Bell invests in Mexican cellular firm Foothold could bring huge payoff

MEXICO CITY — MEXICO CITY -- Bell Atlantic Corp. announced yesterday that it would spend as much as $1.04 billion for a minority stake in Mexico's second-largest cellular telephone company, Grupo Iusacell.

The deal, in which Bell Atlantic will initially buy a 23 percent share of the privately owned company for $520 million, would put Iusacell in a position to expand aggressively in what has been a booming Mexican market in cellular telephone services.


But both companies were quick to lay out a broader agenda: turning Iusacell, (pronounced yoo-sah-SEL) into a wider-ranging telecommunications company that can begin to challenge Telefonos de Mexico, or Telmex, the monopoly that the government sold off to private investors in December 1990.

By next fall, after Bell Atlantic completes its purchase of a 42 percent share in Iusacell, the partners said, they would begin operating a new network of fixed wireless telephones that would compete with Telmex and its ground lines in providing basic phone service.


In 1996, when the government is to break up Telmex's control over long-distance service, Iusacell hopes to get into that, too.

As for Bell Atlantic, its technology strategy could be the forerunner of a North American, perhaps even a pan-American, wireless telephone network led by the Philadelphia-based regional Bell company, analysts said.

Bell Atlantic, which owns Chesapeake and Potomac Telephone Co. ofMaryland, emphasized that the Mexican venture was part of an increasingly ambitious wireless and advanced-technology program that includes the personal communications services recently authorized in the United States.

"Just because we're in Mexico does not mean we're going to let up on anything else," said Lawrence T. Babbio, chairman and chief executive of Bell Atlantic Enterprises International, the unit responsible for the company's wireless telecommunications in the United States and abroad.

The company said also that it was actively pursuing methods for using cable television networks for two-way communications and standard telephone lines for carrying video programming.

New Zealand deal

Mr. Babbio said he saw Bell Atlantic's Mexico deal as similar in some ways to its $1.2 billion investment in 1990 in New Zealand Telecom, which was being privatized at the time and had a large wireless business.

But unlike that transaction, in which the New Zealand government required a rapid reduction in Bell Atlantic's ownership stake, the American company plans to eventually increase its holdings in the Mexican company, Iusacell, after it issues its first publicly traded shares.


And compared with New Zealand, Mr. Babbio expects much faster economic growth in Mexico, even if Congress does not approve the North American Free Trade Agreement.

Although Mexico's ravenous demand for telephones has made Telmex a favorite stock of international investors, the company's service has remained notoriously poor.

Pay phones rarely seem to work, lines cross frequently, and they can often go down in little more than drizzle. Customers must sometimes wait more than a year to get a new line.

The deregulation of Mexico's phone service does not depend particularly on NAFTA, which is expected to be voted on by the U.S. Congress later this fall.

Potential for growth

But the agreement has focused the attention on an enormous potential for growth. For every 100 people in Mexico, only seven or eight havetelephones, compared with about 85 of every 100 people in Canada and the United States.


"As we say in the business, Mexico is very 'under-phoned,' " said Douglas Clark, the head of Northern Telecom of Canada's subsidiary in Mexico.

Iusacell's president, Guillermo Heredia Cavarga, said in a telephone interview that Iusacell expects to have 1.5 million customers for its new fixed wireless service within three years after it begins to operate.

The new phones would work like a cross between existing cordless telephones and old-style car phones, a service that Iusacell has offered for years.

The new partnership is to go public with an initial offering of about 10 percent of its stock.

Second investment

Mr. Babbio said Bell Atlantic would make its second $520 million investment after Iusacell had bought majority stakes in three other Mexican regional cellular telephone companies.


Those holdings would still only give Iusacell a presence in four of nine regions into which Mexican cellular service is divided. But with the expansion, Iusacell officials said their service would be available in areas where 72 percent of Mexicans live.

Mexico's dominant cellular company, Telcel, is a Telmex subsidiary licensed to operate in all nine regions. According to Mexico's Communications and Transportation Ministry, Telcel has about 60 percent of the market and slightly more than twice the 90,000 subscribers of Iusacell.

In the short term, several analysts said, Iusacell should be able to use Bell Atlantic's money and technology to make a stronger run at Telcel in the cellular market. But none of those analysts believed the deal would make strategic sense for Bell Atlantic simply on that basis.

"Clearly they are making a bet that, by having a stake in Iusacell now, it gives them a chance to have one in a competitive Mexican long-distance company down the road," said Jack B. Grubman, an analyst at Paine Webber Inc. in New York.

But while fixed wireless telephones might be a fast and relatively inexpensive way to begin providing service and to prepare for competition with Telmex as a long-distance carrier, Michael Elling, an analyst at Oppenheimer & Co., noted that the devil could be in the deregulation.

"The key consideration is who controls the telephone numbers," he said. "Can any customer who wants to move over to Iusacell without having to change their phone number? Competition will drive new technology -- that's what Iusacell is saying. But what they can do depends how the government does the deregulation."