Insight: Collusion probe latest Mexico woe for Telefonica

Thu Apr 26, 2012 9:11am EDT
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By Patrick Rucker and Elinor Comlay

MEXICO CITY (Reuters) - When Telefonica arrived in Mexico about a decade ago, the Spanish phone company framed the expansion as a social crusade as much as a business: It would bring wireless service to the country's poor while taking on Carlos Slim, the tycoon who has dominated Mexico's telephone industry for a generation.

Telefonica says it has achieved part of its goal. Cellphone use has quadrupled since the company arrived, it says, and it has helped put handsets into the hands of rural peasants and street vendors while shrinking the cost of service.

But from a business perspective, Telefonica has spent a fortune in Mexico while remaining a low-end brand. And in struggling to reach solid ground, it has run into regulatory trouble.

The company's $13 billion investment in Movistar, the Mexico unit, has won it 22 percent of mobile phone lines in the country, yet it gets only 12 percent of what Mexicans spend on such service. High-end rival Nextel (NIHD.O: Quote) has the same share of mobile spending with only 4 percent of phone lines.

Telefonica does not disclose its net profit for Mexico, and a spokeswoman declined to provide figures. What is clear, analysts say, is that the company performs poorly, given what it spends in Latin America's second-biggest economy.

In 2010, the year Telefonica invested in its 3G network, the Mexico unit reported operating income of about a third of the roughly $2.1 billion invested.

Last year was not much better. Operating income sank 8 percent, and the company curtailed investment.

While investors shake their heads, regulators are giving Telefonica a closer look.   Continued...

Mexican telecommunications and retail mogul Carlos Slim Helu (L) meets Macedonian Prime Minister Nikola Gruevski during his three-day visit to Macedonia in Skopje March 31, 2012. REUTERS/Ognen Teofilovski