Report: Axtel eying Alestra purchase

Tuesday, June 12, 2007

Mexican fixed line telco Axtel is likely eyeing fixed line operator Alestra as its next acquisition target, according to a report from the Mexican investment division of Spanish bank Santander.

Axtel acquired competitor Avantel at the end of 2006 for US$500mn in what is seen by analysts as a consolidation drive to establish Axtel as the firm number two fixed line operator in Mexico behind Telmex (NYSE: TMX).

Based on the synergies generated through the Avantel acquisition and Axtel's future growth possibilities, Santander increased its target share price to 65.50 pesos from 44 pesos.

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Santander also increased its two-year cost savings estimate to US$60mn from US$40mn as a result of synergies from the Avantel acquisition.

However, Axtel still faces several key risks, mainly due to its decision to use WiMax technology and the investment in acquiring new spectrum to perform a full rollout.

The company announced at the beginning of 2006 it would be rolling out WiMax, although a deployment has yet to happen.

Many industry analysts and supporters of the competing 3G mobile technology have said the use of WiMax on a mass scale is still years away and it still faces many compatibility obstacles since there are several different standards in use.

Additionally, telecoms regulator Cofetel, which has yet to announce an auction for WiMax spectrum, is still holding up widespread rollouts of the technology. Santander estimates that spectrum could be costly.

Santander cautioned that Axtel's expansion into new Mexican cities could also impact profitability in the immediate term.

The bank expects Telmex to launch an aggressive campaign to compete with Axtel.