Stock Offering by Mexico Telephone Company Is a Hit
Ma Bell is dead as we knew her, but Senora Bell is alive and well in Mexico--and she’s also become a huge investment hit north of the border.
Telefonos de Mexico SA de CV, the Mexican phone company, Tuesday sold 40 million new shares in the United States. The shares were initially expected to fetch $22 to $24 a piece. Instead, demand was so strong that the stock was priced at $27.25. In first-day trading on the New York Stock Exchange, it closed at $27.375.
The new offering supplements TelMex shares that have been trading in the United States since 1986 on the NASDAQ electronic system. Those shares have been among the hottest NASDAQ securities of the past year. The stock closed at $3.41 on Tuesday, up 105% from $1.66 at the start of the year and up 290% from last year’s low of 87.5 cents. (More on the two stock classes later.)
TelMex has become an alluring story for American investors, and for good reason. There is a growing feeling that the Mexican economy has broken out of its debt-induced trauma of the 1980s. The free-market policies of President Carlos Salinas de Gortari--including mass privatization of state enterprises, such as TelMex--are expected to revitalize Mexico in the 1990s, leading to rising foreign investment and real economic growth of 4% or more annually.
And if President Bush can persuade Congress to create a free-trade bloc with Mexico and Canada, Mexico is expected to benefit in myriad ways.
TelMex, because of its size and the universality of its business, has become the symbol of all that’s going right for Mexico. “It’s a growth utility in an expanding economy,” says Adam Holiber, vice president oA. Campbell Co., a Los Angeles firm specializing in Mexican stocks.
Specifically, here’s what backs up the stock:
* There are an estimated five to 10 phones in Mexico today for every 100 people. In contrast, there are 65 to 75 phones per 100 people in the United States. (Estimates vary, hence the ranges.) So Mexico is a country just waiting to be wired.
* TelMex is already expanding rapidly. Revenue was $3.4 billion last year, and TelMex’s order backlog extends 18 months, says Phil Dubuque, manager of the Financial Programs Utilities stock mutual fund in Denver. And the company is working with partners (France Telecom and St. Louis-based Southwestern Bell) and technology (digital rather than analog) that should guarantee the development of a world-class communications network, Dubuque says.
* Earnings, which doubled last year, are expected to grow 15% to 20% a year through the end of the century. Maybe that’s overly optimistic, but it at least seems like a reasonable target for the next few years, which is as far out as anyone looks anyway. “The Mexican government has said that the company must be profitable enough to fund its expansion,” says Holiber. In fact, TelMex’s internal cash flow should provide 75% of its capital needs, analysts say, keeping its debt low.
With the new stock sale and some other financial and accounting wrangling, earnings-per-share estimates for this year are wide-ranging. But in general, TelMex’s current stock price is figured to be about 10 times this year’s earnings. That compares to price-to-earnings multiples of 13 to 15 for AT&T; and the regional U.S. Bell companies, which aren’t growing anywhere near as fast as TelMex. To fund manager Dubuque, “this is a good long-term stock”--good enough that it now accounts for 7% of his $51-million fund.
The risk? That something unforeseen halts Mexico’s recovery or that President Salinas or his successor (Salinas’ term is up in 1994) ends up draining TelMex’s profits for political reasons. Still, the further the privatization genie gets from the bottle, it’s that much harder to put it back.
Now, what about those two TelMex stock classes? In essence, you can buy either, and you’re getting the same piece of the company:
* Each new NYSE-listed share represents 20 new “L” series shares trading in pesos in Mexico. These are non-voting shares, for the most part.
* Each NASDAQ-listed share, meanwhile, represents one “A” series share trading in pesos in Mexico. These shares do have voting rights.
Next week, the NASDAQ stock owners will receive a dividend of 1.5 “L” shares for each “A” share owned. This isn’t a windfall. All it will do is adjust the “L” and “A” shares to the approximate same price. The price of the NASDAQ shares will fall to about $1.36 a share (based on Tuesday’s close), while the total value of each NASDAQ owner’s TelMex holdings will stay the same.
The NASDAQ shares will then be convertible to the NYSE shares at a ratio of 20-to-1. So you can expect the prices to trade pretty much in tandem with that ratio. Take the $27.375 close for the NYSE shares Tuesday, divide by 20, and you get the $1.36 expected NASDAQ share price after the stock dividend.
But Mark Fane, a Mexican stock specialist with the firm of Charles M. Blair & Co. in Los Angeles, notes that in the long term both stocks ultimately will trade according to how their underlying shares perform in Mexico City, in pesos. And he believes that the “A” series shares will trade at a premium to the “L” shares in Mexico, because the “A” shares have voting rights. He recommends that American investors stick with the NASDAQ shares.
BUYING TELMEX IN THE U.S.
52-week Tues. Where Stock high/low close traded TelMex* new issue $27.38 NYSE TelMex** $3.66-$0.88 $3.41 NASDAQ
*Each share represents 20 “L” shares (non-voting) traded in Mexico. Ticker symbol: TMX. Dividend: nil.
**Each share represents one “A” share (voting) traded in Mexico. Ticker symbol: TFONY. Dividend: nil.
MEXICAN FUNDS ON THE NYSE
Rather than invest in TelMex directly, U.S. investors can buy a broad spectrum of Mexican stocks via one of three NYSE-traded Mexican investment funds. A fourth fund, the Latin America Fund, invests in the entire region, but most heavily in Mexico. An attraction of the funds is that they now trade below the actual per-share value of their assets (the NAV, or net asset value).
52-week Tues. Stock Fund high/low close NAV* vs NAV Emerging Mexico 15 1/4-8 3/4 15 16 5/8 -10% Latin America Fund 17 7/8-9 1/8 17 3/4 19 3/8 -8% Mexico Equity & Income Fund 11 7/8-8 1/8 11 1/2 13 5/8 -16% Mexico Fund 20 3/4-11 20 1/8 21 3/4 -7%
*NAV: net asset value per share, rounded to nearest eighth of a dollar, as of May 10
