Last updated: March 12, 2013 9:16 pm

Latin America: Mexican stand-off

Enrique Peña Nieto is challenging the tycoons who dominate the corporate landscape
©Corbis, Bloomberg

The state versus Slim: President Enrique Peña Nieto, left, has Carlos Slim in his sights

Twenty five years ago, as a dynamic and reformist government took power in Mexico, a youthful Carlos Slim, clean-shaven and with a full head of dark hair, sensed an opportunity.

The government’s sweeping privatisation programme handed the shrewd dealmaker of Lebanese origin the chance to snap up Telmex, the state telecoms monopoly, for $1.75bn. The purchase catapulted Mr Slim into the leagues of the mega-rich and paved the way towards his current position as the world’s richest man with an estimated fortune of $73bn.

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Today, after years of frustrated attempts to modernise Latin America’s second-largest economy, Mexico finally has another reformist government. But this time, it is showing Mr Slim a very different face: on Monday night, President Enrique Peña Nieto announced a monopoly-busting proposal that seeks to break open Mexico’s $30bn-a-year telecommunications market to greater competition, and bring Mr Slim’s business, and others like it, back down to earth.

Flanked by opposition leaders, Mr Peña Nieto described the proposed reform as “the opening of a new era of development in Mexico . . .[that] represents challenges for the companies in the sector but also opens up new opportunities”.

Square in his sights are three of Mexico’s biggest companies and three of its richest men. The first is Mr Slim, whose América Móvil controls 70 per cent of Mexico’s 100m mobile phone subscribers and landlines.

The second is Emilio Azcárraga, with a $2.5bn fortune according to Forbes, who controls Televisa, Mexico’s largest broadcaster. The network has a 70 per cent share of free-to-air broadcasting and produces many of the country’s most popular television shows, from soap operas to news. The third target is Ricardo Salinas Pliego, another billionaire who controls Mexico’s TV Azteca, which has a 30 per cent market share.

The offensive from Mr Peña Nieto, who took office only in December, comes as part of a broader push to introduce greater competition into the domestic economy – moves that could ultimately even shake up the long sacrosanct oil industry.

Mr Slim has successfully stymied attempts to sanction him in the past but he now faces a president supported by the unusual degree of political consensus he has forged in a country plagued by factionalism.

So what does Mr Peña Nieto’s proposal do? First, it creates a strong industry regulator to curb dominant companies that have more than 50 per cent of the market, and to open up space for new entrants.

Deregulation: A monopoly that has cost the economy dearly

Mexico’s overhaul of its telecoms market looks set to follow the deregulation of European markets more than a decade ago, which diminished the clout of former state-backed telecom monoliths such as BT, France Télécom and Deutsche Telekom. The European companies still complain about declining prices, revenues and market shares after regulators forced their networks to open up to competition. Whether Telmex, also a privatised former state company, is similarly affected depends on how the regulator sets out pricing. Equally important will be how aggressive foreign entrants can be given the need for initial capital expenditure, even with fewer constraints on ownership.

To continue reading ‘A monopoly that has cost Mexico dearly’, click here

The regulator can apply sanctions, ranging from so-called asymmetric regulation on pricing, to fines and even forced asset sales. The proposal also envisages requiring existing television networks to offer their free-to-air programming at zero cost to cable operators.

Importantly, it seeks to encourage new entrants by creating two new free-to-air television channels that neither Televisa nor TV Azteca can compete for. The bill widens the field of bidders by raising limits on foreign ownership of broadcasting companies to 49 per cent – and, in the case of telecoms, to 100 per cent.

Surprisingly, perhaps, Mr Slim’s América Móvil and Mr Azcárraga’s Televisa reacted positively. In a statement, Televisa said: “We welcome the constitutional initiative. It promotes competition,” adding that the company “supports the need for more modern telecommunications and broadcasting industries in Mexico”.

América Móvil said the proposal was “a new phase in the development of telecommunications and broadcasting in Mexico”, welcoming the lifting of foreign ownership limits.

Such tame responses from two of Mexico’s most powerful companies would have been unthinkable only a year ago. For decades, Mexico’s corporate sector has been dominated by just one or two companies in many sectors. The resulting duopolies have produced high barriers to entry for potential newcomers.

They also kept prices high. According to Felipe Calderón, Mr Peña Nieto’s predecessor, Mexico’s corporate landscape means families typically pay about 40 per cent more for goods and services than they should.

The companies’ size and influence also made them appear “untouchable”. In an interview with the Financial Times in 2007, Luis Téllez, then telecoms minister, accused the regulator of playing more to the interests of corporate giants than consumers. “The regulators have been captured by the regulatees,” he said. “They do not always respond to the public interest. I’m having a huge problem.”

But not, it seems, any more. Analysts say that Mr Peña Nieto, a 46-year-old former state governor, could never have pulled off this week’s proposed shake-up had it not been for a two-pronged power-building exercise.

The first part of the plan consisted of killing the idea that Mexico’s main political parties are so divided that reform is impossible.

A series of cross-party appointments into his cabinet created the first bridges between Mr Peña Nieto’s centrist Institutional Revolutionary party (PRI) and the opposition. Then came the Pact for Mexico, a manifesto laying out a reform timetable on everything from social security to energy, signed by all the party leaders.

“After 12 years of gridlock, you now have a way of negotiating between the parties that enables legislative progress,” says Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center in Washington. “It has become the central negotiating mechanism for Mexican politics today.”

One of the pact’s first initiatives was to speed passage of a bill that makes it impossible for companies holding public concessions – such as América Móvil’s – to delay regulations and fines by using court injunctions. The bill, which still requires approval in the senate, strips companies of the main weapon they have used to deflect government sanctions.

The second prong of Mr Peña Nieto’s strategy has been to consolidate his political standing. He achieved a huge political victory last month after his administration arrested Elba Esther Gordillo, head of the powerful teachers’ union, on charges of embezzlement. The arrest of such a powerful figure and a symbol for many of a corruption-plagued Mexico sent a clear signal that Mr Peña Nieto was serious about reform and tough enough to brush aside vested interests. Those include Televisa, which had a fruitful relationship with the president when he was a state governor.

All this paved the way for the telecoms reform, which breaks open the sector in part by pitting its strongest companies against each other.

For Televisa and TV Azteca, having to offer their free-to-air programming to cable companies for free represents a monthly loss of $1.96 per subscriber. JPMorgan estimates that will cost Televisa some 3bn pesos, or 3.4 per cent of annual consolidated revenues.

Against that cost, however, the reform opens the way for Iusacell, Televisa’s telecoms company, which it jointly owns with TV Azteca, to expand its current 5 per cent share of the mobile sector. As that market has annual revenues about four times the size of Televisa’s broadcasting operation, any gains in mobile could offset losses from broadcasting. Televisa stock shed 1 per cent on Tuesday after a similar fall on Monday.

The proposal’s effects are clearer- cut for Mr Slim’s América Móvil. The company gets about half its $60bn of annual revenues from Mexico. That is a statement about what a gold mine Mexico remains for this stalwart monopolist, even though interconnection rates have been slashed by more than 60 per cent in the past two years.

But earning half of its revenues overseas also shows how successful it has been at capturing new markets in the Americas. It has, for instance, a quarter of Brazil’s mobile market and two-thirds of Colombia’s.

The size of América Móvil’s overseas operations should, therefore, limit the effect of the proposal. Furthermore, the opening of the television market will allow Mr Slim to intrude on his rival’s broadcasting turf by offering subscribers “triple play” packages that offer broadband, phone and, now, television services.

As the tycoon told the FT last month, “the price of voice over phone services has been falling ever since Thomas Edison made the first call . . . Content is very important. We want to offer our customers whatever they want to watch, when they want to watch it, and at a price they like.”

Picking through what this means for América Móvil as a stock, then, is well-nigh impossible – in part because the measures are not yet decided. Among the open questions that remain are: the nature of the asymmetric regulation that could be applied to América Móvil; and the conditions that might prompt the regulators to force it to divest assets.

All this is meant to be spelt out over the next six months. Still, the market’s first judgment is negative. América Móvil stock closed down 3 per cent on the news, slicing more than $700m off Mr Slim’s wealth, according to Bloomberg estimates. The stock lost another 1 per cent on Tuesday and Credit Suisse cut the stock to “neutral” from “outperform”.

By contrast, Mr Peña Nieto’s stock is soaring. In the first 100 days of his presidency, he has taken on the rich and powerful in ways that seemed impossible less than a year ago.

His next big job – indeed, the biggest of them all – is to bring off the opening up of Pemex, Mexico’s state oil monopoly. Given the immensity of that challenge, Mr Peña Nieto is going to need all the political prowess that he can summon.

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