América Móvil strengthens its position in Brazil with Nextel acquisition

The Latin American mobile heavyweight América Móvil has agreed to acquire its competitor Nextel in the Brazilian market for $905 million.

Shortly after the deal was announced by América Móvil on Monday, and the board of NII Holdings, which owns 70% of Nextel, announced that it would propose to the shareholders to accept the offer. The other 30% of Nextel is owned by AI Brazil Holdings, the local operation of Access Industries, an American private company whose portfolio includes natural resources, telecoms, internet services, as well as Warner Music, among other media interests.

The nature of the deal, “cash free / debt free”, will let NII and AI Brazil keep all the cash while América Móvil will not assume Nextel’s debts. Although the total transaction value is less than 1.5 times of Nextel’s annual revenues in 2018 ($621 million), it represents almost four times NII’s market capitalisation on its latest trading day on NASDAQ ($229 million), indicating the buyer’s relatively strong confidence in the business prospect.

Brazil is a highly competitive market. According to research by Ovum, by Q4 2018, Vivo (owned by Telefónica) led with one third of the total mobile market, while TIM and Claro (América Móvil’s existing operation in Brazil) were vying for the second place, each serving about a quarter of the total mobile subscribers. Nextel had slightly over 1% market share. The rest of the market is served by Oi (a JV between Altice Portugal, formerly Portugal Telecom, and Telemar, Brazil’s largest integrated telecom operator).

After the acquisition, América Móvil plans to combine Nextel with Claro to “consolidate its position as one of the leading telecommunication service providers in Brazil, strengthening itsmobile network capacity, spectrum portfolio, subscriber base, coverage and quality, particularly in the cities of São Paulo and Rio de Janeiro, the main markets in Brazil.”

For NII, selling Nextel in Brazil represents the end of an era. The company once operated mobile services in multiple North and Latin American markets, including the eponymous professional radio service in the US, which was later acquired by Sprint. Brazil is its last operation, where it has been struggling in a classic four-operator market. Not only has it not been able to break into the leader group, but also seen business declining fast. The revenues in 2018 were a 29% decline from 2017 ($871 million), which itself was a 12% decline from 2016 ($985 million).

“The announcement of this transaction marks the culmination of an extensive multi-year process to pursue a strategic path for Nextel Brazil and provides our best opportunity to monetize our remaining operating assets in light of the competitive landscape in Brazil and long-term need to raise significant capital to fund business operations, debt service and capital expenditures necessary to remain competitive in the future,” said Dan Freiman, NII’s CFO. Earlier potential buyers included Telefónica Brasil, Access Industries (NII’s JV partner), though the most concrete case was TIM, which, according to Reuters, approved a non-binding offer in November last year. None of these negotiations has come to fruition.

“Management and our Board of Directors believe the transaction is in the best interest of NII’s stockholders,” Freiman added.

TIM looks to Nextel to boost Brazilian armoury

Telecom Italia is reportedly scouring through bank statements, trying to figure out whether it can purchase Nextel Telecommunicacoes in an effort to boost market share.

The move itself might be considered by some as somewhat of an unusual one. With activist investor Elliott Management pulls the strings of nine board members, the business has seemingly been favouring strategies which would return cash to investors across a shorter period of time. One of these ideas might have been a disposal of assets, making any acquisition rumours slightly out of the ordinary.

According to Bloomberg, TIM is considering the move to absorb the fifth largest Brazilian telco to improve market share and spectrum holding in certain parts of the market. The Brazilian business is the only market of genuine note for TIM outside of Italy, and has been aiding the overall performance for the group, though the emergence of acquisition rumours are slightly unusual. Brazil is a highly competitive market, there are seven telcos of note and hundreds of minor regionalised companies, which does not make it seem like a bet of particular value to the short-termist investor.

CEO Amos Genish and certain executives do have an eye cast on the long-term, and most likely greater, success of Telecom Italia with the TIM2020 strategy, though you cannot argue with the majority. Thanks to some pretty effective rousing and sh*t-stirring, Elliott now has control of the board. It might not want to rock the boat too much when it comes to altering the TIM2020 strategy, losing Genish at this point would not be healthy for anyone involved, though we suspect it might have enough muscle on the board to quell any ambitions for expensive acquisitions.

For a telecommunications company which has its eye on the distant horizon and is concentrating on building value in the business for the greater gains in the long-run, this acquisition makes sense. However, with Elliott Management pulling the strings, strings which do not have much slack, we find it hard to believe rumours are not focused on more short-term profitability.

Why would such a short-termist investor allow the board to entertain an idea which will possible decrease profitability, reduce free cash and continue the trend of absent dividends, which has existed since 2013. This doesn’t quite make sense to us.