new countries, the head office sends out professionals to analyze, organize and integrate operations that have just been acquired, in accordance with its managerial style. The goal is to train local professionals and, little by little, let them take over.
Telefónica has already sent hundreds of expatriates to Latin America , ever since it first moved into that region. However, it doesn’t appear that the firm will take the same approach with its latest acquisitions. According to Mauro Guillén, a management professor at Wharton, “The company already has teams of people trained in Latin America . So it’s very likely that they will rely on people who are already there. Another question is whether they are going to integrate everything right away. Perhaps Telefónica is waiting for a new wave of investments, and then they will integrate.
“Normally, American companies rely on a relatively low number of expatriates, while Japanese firms use a greater number,” Guillén adds. “Spanish companies take an approach that is somewhere in between. Of the top 15 or 20 management positions, usually between 7 and 10 positions are held by Spaniards.” However, when it comes to BellSouth assets, Guillén doesn’t believe many expats will be required. “What’s missing will be an initial shock team, composed of between 20 and 30 professionals, who stay for three or fourth months and take care of personnel cuts, new contracts, buying and selling real estate, and so forth.”
Financing the acquisitions is another area where Telefónica won’t have any problems. In addition to acquiring debt, it will pay cash, using the resources of Telefónica Moviles. BellSouth will get $4.2 billion of the $5.85 billion involved in the deal, while Telefónica assumes “about $1.5 billion in the debt of the acquired companies,” as Antonio Viana-Baptista, Telefónica’s managing director, told Expansion, the Spanish daily. The remaining $150 million in the deal will be used to buy shares owned by minority owners in nine of the ten acquired companies. BellSouth controlled 100% of the capital only in its Chilean subsidiary. Elsewhere, it shared ownership with minority owners.
