Article on Mexican cell market [Positive Pegaso reference]
worldlyinvestor.com
Cell-ing Out to Competition
March 19, 1999 6:21 AM EST
By Cheryl Peress
Correspondent
Going cellular seems to be the theme of late.
And nowhere is the potential for growth greater
than in the developing countries of the world.
Mexico is one case in point and Grupo
Iusacell (quote, chart, profile), the country's
second largest cellular service provider, is one
company to watch, albeit with trepidation.
Cellular phone subscriptions in Mexico have
grown by 56% over the past four years.
Cellular phone penetration stands at 3.5 cell
phones per 100 inhabitants, which is one-tenth
the cellular penetration of the United States,
according to statistics by Merrill Lynch and
Pyramid Research.
But, huge growth potential may not be enough
to bolster the stock of Iusacell.
The company is burdened by heavy debt, $462
million, and an expected loss of almost $1
billion for 1998. Also, the entrance of some
new competitors into the market has made
analysts doubt that Iusacell will be able to
maintain its number two position for very long.
Other concerns stem from the recent storm
that has rocked Latin American markets.
Still at a Loss
Iusacell specializes in cellular service. The
company is 47% owned by Bell Atlantic
(quote, chart, profile).
The biggest thing Iusacell has going for it is
that its subscribers increased by 89% in 1998,
upping the base to 755,375. That's a pretty
astounding growth rate, but, unfortunately, the
end result still lags behind the one million plus
subscriber base of incumbent telecom
Telmex's (quote, chart, profile) cellular division,
TELCEL.
No matter how Iusacell may stand to benefit
from growth in Mexican cellular penetration,
many investors cannot get around Iusacell's
very weak bottom line. The company has been
operating at a loss since 1992 and Merrill
Lynch analysts don't expect the company to
turn a profit until 2000 at the earliest.
Currently trading at $8.80, the ADR has been
slowly climbing its way up from its September
low of $4. Its performance has certainly been
impeded by the hit Latin American markets
have taken over the past few months.
Although GDP growth is only expected to be a
modest 1.5% this year, Mexico is in much
better shape than its Latin American
neighbors. But, a shaky political situation still
makes analysts and investors wary.
However, since the Mexican market has been
on the upswing this year, Merrill Lynch
analysts are recommending Iusacell out of a
belief that an improved Mexican economy will
translate to increased revenues for Iusacell.
"We continue to like the shares of Iusacell,
believing that the company will benefit from the
relative health of the Mexican economy, an
under-penetrated telecom market, and a
potential improvement in share liquidity,"
Merrill Lynch analysts wrote in a recent report
on the company.
Competition is Coming
Iusacell's management would likely argue that
Iusacell has a distinct advantage over
TELCEL, in spite of the difference in the size
of their respective subscriber bases. Iusacell
owns the cellular licenses for four of Mexico's
nine regions, including the most densely
populated and lucrative Mexico City region.
In emerging markets like Mexico, cellular
growth comes from two markets: the urban
market (Mexico city) and the newly moneyed,
up and coming younger population who often
find it more convenient and less expensive to
use a cell phone over a land line phone.
Another point in Iusacell's favor is the
upcoming implementation of the Calling Party
Pays (CPP) pricing plan for telephone calls.
As the name explains, under CPP, the person
who makes the phone call pays for the phone
call.
Because Telmex has a tight squeeze on most
fixed line telephones in Mexico, and since
most incoming calls to cell phones are placed
from fixed line telephones, Telmex customers
will have reason to complain about increases
in their phone bills, which may put a dent in
Telmex's business.
Although implementation has been pushed
back from March 1 to May 1 and may be
delayed yet again, analysts think that CPP
will have a positive impact on Iusacell's
business, and may have an even better impact
on cellular subscriptions on the whole. In fact,
one analyst has predicted that CPP could
boost cellular subscriptions by one million.
But, unfortunately for Iusacell, there is more
competition on the horizon, namely in the form
of upstart Pesago, who intends to begin
operations in Mexico City as soon as June.
That, on top of the fact that Pesago's contract
service price plans significantly undercut those
of Iusacell and TELCEL, makes Pesago
Iusacell's most direct competitor.
Although Merrill Lynch analysts think that
increased competition in the cellular service
sector may spur growth, they are concerned
that Iusacell may not be able to withstand the
competition.
As analysts at Merrill Lynch wrote, "... things
could get ugly. When Pegaso opens up shop
in Mexico City, things should start to get
interesting."
It also seems unlikely that any cellular
provider will eclipse TELCEL's dominant
position any time soon. But, a fight between
Pesago and Iusacell should pique investor
interest. Until CPP is implemented, and
Iusacell and Pesago make their market shares
explicit, it may be wiser to watch Iusacell than
to buy it.
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