Facing spectrum payments, Telefonica lobbies Mexico for a discount

By Julia Love

MEXICO CITY, Sept 7 (Reuters) - Telefonica, the Spanish telecoms giant which has long struggled to gain traction in Mexico, is appealing to Mexican officials for a discount on spectrum payments coming due next year, three people with knowledge of the matter said.

Telefonica SA, the No. 2 player in Mexico by mobile market share, must soon pay to renew roughly a third of its spectrum licenses, which are set to expire after 20 years and could cost the company tens of millions of dollars.

The company has been lobbying Mexico's Finance Ministry and telecommunications regulator for a break on the licenses, warning that the payment could threaten its place in the market, the people said.

With speculation rampant among industry watchers about Telefonica's future in Mexico, the spectrum payments may test the company's resolve to stay in the market.

"Management has been open about exploring all options with regards to Mexico given that they have been struggling for a couple of years," said Carlos de Legarreta, an analyst at brokerage firm GBM. "It's not obvious that they would be willing to pay if the license renewal fee is too steep."

A spokesman for Telefonica declined to comment.

Mexico auctions licenses for the airwaves needed to deliver phone and internet service, and firms must pay a lump sum to renew when the licenses run out, often after 20 years, as in the case of Telefonica.

A hefty spectrum bill would be a further blow to Telefonica in Mexico. Lagging far behind Mexican mogul Carlos Slim's America Movil since its entry in 2001, Telefonica hoped to get a boost from the 2014 telecom reform intended to lessen Slim's dominance. Instead, the company came under pressure from a new entrant, AT&T.

After Mexico's Supreme Court's decision last month to weaken a key pillar of the reform, Telefonica voiced grave concerns, saying the ruling had "serious consequences for the sustainability and makeup" of the sector.

America Movil paid about $47.25 million at current conversion rates (836.48 million pesos) to renew a host of spectrum licenses in February, setting a standard for how renegotiations should proceed following the telecommunications reform.

Telefonica has less spectrum to begin with than its rivals in Mexico, making it more crucial for the company to renew the licenses in order to maintain a good level of service, de Legarreta said. It is due to renew more licenses than America Movil did earlier this year.

"To ensure service continuity, they would absolutely need to do it," he said.

While the amount Telefonica must pay has not been set, preliminary calculations alarmed the company, according to two of the people with knowledge of the matter.

The final amount that Telefonica must pay will be set by IFT, Mexico’s telecom regulator, with authorization from the Finance Ministry, a spokesman for the Finance Ministry said.

A spokesman for the IFT did not respond to a request for comment.

The price must be determined before Telefonica's licenses begin expiring next summer, and the company's campaign will likely ramp up this autumn as the date nears, one of the people with knowledge of the matter said.

Despite Telefonica's efforts, government officials may be reluctant to grant the company a discount for fear of setting a precedent that they would have to follow with competitors, industry experts say.

"I don't see the grounds for doing that," said Federico Hernandez Arroyo, a partner who specializes in telecommunications at the law firm Hogan Lovells.

Telefonica has a high share of less profitable pre-paid customers in Mexico, and its fortunes in the market have suffered as the rates carriers pay each other to complete calls have fallen, de Legarreta said. Mexico accounted for only about 2.7 percent of the company's revenue last year, down from 3.2 percent the previous year.

Telefonica generated revenue of 670 million euros ($798.04 million) in Mexico from January to June of this year, down 10.2 percent from the same period last year. ($1 = 0.8396 euros and 17.7020 Mexican pesos) (Editing by Frank Jack Daniel and Leslie Adler)