Slim’s telecom tie-up deters funds

By Noel Randewich – Analysis

MEXICO CITY (BestGrowthStock) – Carlos Slim’s plan to merge his telecom assets has scared away some of the world’s savviest investors from the tycoon’s flagship America Movil (AMXL.MX: ) but has attracted attention to his fixed-line operator Telmex Internacional.

After Slim unveiled his plans in January, funds run by leading investors including Julian Robertson, Lee Ainslie and Stanley Druckenmiller liquidated stakes in America Movil during the first quarter, according to recent regulatory filings.

That made American Movil one of the least favored stocks among 30 of the largest equity-oriented hedge funds, according to data compiled by Thomson Reuters. The 30 include Robertson’s Tiger Management, Ainslie’s Maverick Capital and Druckenmiller’s Duquesne Capital.

One of the 30, Eric Mindich’s Eton Park Capital, bought Slim’s Telmex Internacional (TELINTL.MX: ) (TII.N: ), which offers fixed-line and Internet services in much of South America, to take advantage of the terms of Slim’s offer.

America Movil is offering investors their choice of 11.66 pesos in cash or 0.373 shares of America Movil for each share of Telmex Internacional in a deal meant to create savings for Slim’s empire and address growing competition.

Since the offer gives owners of Telmex Internacional a guaranteed price floor and also exposure to America Movil, investors favored the stock at the expense of America Movil.

“You have a put option at 11.66 pesos and a call option on America Movil’s stock,” said Santander analyst Gregorio Tomassi. “That’s still weighing on America Movil’s stock in the market.”

As part of the planned tie-up, America Movil will also acquire control of Telmex (TELMEXL.MX: ), Mexico’s dominant local telephone operator, which is also controlled by Slim, who is ranked the world’s richest man by Forbes magazine.

Since the deal was unveiled, America Movil’s stock has fallen almost 4 percent, and analysts are now increasingly recommending the company.

“America Movil should trade at a premium to its international peers for operational and financial reasons but also because it is run by Slim, one of the world’s most successful businessmen,” said Itau Securities analyst Martin Lara.

Telmex Internacional traded on Thursday at 11.60 pesos, only 6 centavos below Slim’s cash offer, which expires on June 10. America Movil traded at 30.65 pesos, up 0.66 percent.

MIDAS TOUCH

The cigar-smoking Slim and his partners acquired creaking state telephone company Telmex in 1990 for $1.7 billion. Famous for his Midas touch, Slim remade Telmex into a cash cow and went on to spin off America Movil and Telmex Internacional.

Now, as regional competition in telecommunications heats up, Slim wants to re-integrate his telecom empire to create a provider with fixed-line telephone, mobile and Internet services across Latin America to better challenge arch-rival Telefonica (TEF.MC: ).

Once Slim’s companies are combined, America Movil will have clients with a total of 250 million connections, making it one of the world’s largest telecom operators and putting it ahead of Telefonica’s 172 million fixed-line, wireless, Internet and television connections across Latin America.

Investment costs should be lower as the companies join their networks. America Movil, with operations in Mexico, Brazil, Chile, the United States and elsewhere in the region, has refused to say how much money might be saved overall.

The company has set aside 9.8 billion shares in its treasury, worth about $23 billion, to pay for the transactions, according to a regulatory filing.

Lara suggests buying America Movil and selling Telmex, which in recent years has lost clients to cellphone operators and small cable companies.

With 80 percent market share, Telmex remains by far Mexico’s largest fixed-line telephone and Internet operator, although it is no longer the crown jewel of Slim’s empire after freezing prices for a decade.

Tomassi raised his recommendation on America Movil to “buy” from “hold” this month following the stock’s sell-off.

“It’s now less expensive than before in relation to its global peers,” he said. He expects earnings before interest, taxes, depreciation and amortization to grow about 7 percent this year.

On May 11, America Movil formally launched its offer for Carso Global Telecom (TELECOMA1.MX: ), a holding company where Slim houses his controlling stakes in Telmex Internacional and Telmex. On the same day, America Movil also launched its offer for all shares of Telmex Internacional outside of Carso Global Telecom.

Stock Investing

(Reporting by Noel Randewich; editing by John Wallace)

Slim’s telecom tie-up deters funds