AT&T May Follow Telefonica in LatAm

Now that Telefonica de Espana has publicly announced a decision to take full ownership of its Latin American subsidiaries and to realign all of its holdings in one global organization, the race is on to see which foreign participant in the region will be next to execute a similar consolidation.

"These [foreign telecoms] are big boys that always go with the same strategy," said Ike Michaels, managing director at The Weston Group. "[They] don't want their local companies competing with Telefonica of Spain. It's too much of a mismatch."

AT&T Corp., in particular, is expected to follow in Telefonica's footsteps, and the firm was rumored to be in talks with its Mexican affiliate, Alestra, last week, regarding a possible merger with AT&T's other subsidiaries in Latin America.

Indeed, AT&T has already begun the consolidation process by announcing its intention to merge Brazilian telephone company, Netstream with Firstcom, a digital service provider with operations in Chile, Peru and Colombia. The two AT&T subsidiaries will be part of a new venture called AT&T Latin America, which will be 60% owned by the U.S. parent company.

But in order to match the steps taken by Telefonica, AT&T would have to take full ownership of the new concern while also expanding its participation in Alestra - currently at 49% - and in Colombian cellular service provider Celumovil, in which it currently holds a 12% stake.

The advantages of a full-scale consolidation are manifold for the AT&T subsidiaries, said Marc Heimowitz, senior analyst at Miami-based Standard Americas Asset Management. By being drawn into one global organization, AT&T's holdings would not only enjoy more efficient management, they would also be able to borrow money more cheaply on international markets.

"Granted, the participation from a multinational corporation - here AT&T - you get to the point at some level where the bond should really trade off of the parent company's debt profile rather than [off of] the sovereign curve. That's probably happened with Telefonica," said Chris Taylor, Latin American telecom analyst at ING Barings. "But when AT&T will adopt such a strategy remains to be seen, and it could come later rather than sooner... If you asked me will it happen over the next month?' I'd say there's a 90% chance [it won't], but over the next two years, there's a 70% to 80% chance it will in some form."

One of the biggest obstacles is the Mexican government's rule that foreign investors cannot hold more than 49% of a local company, he said. While AT&T likely will be able to circumvent this rule, it won't happen tomorrow, he said.

But the precedent set by Telefonica in Brazil and Argentina, which also have laws restricting foreign investment, could put additional pressure on the Mexican authorities, Michaels said, and Alestra might be up for grabs very shortly.