Grupo Televisa S.A. (TV), the largest cable MSO (multi-service operator) and Media company in the Spanish-speaking world, has put aside its wireless initiatives, at least for the time being. The company, together with its partner NII Holdings Inc. (NIHD), yesterday announced the mutual decision to break their partnership in Mexico. The reason for this break-up is a series of legal battles with competitors.
Even after the government’s decision to award the radio spectrum, the Televisa-Nextel venture is facing more than 70 lawsuits in several Mexican courts, and some of the courts have already granted injunctions to its competitors.
Last February, Televisa signed an agreement with NII Holdings to acquire a 30% stake in the latter’s wireless arm in Mexico, Nextel, for approximately $1.44 billion with an option to further raise its share to 37.5%. On August 17, 2010, the Mexican wireless regulator CoFeTel approved the auction bid submitted by the Televisa-Nextel venture for a 30 MHz nationwide block in the 1.7 GHz band of wireless frequency.
The Competitors’ View
The bid raised several eyebrows because the Televisa-Nextel bid size for 30 MHz spectrum block is for just $14 million. This is miles behind the $400 million bid size quoted by the two largest Mexican wireless operators, America Movil SAB (AMX) and Telefonica S.A. (TEF), for another block of wireless spectrum. Televisa is a giant firm which controls more than 70% share of the Mexican pay-TV and satellite TV market. Iusacell, a small wireless operator in Mexico, argued that it will be unfair to allow a large firm like Televisa to enter the mobile market for such a cheap investment.
The Government View
Despite this low bid, Televisa-Nextel venture remains the only bidder due to the CoFeTel rules that restrict the amount of wireless spectrum that an individual operator can secure. Both American Movil and Telefonica have already reached that level.
The recent move by the Mexican government to conduct auctions for both fiber optic strands and wireless spectrums are aimed to boost competition in the country’s telecom market. The Mexican wireless market is highly monopolized, as America Movil controls more than 70% and Telefonica controls a little over 20%.
Possible Impact on Televisa
Undoubtedly, a foothold in the lucrative Mexican wireless market would have opened up a strong revenue stream for Televisa. However, the company may still offer mobile services and its highly appreciated Spanish contents using the network of other mobile operator. In the meanwhile, Televisa has made a strategic move to invest $1.2 billion in the U.S. cable TV operator Univision, which was once its closest rival in the U.S. Hispanic entertainment market.
Televisa will effectively control 35% of Univision. The U.S. Hispanic TV market is highly lucrative and growing at a remarkable pace. Televisa will have a right to buy an additional 5% stake over the next five years.
We believe Televisa now wants to concentrate on its core entertainment content creation and distribution businesses rather than bearing huge legal expenses for a new venture. Deal with Univision becomes very much handy for Televisa to pursue this goal.
Possible Impact on NII Holdings
Nextel Mexico, the Mexican arm of NII Holdings, has decided to keep the awarded airwave and will go it alone in Mexico to take on much larger rivals. Nextel is currently working on building its nationwide 3G wireless network. Televisa’s opting out will deny the company a valuable chunk of fund for its future expansion. However, the company has around $2 billion of cash that will provide the initial wherewithal to deploy the 3G network.
Improving Latin American markets helped NII Holdings to generate significant net subscriber growth during the second quarter 2010. Besides Mexico, the company has solid presence in Brazil, Argentina, Peru, and Chile.
Our Recommendation
We maintain our long-term Neutral recommendation for both Televisa and NII Holdings. Currently, both the stocks have a short-term Zacks #3 Rank (Hold).
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