TV Azteca owners approve Unefon spin-off

Monday, December 22, 2003

Shareholders of Mexican broadcaster TV Azteca (NYSE: TZA) approved Friday plans to spin off its 46.5% stake in mobile operator Unefon and its 50% stake in wireless broadband provider Cosmofrecuencias into a new entity called Unefon Holdings.

Unefon Holdings will become a separate entity 45 days from Friday's meeting and shares in the new company will likely be distributed and start trading on Mexican and United States markets during 2Q04, TV Azteca said.

Markets have welcomed the spin-off from TV Azteca's point of view, as it separates the media broadcaster from its more volatile telecoms assets. But analysts said the future for Unefon itself remains uncertain due to competition from its larger, well funded competitors TelCel and Telefonica Moviles Mexico.

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"Unefon is in a complicated position because it can't compete against [TelCel and Telefonica Moviles Mexico] with the resources, debt and technology it has. It has to focus on a very specific niche and can't steal market share," said Jorge Lagunas, telecoms analyst at local brokerage GF Interacciones.

Unefon has historically gone after low income clients in its coverage area of eight cities, with some of the lowest call rates in Mexico. At the end of September, the company reported 1.8 million subscribers and losses of 186mn pesos (US$16.5mn), a substantial improvement from a 300mn peso loss in the same period last year.

"Unefon has done a good job considering the number of subscribers it has in the limited number of [cities] where it operates," said Manuel Guerena, an analyst at credit rating firm Standard & Poor's. "This industry requires a lot of investment, and even though its balance sheet is a lot better than it was a year ago it's going to have to be very careful because the restructuring of [sister company] Iusacell's debts could open or close doors depending how it turns out."

Unefon and TV Azteca owner Ricardo Salinas also controls the country's fourth largest mobile operator Iusacell. Salinas acquired a 75% stake in Iusacell in July in a US$10mn tender offer. Iusacell has focused primarily on business customers in recent years and reported 1.5 million clients at the end of the third quarter.

According to Guarena, a potential merger of Unefon and Iusacell will depend on the outcome of the restructuring of the latter's US$820mn plus debts.

Even a merged company would still be the tallest dwarf on the block, trailing well behind market leader TelCel, which has over 22 million clients.

The split-off will reduce TV Azteca shareholders' equity by about US$193mn for the book value of Unefon and Cosmofrecuencias, but TV Azteca chief executive Pedro Padilla said it would not affect the six-year plan to distribute US$500mn to shareholders and reduce the company's debt by about US$250mn.

"The strategy will further reduce our credit risk, and will allow for increased market focus on the strength of our core business operations, further increasing stakeholder value," he said.