Analysis - Slim's flagship America Movil under pressure as shares sink

MEXICO CITY Fri Feb 22, 2013 6:52pm GMT

The logo of America Movil is seen on the wall of the reception area in the company's corporate offices in Mexico City February 13, 2013. REUTERS/Edgard Garrido

The logo of America Movil is seen on the wall of the reception area in the company's corporate offices in Mexico City February 13, 2013.

Credit: Reuters/Edgard Garrido

Quotes

   

MEXICO CITY (Reuters) - The business empire of the world's richest man, Carlos Slim, is showing signs of wear as investments made by his flagship firm America Movil sour and regulators and competitors squeeze profit margins at Latin America's largest phone company.

Slim is revered by many as a savvy value investor and he seems content to sit tight on loss-making investments and back his executives' management. But America Movil's minority investors are starting to demand more transparency as well as greater cash returns from the family-controlled company.

Shares in America Movil, once a darling among regional investors, have lost more than 10 percent in the last 10 days and are down nearly 25 percent from highs hit last May.

Uncertainty over how his empire will be affected by planned overhauls of the telecoms industry and competition laws in Mexico - part of a wider raft of economic reforms - is also weighing on the stock.

For minority investors the shrinking stock price compounds frustration with the company. Fourth-quarter profits came in way below expectations and America Movil is sitting on billions of euros in paper losses from investments in two European telecoms firms.

"What they need to do is show shareholders that they're cognizant of the weak performance," said Kevin Smithen, an equities analyst at Macquarie Bank. "It would behoove them to start buying back stock or increase the dividend."

The shares have slumped 10.8 percent since the company reported the weak fourth-quarter profits on February 12.

That amounts to a hit of about $4 billion (2.6 billion pounds) to Slim and his family's fortune, estimated by Forbes magazine last year to be around $69 billion.

America Movil has a dividend yield of 1.42 percent, among the lowest in the 30-name Dow Jones Titans Telecommunications Index, according to Thomson Reuters data.

Since the weak earnings report, the stock is underperforming compared to a 3.8 percent dip in that index and a 1.6 percent dip in Mexico's benchmark IPC stock index.

LACK OF TRANSPARENCY

A constant complaint from America Movil's investors and analysts is that it lacks transparency: it is not forthcoming with detailed operating performance data and, compared to rivals, executives rarely meet with shareholders at public investor days or similar events to discuss performance.

A spokeswoman for the company declined to comment.

In particular, investors have struggled to understand America Movil's investment in Dutch telecom KPN, which has lost more than half its value since Slim started building up a 29.77 percent stake last June. A similar acquisition of stock in Telekom Austria is also under water.

The company said it spent 79 billion pesos (4 billion pounds) in the first nine months of 2012 on those two positions.

KPN shares are down more than 60 percent since America Movil started building up its stake in June, while Telekom Austria shares are down almost 40 percent since mid June, when America Movil spent $1.1 billion to add a 21 percent stake to an existing position in the company.

That outlay on the European stakes is nearly as much as the hefty 82 billion pesos America Movil spent on capital expenditures and is almost four times its spending on share buy-backs and dividend payments in the first nine months of 2012.

Stepping into Europe was a move that surprised some investors, since the company until last year did not have experience outside of the United States and Latin America.

America Movil has said it views the European stakes as long-term holdings but beyond that it has not done much to explain what so far looks like a costly strategy.

After it emerged on Wednesday that America Movil was putting new money - about 900 million euros - into its KPN position as part of the Dutch company's rights issue, America Movil shares slid a further 2 percent.

"I think that if they were to have a little bit more transparency and to communicate their strategy in some of the metrics associated with their outlook, people would probably be a bit more excited about (the European investments)," said Rick Hoss, co-portfolio manager of Euro Pacific Latin America Fund.

Hoss' fund has $15 million under management and at the end of December about 4.56 percent of its portfolio was invested in America Movil shares.

REGULATORS AND COMPETITORS

Aside from its European bets, America Movil has been spending big on improving its networks in Latin America.

The company started rolling out 4G services in Mexico at the end of last year, using long-term evolution (LTE) technology that boosts average speeds on wireless devices.

That spending has put pressure on profit margins. After the weak fourth quarter results, analysts questioned the company on when investors might expect that pressure to ease.

"We are investing a lot, and I think all those investments are going to end up giving us good profitability in the future," said Chief Executive and Slim's son-in-law Daniel Hajj. But neither he nor Chief Financial Officer Carlos Garcia Moreno discussed when profit margins might improve.

One strategy that might help mitigate this cost is network sharing, which has been embraced by America Movil's biggest rival in Latin America, Telefonica.

That is a smart strategy in a region that needs heavy investment, said Marceli Passoni, senior analyst at Informa Telecoms & Media in Sao Paolo. It is surprising that America Movil is not signing network sharing agreements, she added.

"That's one thing they should consider changing," she said.

At the same time, the value of America Movil's vast networks is under pressure from competition authorities.

In Mexico, which is America Movil's key market, regulators are seeking to cut the fees the company can charge competitors to connect to its network, while allowing rivals to charge America Movil more in a process known as asymmetric regulation.

As it battles regulators to defend its fees, America Movil is facing tougher competition that is forcing it to spend more on subsidizing handsets for internet-enabled phones so it can move more clients to lucrative data packages.

To be sure, some investors note that these are short-term hits to profit margins and although America Movil's share price has been under pressure, it remains an attractive company.

"I don't necessarily think the problem is with the company, I think it's with overly active governments and markets," said Euro Pacific's Hoss. "They're competing just fine, it's just a matter of having to play by so many different rules."

Macquarie's Smithen noted that America Movil leads large telecoms such as China Mobile, Verizon, AT&T and Vodafone in revenue growth, with a 5.2 percent fourth-quarter increase in service revenue year-over-year.

Still, he said America Movil must improve communication with investors. "This company used to have a combination of good growth and returns to shareholders, now the growth has slowed, they're making investments and the stock has underperformed."

When he talks to investors about America Movil, they tell him they like its valuation but they would like to see a dividend or a buyback to provide support for the share price.

"I think they need to re-establish that," he said. "(Then) people will start looking at the longer term prospects and look through some of the regulatory concerns."

(Reporting by Elinor Comlay; Editing by Kieran Murray and Andrew Hay)