Company Trend Analysis - Axtel Acquisition A Long-Term Bet For Rivals - DEC 2017


BMI View: Acquiring Axtel would be a medium to long- term play for either Telefonica or AT&T, as neither player would be able to incorporate Axtel ' s wireline assets into a converged strategy. If the regulator manages eventually to loosen America Movil ' s grip on the mobile and wireline market, it is more likely to allow full convergence strategies for all players.

Axtel is considering selling its wireline broadband and cable pay-TV operations and, as these assets would significantly enhance a converged services business, we believe rival players would be keen to invest, despite regulatory hurdles.

AT&T is the most likely buyer, as it could leverage Axtel's wireline assets to boost its mobile operations in the country. AT&T already owns satellite pay-TV assets in SKY Mexico, which complement its core mobile business. A rival bid could come from Telefonica-owned Movistar; it runs a mobile-only operation in Mexico and has seen its market share progressively eroded with the arrival of AT&T in 2015. Both AT&T and Movistar have considerable expertise in convergent business models in other markets.

Broadband To Drive Wireline Growth
Mexico Wireline Broadband And Voice Forecasts
f = BMI forecast. Source: Operators, IFT, BMI

Theoretically, both players could use Axtel's wireline assets effectively in a converged strategy. The reality is that Mexico's telecoms market lacks the regulatory support needed to commercialise converged service platforms. Operators can bundle together pay-TV and wireline voice and broadband, but not mobile services. As a result, neither player could reap the full benefits of a fully convergent strategy through Axtel's wireline assets.

Incumbent America Movil, as compelled by the regulator IFT, had to completely separate its mobile ( Telcel) and wireline ( Telmex and Telenor) operations. This functional separation was part of the regulator's efforts to curb America Movil's market dominance. Consequently, the regulator is unlikely to allow the market to move to a full mobile-wireline converged model in the next few years.

After forcing America Movil to separate its business units, allowing other operators to offer fully converged bundles would favour Movistar and AT&T too much, to the point where the competition watchdog COFECE could intervene on grounds of unfair competition. If the IFT's other measures are able to reduce America Movil's market share, it is more likely to allow convergence from all operators at the same time. In the meantime, either if either player buys Axtel, it would have to run it separately until regulations change.

We forecast broadband subscriptions in Mexico to grow from 15.4mn in 2016 to 22.6mn by 2021. Consolidation of wireline and cable players by a large player like Movistar or AT&T would drive efforts to expand wireline infrastructure, posing upside risks to our forecast.