Slim pickings for Slim in $6.5 bln Telmex tender

August 2, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Talk about slim pickings. Mexican billionaire Carlos Slim’s $6.5 billion tender offer for Telmex offers little for shareholders in his America Movil to be happy about. The cellphone carrier is buying out the remainder of the country’s shrinking fixed-line carrier at a premium valuation relative to its own. That looks like a bad exchange. Without a solid explanation, it’s easy to see why investors sliced $4 billion off Movil’s value.

As a fixed-line operator, Telmex’s best days lie behind it. Customers are going mobile, disconnecting lines and making fewer calls. Data services are growing, but not fast enough to offset declines elsewhere. Revenue at Telmex peaked in 2007 and has fallen steadily since. By contrast, Movil is growing steadily, even if Latin America isn’t the virgin market it once was. Revenue was up 8 percent last year.

Yet Movil’s offer for the 40 percent in Telmex it doesn’t own comes at an 11 percent premium to where the stock has traded over the past 30 days. That’s equal to about 12 times estimated 2012 earnings. Movil, on the other hand, trades at 11 times.

There are some benefits. Telmex should generate about $2 billion of free cash flow this year. While Movil already consolidates Telmex’s results, full ownership would mean it doesn’t have to cede chunky dividends to outside shareholders. Moreover, since debt is cheap and Movil is paying in cash, the acquisition could slightly lower the company’s cost of capital. Finally, even though the two firms already work together closely, there may be some operational benefits. Redundant managers can be let go and bundles of services may eventually be offered to existing customers.

If synergies don’t appear, it will take many years of the additional cash it is capturing in the transaction to compensate for the billions Movil is shelling out. Indeed, if Telmex keeps losing business — which seems inevitable — Movil may never reap an acceptable return on its investment. Given the nearly $4 billion fall in Movil’s market value on Tuesday, it is clear minority investors would have preferred a dividend. But with Slim running the show, it doesn’t really matter what other investors want.

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