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America Movil (AMX) Eyes Oi, Plans to Shift Base to Brazil

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Mexican telecom behemoth America Movil SAB (AMX - Free Report) seems to be focused on shifting its business centre from the Mexican telecommunication market to that in Brazil. According to a recent report, the Mexican telecom company is willing to purchase Oi S.A., the biggest telecommunications company in Brazil and South America, headquartered in Rio de Janeiro. The company’s rationale behind this move is to shift from the region as regulatory measures and intensifying competition in Mexico are weakening its market position and resulting in low profits.

Mexico: Stiff Competition, Strict Laws

America Movil, which has been ruling the Mexican market for quite some time now, witnessed declining figures in its profit margin in Mexico, falling below 40% (to 33%) in the second quarter of 2016 for the third consecutive quarter. Stringent regulatory measures and intensifying competition in Mexico were the primary factors behind the dismal performance. Thus, if the regulatory concerns and competition continue to mount, it could hurt the company’s top and bottom line further. Also, this trend might deal a major blow to America Movil and weaken its market position further. In the second quarter of 2016, EBITDA declined 10.7% year over year to $3,354.1 million. EBITDA margin was 26.1% compared with 31.1% in the year-ago quarter.

The Mexican telecom regulator, the Federal Telecommunications Institute (IFT), on identifying America Movil as the dominant player in the telecom sector, wanted to restrict the maximum hold of the company in the market to 50%. America Movil’s wireline division, Telmex, controled 70% and its wireless division, Telcel, owned 68% of the Mexican market share. As a result, stringent regulatory measures were imposed on the company by IFT. As an add-on, Telmex, the fixed-line telephone subsidiary of America Movil, has decided to gradually lower its rates by about half for calls from land lines to mobile phones by 2018. Ultimately, the pre-tax call rate from landline to mobile phones will come down to MXN 0.342 ($0.0185) per minute in 2018 from the current MXN 0.6763. The decision to reduce fixed-line-to-mobile call rates in a phased manner reflects the company’s compliance with the regulations. 

Meanwhile, U.S. telecom behemoth AT&T Inc.’s (T - Free Report) entry into the Mexican telecom industry with the acquisition of Gurpo Iusacell and Nextel de Mexico was a major setback for America Movil. Further, in order to gain enhanced market traction, AT&T’s huge investments in Mexico over the next three years, plans to provide 4G LTE mobile Internet service to 100 million Mexican customers by the end of 2018 and purchase of satellite-TV operator DIRECTV posed serious competition to America Movil.

America Movil also follows an aggressive promotional strategy to increase penetration in the smartphone market. The company is striving to boost smartphone sales through promotion discounts and subsidized offers. However, these efforts may dent margins and affect profitability in the near term.

Brazilian Market Scenario

Several analysts opined that Oi may be too large to be acquired by any of the companies. However, Oi’s data centers, fiber networks and mobile operations make lucrative buyouts.

On the other hand, America Movil’s Brazilian operation, Claro is being challenged by Vivo, which is owned by Telefonica Brazil SA (VIV - Free Report) . Telefonica Brasil operates as the leading telephone operator in Brazil following the establishment of Vivo as the commercial brand for all services. Strict switching policy has also led to massive customer churn in Peru and Ecuador and is a near-term concern for America Movil.

Zacks Rank and Stocks to Consider

America Movil currently has a Zacks Rank #5 (Strong Sell).A couple of better-ranked telecommunication stocks include NTT DOCOMO, Inc. and Nippon Telegraph and Telephone Corporation , both holding a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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