Telefonica’s Argentine revival starts with 192% price increase

Bloomberg

This month, Telefonica SA was able to raise the price of landline phone service in Argentina for the first time since 2000 — by a whopping 192 percent.
The increase in the line-rental fee to about 38 pesos ($2.70) a month from 13 pesos in the carrier’s second-largest Latin American market comes after 16 years of government-frozen tariffs. The country’s new leadership is scaling back policies of previous regimes, hoping to spur investment in infrastructure such as telecommunications networks.
Pricing leeway offers Telefonica the chance to increase revenue and profit, and to step up network investments in a country of more than 40 million people starved for video and data services. While Argentina accounts for more than 6 percent of Madrid-based Telefonica’s sales, its profit contribution has been far less. The company’s at a turning point after several problematic years, said Andre Bolumburu, an analyst at Banco Sabadell in Madrid.
“These are countries that are affected by cyclical situation and when they improve, as Argentina may now, they can be a source of some good news,” said Bolumburu, who recommends buying the shares.
The fixed-price policies of the past prompted Telefonica and main rival Telecom Argentina SA to limit investment in phone lines and come up with innovative ways to keep up with booming demand.
One of the solutions was “mobile at home,” which gave customers seeking fixed lines a mobile phone instead — though it looked like a house phone and couldn’t be moved. The product allowed carriers to use their cellular spectrum, which has more loosely regulated prices, rather than invest in copper networks.
Though Argentina is second to Brazil in sales among Telefonica’s Latin American markets, it is one of the least profitable. Operating income before depreciation and amortization dropped to 1 billion euros ($1.1 billion) in Argentina in 2015 from 1.7 billion euros in 2000 and the Oibda margin is the second-lowest among the carrier’s 10 markets in the region.
While users have complained about the quality of Telefonica’s phone and internet service, it’s part of a bigger problem in Argentina, where frozen tariffs and low investment have also plagued utilities. The administration of Mauricio Macri, who took over as president in December, has cut subsidies and freed prices, reversing policies that date back to the 2001-2002 financial crisis and the 12-year administrations of spouses Nestor Kirchner and Cristina Fernandez that followed. Fuel prices at the pump have risen 35 percent year this year, while electricity in some parts of the country has quadrupled in cost.
In March, the government authorized the landline price increases, and both Telefonica and Telecom Argentina raised tariffs by the same amount this month. Lawmakers summoned both carriers, as well as the local unit of America Movil SAB, to a congressional hearing last week.
Even after the increase, prices in Argentina remain low compared with many other markets. Telefonica also faces mounting competition in the country, with Mexican investor David Martinez acquiring Telecom Argentina earlier this year, and the country’s largest media conglomerate, Grupo Clarin SA, buying Nextel’s local assets in 2015.
The government this month also announced new rules aimed at helping to create so-called virtual operators, which rent capacity from network owners and typically compete with lower prices.
“The increases could be a double-edged sword,” Martin Becerra, a professor at the Argentine universities of Buenos Aires and Quilmes. They “could potentially help foster the development of competitors.”