Europe’s telecoms should continue to fear the billionaire fist of Carlos Slim

October 30, 2013
October 30, 2013

América Móvil, Carlos Slim’s telecommunications company, reported lower than expected profits on Friday amid growing speculation about its investment strategy for Europe. Two weeks ago it pulled out of an acquisition of KPN that would have positioned the giant to expand in Europe.

Some observers have suggested the move signals Slim’s dying interest in Europe and his shifting focus toward Brazil. But it seems Slim is not finished with KPN and Europe just yet.

Daniel Hajj, América Móvil’s chief executive, said the company “is still open to any good investment in Europe or Latin America,” and that the “KPN problems would not be repeated in the future.”

By “problems,” he means the independent foundation, which protects Dutch companies “hostile” takeovers according to Dutch law, that came in between América Móvil’s KPN bid.

América Móvil’s focus on European investments comes from constraints in its home market, Mexico, where average revenue per user dropped by 6%, following weakening economic conditions and more competition. But the entry into the European telecoms market will remain difficult given European governments’ incentives to block takeover bids for national pride reasons. 

“European telecoms companies, especially non-EU players, have a desire to retain control of the national broadband infrastructure. They are concerned about national security and straightforward protectionism,” says Emeka Obiodu, telecoms analyst at Ovum.  “It is not impossible for outsiders to acquire these assets, but they must be prepared to pay over the odds.”

Thus, Slim’s desire to break into Europe’s telecom market doesn’t make a lot of sense, especially given the industry’s bleak mid-term prognosis. Mobile services revenue in Europe is forecasted to decline by 1% between 2012 and 2018, Ovum research suggests.

But the company has the financial firepower to hunt for telecoms assets, especially in Europe. América Móvil’s cash balance was $3.5 billion at the end of 2012.

Europe remains attractive since América Móvil is looking to diversify away from the Americas and wants to take advantage of the fact that telecoms are currently being valued low. Telekom Austria and Telefonica SA’s Czech division could serve as a stepping stone for América Móvil’s expansion in Europe.

“Despite Europe’s slowing macroeconomic state, its telecom markets are mature and offer a good return,” says Carlos de Legarreta, analyst at Corporate GBM SAB. He agreed that increasing its stake—currently 23.7%—in Telekom Austria would be a “natural option.” It’s possible that a takeover of Telekom Austria could follow a similar path as KPN.

Orange, the French telecom firm, is discussing European consolidation plans with Slim at the moment, French paper Le Journal Du Dimanche (link in French), without discussing concrete takeover plans.

América Móvil said last week it would not continue with a planned offer for KPN (pdf). But Robin Bierenstock, senior analyst at Bernstein, said a retreat from a €7.2 billion ($9.9 billion) bid for KPN seems more a tactical move than a permanent one. She also said that América Móvil “must clearly believe KPN is worth more than its current share price implies.”

Sam McHugh, senior research associate at Bernstein, said that although European stocks are undervalued at the moment and will be for the foreseeable future, Slim is eyeing a eventual turnaround in Europe which could create value in the long run.

So despite the regulatory hurdles, the European’s undervaluation, and Slim’s botched bid for KPN, the standstill will likely just be temporary. And Slim could soon get the winning hand in the battle for consolidation on Europe’s telecoms market again. He’s certainly not used to losing.

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