Timing, price and opportunity are right for America Movil to invest in Europe
The diminished room for growth in Latin America and the negative macroeconomic situation and operating environment in Europe mean that times are ripe for America Movil to launch into a European expansion campaign. In Latin America, the cash-rich Mexico-based telecoms group has a history of buying troubled operators at good prices to turn them into profitable companies, by exploiting synergies and developing efficient operations.
While it’s true that other large operators, such as Vodafone or Telefonica, have failed to make similar non-controlling investments work, we believe the tie-up between America Movil and KPN and Telekom Austria will have a significant impact in the Dutch and Austrian markets, but will also produce important benefits for the core Latin American operations.
To date, the expansion strategy in Latin America has been highly successful. On the one hand, the emerging Latin American markets have offered plenty of opportunities for new acquisitions, and on the other, America Movil has been able to grow its share in almost each and every market by taking advantage of low penetration levels and fully exploiting its first mover advantage, often turning market leadership into market dominance. However, sustained by strong economic growth across the continent Latin American telecoms markets are rapidly maturing. Penetration is growing fast, and the nature of competition itself is rapidly evolving from network-based competition to service differentiation. More mature markets also entail stronger regulations, and more regulatory burdens on operators, especially on dominant ones.
There are at least three good reasons why this is the right time for America Movil to look at new mature markets in Europe. One very basic motive for expansion is that there is almost no more room to expand to in Latin America. Having added Costa Rica to its footprint last November, the group is now active in almost every good-sized Latin American market. Although the very few markets not yet reached by Carlos Slim and his ventures, namely Venezuela and Bolivia, do offer good potential for growth, the complicated political environment of these two countries does not make them potential targets, at least for the time being.
The opportunity for service differentiation and innovation, however, is the most important driver for European expansion. The operator’s head-to-head competitor in Latin America, Telefonica, is benefiting from its exposure in Europe in terms of service differentiation, understanding of new customer behaviour patterns, and innovation. For example, Telefonica has leveraged its European experience by debuting a completely new data pricing structure in Colombia, application-based pricing. In the strategic enterprise segment, Telefonica has been able to easily replicate its European cloud computing software-as-a-service (SaaS) offering in Latin America.
If the deal provides scale for procurement both for Telekom Austria and KPN, it will also provide America Movil with further experience in the enterprise and M2M sectors. In 2010, KPN signed an agreement to become the preferred European network operator for M2M platform provider Jasper Wireless. America Movil also has an agreement with Jasper Wireless to provide M2M connectivity across Latin America. Despite the difficult operating environment in the Netherlands, KPN’s business wireless segment is one of the company’s enduring bright spots, having seen revenues rise by 2.9% in 1Q12 and increasing both its customer base and its share of customers using data services. Turning to Germany, the tie-up would give America Movil a foothold into Western Europe’s largest market, as well as an insight into subsidy-free tariff plans through E-Plus’ MeinBase offerings; E-Plus’ extensive wholesale/MVNO activity also fits in with America Movil’s activity in the US, via MVNO Tracfone.
Price is another good reason for America Movil to invest in Europe at this time, especially when compared to the alternative opportunity of investing in the US. The low initial offer to acquire KPN shares, which provoked a hostile reception from top executives at the Dutch incumbent, prove that the Mexico-based operator, in line with its tradition, has come to Europe to make a good deal. Both KPN and Telekom Austria have gone through difficult waters in recent times, making them even better acquisition targets. This does not mean, however, that these are buy-to-sell operations, with America Movil getting a good price now to sell at higher prices in future. These are certainly strategic operations that can give America Movil more tools to compete back home in Latin America.