Consolidation Grips Mexico's Cable Industry

Mexico City-Four of Mexico's top cable operators are leading the aggressive purchase of systems nationwide amid an atmosphere of intense industry consolidation.

The acquisition-hungry MSOs already have sizable cable operations. But Mexico's more stable economy and the arrival of new broadband services are spurring the consolidation trend, according to industry executives.

"Mexico's exciting right now. There's been organic growth on the basic-cable side, and we've seen a very positive reaction to our high-speed Internet services there," said Paul Sigmund, vice president of RCN Corp. RCN's international unit owns a stake in Guadalajara-based MSO Megacable S.A.

Megacable was one of the first cable operators in Mexico to participate in the much-talked-about consolidation process when it purchased a system last year in the central city of Puebla.

Since then, though, the buying spree has gathered momentum, spurred by foreign investors that are eager to participate in the country's broadband bonanza.

"Local cable operators don't have the financial wherewithal to upgrade their systems, which is why they are looking to [foreign players] for capitalization," said Sean Thorpe, managing director of Los Angeles-based Mandeville Partners LLC.

Mandeville is one of four foreign firms comprising Olmeca Cable Investments S.A., a minority investor in Mexican MSO Grupo Telecab S.A. Another overseas shareholder in Telecab is Citigroup Inc.'s Citicorp Venture Capital.

Aside from Telecab and Megacable, another leading cable consolidator is Telecable S.A., which is backed by United-GlobalCom Inc.

Only one of the country's four top operators-Cablevisión S.A.-is without a foreign financier. But that's not to say that the company is lacking weighty backers. Its two shareholders are Mexican media giant Grupo Televisa S.A. and the country's top telco, Teléfonos de México S.A. (Telmex).

Cablevisión executives were not available to comment on their previously stated plans to acquire new cable assets. However, a planned initial public offering of stock is widely expected to provide the purse for any such buys.

The quality of Mexican systems up for grabs varies considerably, ranging from very modest mom-and-pop-run 330-megahertz systems to some 750-MHz systems that offer 60-channel lineups and premium services.

Consequently, valuations vary widely. Quotes from industry players ranged from $550 to $2,500 per subscriber, although several said a typical system hovers around the $1,000-per-subscriber mark.

Telecab is proving to be the most aggressive buyer in the market right now, according to one executive at a rival MSO. "We've heard that Telecab has been mass-mailing [letters to] cable systems around the country, soliciting sales," the executive said.

And it's not as if the company is hiding its ambitions. "We have several [deals] pending regulatory approval, and five in negotiation," Thorpe said.

These Telecab pacts do not include the deal closed last month to acquire a 28,000-subscriber system in Mexico's colonial city of Mérida, located on the Yucatan Peninsula.

The company-Cable y Comunicaciónes de México S.A.-was acquired for an undisclosed price directly by a Mandeville company, and not through Telecab. But Thorpe said it will eventually be brought under the umbrella of Telecab, better known by its brand name, Cablemás.

Mandeville-which invested in Telecab in October-is well known in the Latin American cable industry. In 1996, it founded an MSO in Argentina brandishing the Mandeville name, which grew rapidly into a 450,000-subscriber-strong system. It was eventually sold off to a larger cable concern, Argentine MSO CableVisión, for $1,300 per subscriber according to Thorpe.

Mandeville currently invests in a leading Venezuelan MSO, Intercable. In addition to ambitious expansion plans in Mexico, it has been actively eyeing investments elsewhere in the region.

Back in Mexico, macroeconomic conditions have improved dramatically since the disastrous 1994 peso devaluation, helping to fuel optimism within an industry that's also being driven forward by the development of broadband services.

Thorpe strongly attributed the current acquisition fever to "the potential of [broadband] services, the ability to offer data services, like the Internet. Digital cable is also coming down the line, and at some point, telephony will become viable in Mexico."

But while there may be no legal obstacles to cable companies offering telephony services, there's a worry among MSOs that Telmex's allegedly protected position in this market makes it a tough one to enter.

That's certainly the view of Jim Clarke, UnitedGlobalCom's vice president of regional operations, Latin America/Asia Pacific. "It's difficult to model a telephony business with the dominance that Telmex demonstrates," Clarke said.

UnitedGlobalCom would only contemplate entering that market with "a good regulatory environment and a viable interconnectivity agreement" with Telmex, he added, referring to the price Telmex charges for connecting third-party telephony providers to its network-one of the most contentious issues raised by Telmex's competitors to date.

However, that issue has not damped UnitedGlobalCom's desire to pursue acquisitions through Telecable, which is majority-controlled by the Kahn family.

In line with Mexican law prohibiting foreigners from taking majority stakes in domestic companies, UnitedGlobalCom owns 49 percent of Telecab. However, last year, the Denver-based company increased its economic stake in the MSO beyond 49 percent.

This would provide funds not only to extend its high-speed Internet service-known as chello broadband-to Mexico as part of a Latino-wide rollout, but it also provides cash for Telecable to purchase cable systems in its main concession areas of Cuernavaca, Acapulco and Oaxaca, which currently boast 60,000 subscribers combined.

Extending the boundaries of those cities alone would pull Telecable's subscriber base up to 110,000, Clarke said, adding that the company is also interested in applying to the Mexican government for cable licenses outside of its existing territories.

But it might not all be smooth sailing ahead for the eager-beaver consolidators of Mexican cable.

The recent hiccups of world financial markets have been felt here, albeit to a lesser degree. It is also an election year, and for the first time in recent history, there is a possibility that the long-standing Institutional Revolutionary Party-which has ruled for more than 70 years-will be ousted.

In the meantime, however, cable acquisitions continue.