Analysts: AT&T's $2.5B Iusacell deal could lead to a bigger Latin American push

AT&T's (NYSE: T) decision to buy No. 3 Mexican wireless carrier Iusacell for $2.5 billion is likely a precursor to a larger move by AT&T into the Latin America market, potentially via a deal for some of América Móvil's assets or a push into Brazil, according to financial analysts. The deal could also possibly make it more likely that América Móvil will look to make a deal with T-Mobile US (NYSE:TMUS), though América Móvil has said it is not in talks with T-Mobile.

Via the deal, AT&T said it will get Iusacell's 8.6 million wireless customers and its 3G GSM/UMTS network that covers roughly 70 percent of Mexicans, which AT&T has pledged to expand to "millions more" Mexicans if the transaction is approved. AT&T expects the transaction to close in the first quarter of 2015.

Macquarie Capital analyst Kevin Smithen wrote in a research note that the AT&T/Iusacell deal is "the first phase in what is likely to be a significant investment in Mexico (and eventually Brazil) over the next several years." Smithen added that he expects AT&T to "move forward with a purchase of certain América Móvil assets wireless and wireline assets in northern Mexico over the coming months."

Recently enacted government rules in Mexico require market leader América Móvil, controlled by billionaire Claros Slim, to offload assets as part of an effort to get its market share in Mexico below 50 percent from around 70 percent.

"We do not believe that T (AT&T) will get a return on this investment on just 8.6m Iusacell subs," Smithen wrote. "We believe T still needs to acquire profitable wireless and wireline subs and infrastructure from AMX (América Móvil) in order to gain necessary scale." Further, Smithen wrote that AT&T will likely sign a deal with whatever company is spun off of América Móvil's tower assets "in order to gain access to the best cell sites across the country."

However, Smithen added that AT&T will likely need to spend billions of dollars on spectrum and network infrastructure to deploy an LTE network for Iusacell.

BTIG analyst Walter Piecyk wrote in a blog post that, while there are no details on what is being sold by América Móvil, most indications are that it would be regional assets that don't include Mexico City. "Iusacell could provide the platform for AT&T to overlay assets purchases from América Móvil, its former partner and board member," he wrote. "This would likely be a much larger transaction than the $2.5 billion used to buy Iusacell, but the assets would be more likely to already be generating free cash flow. Regulators in Mexico would understandably question whether AT&T would represent new competition given their past relationship with América Móvil."

Piecyk also suggested AT&T might try to combine Iusacell with NII Holdings' Mexican assets. In terms of Brazil, Piecyk noted that AT&T already passed on GVT, a fixed operator in Brazil, but that TIM Brasil, a wireless operator, could be another option for AT&T.

"TIM Brasil is already in play in Brazil and is currently in the cross hairs of consolidation from the other three operators in the market lead by Oi, but also likely including Telefónica Brazil and Claro, which is owned by América Móvil," Piecyk noted. "AT&T could emerge as a competitive bidder for TIM Brasil, which has less than a turn of debt leverage and generates free cash flow. Regulators would clearly prefer an acquisition by AT&T to market consolidation, but the price tag for AT&T would be high at an estimated $19.3 billion enterprise value."

Credit Suisse analyst Joseph Mastrogiovanni wrote that Iusacell should give AT&T an asset that it can leverage with its U.S. customer base. He noted that Leap Wireless' Cricket customer demographics are generally similar to the demographics of customers in Mexico. "This would give AT&T the opportunity to provide the best roaming and international calling rates between the U.S. and Mexico," he wrote in a research note. "We see this as a potential catalyst for subscribers in both regions to move to AT&T."

Additionally, Mastrogiovanni thinks the Iusacell deal "could allow AT&T to seek out a lower price should América Móvil assets hit the market. AT&T will be viewed as a stronger competitor than Iusacell. This could scare away potential bidders for AMX assets or, at least, cause them to reevaluate valuation."

Meanwhile, New Street Research analyst Jonathan Chaplin wrote that the Iusacell deal on its own would be a "modest negative" for Sprint (NYSE: S) and T-Mobile, "who we think have a disproportionate share of cross-border subs."

"In addition, this deal cements AT&T's move into Mexico, which we think makes it more likely that América Móvil will acquire some or all of TMUS," Chaplin added. He wrote that an América Móvil acquisition of T-Mobile would be "very positive" for T-Mobile, modestly positive for Verizon (NYSE: VZ) and negative for Sprint.

For more:
​- see this BTIG blog post (reg. req.)

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