AT&T's Mexico deal a cheap foothold outside saturated U.S. market

By Reuters

Nov 11, 2014 07:09 PM EST

AT&T's $1.7 billion agreement to buy Iusacell, Mexico's No. 3 cellular operator, puts it in the unfamiliar position of market underdog, owning an asset that may require billions in investment to catch up to the market's two larger players.

But analysts and investors say the deal could be a cheap way to get a foothold in Latin America's second-largest economy and learn the market's contours before plotting more ambitious acquisitions.

To be sure, extending AT&T's high-speed service across the border will require significant investment in Iusacell's patchy network, marketing and new retail stores.

That growth will put AT&T in direct competition with former ally Carlos Slim's America Movil, whose shares have fallen some 3 percent since news of the deal.

The acquisition comes on the eve of two back-to-back auctions for airwaves in the United States and follows AT&T's $48.5 billion bid for satellite operator DirecTV earlier this year.

"The motive here is to continue to look for new growth opportunities. You have a very mature market in the U.S., and it is apparent that they are looking to shift south," said Angelo Zino, analyst at S&P Capital IQ.

Mexico has welcomed AT&T with open arms.

"The announcement ... confirms the confidence of foreign investors to invest in the country, a direct result of the reforms adopted by the current administration," Mexico's telecommunications and transport ministry (SCT) said.

President Enrique Pena Nieto has spearheaded an effort to shake up the telecom sector, which is dominated by America Movil.

In response to the new rules, America Movil has said it will spin off assets and reduce its market share to below the required 50 percent threshold, implying the sale of at least 19 million subscribers.

Those assets are up for grabs and AT&T is a prime contender.

But AT&T has other options. Smaller players like Nextel, owned by bankrupt NII Holdings, has 2.8 million subscribers, and analysts say it could be a smart next step for AT&T.

The company is also likely to leverage its stake in satellite operator Sky, which has more than 6 million subscribers in Mexico, to bundle television and wireless offerings.

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