Chilean telco's bankruptcy filing raises questions over cut-price model

Chile's WOM is blaming the macro-economic situation for its decision to file for bankruptcy protection in the US, but the move naturally raises questions over its decision to take on its larger rivals with cut-throat pricing.

Mary Lennighan

April 2, 2024

3 Min Read

The telco formerly known as Nextel announced on Monday that it has filed for Chapter 11 with the US bankruptcy court in Delaware and revealed that it has secured a US$200 million debtor-in-possession financing deal from JP Morgan to help fund it going forwards.

The firm is putting a very positive spin on the news, issuing an upbeat press release about its growth prospects and its commercial potential in the long-term. It's as you might expect for a company fighting for its life, or just about. But despite suggestions in the announcement that much of this situation has come about through no fault of its own, the Chapter 11 filing cannot help but shine a light on its business model.

"Our commitment to connect millions of Chileans to the largest 5G network in the country and thereby reduce the digital divide in Chile remains intact, as does our spirit as a company," said WOM chief executive Chris Bannister, in a Spanish language statement.

"We know that our arrival in Chile marked a before and after in the telecommunications market, we dared to offer fair prices for the benefit of millions of people and we will continue working with the same passion that characterizes us," he said.

WOM was formerly known as Nextel Chile, but relaunched under its current brand almost a decade ago following the sale of the company to Novator Partners. Nextel's former owner NII Holdings offloaded a number of Latin American telecoms assets as a result of its own bankruptcy protection restructuring.

As Bannister's comment above suggests, its key selling point has always been offering mobile packages at lower prices than those set by its rivals and to an extent you could argue that this strategy has worked. WOM is currently Chile's third-largest mobile network operator with 5.7 million customers and a market share of just under 22% as of the end of September last year, according to data shared by regulator Subtel. But in January 2015, when the Novator deal closed, the company had just under 209,000 customers, equating to less than 1% of the market.

That growth, impressive as it is, seems to have come at a cost. But WOM itself is focusing squarely on "external factors" to explain its predicament, high interest rates and a difficult credit market coming high up the list, while upcoming bond maturity dates explain the timing of the Chapter 11 filing.

"When interest rates are low, when the money tree throws out free money or when the currency is strong and inflation low EVERYONE can be satisfied its [sic] easy," said Bannister in a LinkedIn post, in English.

"But today's world in Chile is not like that anymore. Todays world has high inflation, low peso, high interest rates," he said, in a post peppered with emoticons. "So hard complex decisions have to be made and those are what the leadership team needs to get right, not for the short term, but for the long term viability and health of the company."

There's no question that the economic situation and more specifically high interest rates have taken their toll on many in the telecoms market. And it is clear that WOM is among those companies. WOM has also spent big on 5G network deployment, but has also had issues meeting rollout targets, something it did not address in its Chapter 11 announcement.

Bannister could well be correct in his assertion that the Chapter 11 filing and the $200 million financing arrangement will enable it not only to survive but also to grow. But the telco would do well to have a close look at its business model too.

About the Author

Mary Lennighan

Mary has been following developments in the telecoms industry for more than 20 years. She is currently a freelance journalist, having stepped down as editor of Total Telecom in late 2017; her career history also includes three years at CIT Publications (now part of Telegeography) and a stint at Reuters. Mary's key area of focus is on the business of telecoms, looking at operator strategy and financial performance, as well as regulatory developments, spectrum allocation and the like. She holds a Bachelor's degree in modern languages and an MA in Italian language and literature.

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