New Owners of Mexican Telephone Company Face a Lot of Tough Calls


Rising expectations may be the biggest challenge facing the new owners of Mexico’s national telephone company, notorious for its poor service.

The first priority of Telefonos de Mexico’s new management will be to communicate with employees, customers and other shareholders, said Jim Kahan, managing director of corporate development at St. Louis-based Southwestern Bell, part of the international consortium that offered the winning bid of nearly $1.8 billion for controlling interest in the company.

The message? “It’s going to take some time,” Kahan said.

Crossed telephone lines, wrong numbers and multi-year delays for new connections are part of the folklore of Mexican life. Those quaint inconveniences are now seen as a major obstacle in Mexico’s path to international competitiveness.


Indeed, the government has stated that its point in selling a controlling interest in Telmex was to turn the company over to investors who could bring service up to international standards.

And Southwestern Bell has a strong interest in meeting that goal. Besides its new partnership with France Telecom and Mexican financier Carlos Slim in Telmex, Southwestern owns the regional telephone company in Texas, a border state that does considerable business with Mexico.

So if phone service in Mexico improves, that carries benefits for the state where half of Southwestern Bell’s local telephone customers live--benefits that will spill over to other border states.

“This will have a positive affect in areas that do a lot of business with Mexico: California, Arizona and Texas,” Kahan said.


Each of the three partners will contribute experts--25 each from France Telecom and Southwestern Bell and fewer from Slim’s Grupo Carso--to a team charged with identifying opportunities and making recommendations to a new Telmex board expected to be named in the next two to three weeks, when the sale closes.

The consortium defeated two other bidders for a 20.4% stake in Telmex that represents 51% of the company’s voting shares, the government announced Sunday. The next-highest bid, from a consortium that included GTE and Telmex board member Roberto Hernandez, was $67 million lower.

The purchase price of $2.03 a share, analysts say, was fair for both the government and the buyers. American Depository Receipts in Telmex--the stock equivalents that are consistently among the most active issues on the U.S. over-the-counter market--rose to $1.97 in early trading Monday, but dropped back to $1.8125 per share, 3.125 cents below Friday’s close. Analysts say the partnership selected to control the company is well-equipped to begin solving Telmex’s longstanding problems:

* France Telecom transformed the French telephone system from one of the world’s most antiquated to one of its most modern, said D.A. Campbell, whose Santa Monica securities firm specializes in foreign stocks. Since 1971, the number of phone lines in France has increased fourfold to 28 million.


The French will concentrate on constructing a network that will allow Telmex to double the country’s telephone lines to 10 million in five years.

* Slim is a noted turnaround expert whose interests range from mining and metals to retailing and include a hotel chain bought from the government in an earlier privatization. Slim’s group will take on primary responsibility for relations with government regulatory agencies and the company’s 50,000 workers, whose union received a government loan to buy a 4.4% stake in the company.

* Southwestern Bell’s confidence in Telmex is reflected in its decision to pay an extra $73.6 million for options on 5% of the non-voting shares in the company, in addition to its stake in the voting stock, said Mark Fane, an analyst at Toluca Pacific Securities in Woodland Hills.

The U.S. company will be primarily responsible for maintenance, customer service and Telmex’s nationwide cellular network, which is only beginning to be developed.


A U.S. court last week cleared the way for Southwestern Bell’s purchase by waiving a 1984 court order that forbade it and the other regional telephone companies created by the breakup of the Bell system from providing long-distance service. The waiver applied only to this case.