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New Mexican Regulations are Credit Negative for American Movil

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The decision by Mexico's regulator to declare that America Movil is dominant in the market last week is credit negative for the company, according to Moody's, because they alone will face stricter regulatory oversight that will pressure revenues and operating margins, although they will remain dominant players for years.

The regulations could be implemented within a few weeks, pending legislative approval of secondary laws, but it will be years before they take full effect. The ultimate impact will also depend on details like the prices they will be able to charge competitors for access to their networks.

The rules from Instituto Federal de Telecomunicaciones (IFT) would require America Movil to open its fixed-line and mobile networks to competitors, although this might only be required in areas where the company is the sole operator, and the prices it can charge would be negotiated among the operators. The company would have to lower interconnection rates that it charges other operators for access to its network. The regulator is also banning nationwide roaming charges, which could weigh on the company's revenues.

The proposal is credit negative for America Movil, which generates about a third of its revenue and nearly half of its EBITDA in Mexico. As it becomes subject to asymmetrical pricing and has to share its nationwide network with operators such as Axtel, Maxcom Telecomunicaciones and Televisa, it will lose some of its competitive advantage.

Consequently, Moody's expects an eventual erosion of the EBITDA margin from its Mexican operations. On the other hand, America Movil may finally enter the faster- growing pay-TV market, although this could initially require significant capital outlays. 

The new laws are credit positive for the smaller operators because they will benefit from lower interconnection rates and access to the incumbents' networks, providing additional cash that they can use for expansion.

IFT was created last summer as part of the reform of Mexico's telecom market. The reform granted IFT more powers than the previous telecom regulator had, including antitrust authority. The telecommunications reform is among a wave of measures introduced by Mexican President Enrique Pena Nieto that have included overhauls of education and the energy sector.

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Tags: america movil  Mexico