Telefonica Buys 65% of Wireless Provider Pegaso
Spanish giant Telefonica has bought control of Mexican wireless telephone company Pegaso, ending the money-losing foray by San Diego-based Qualcomm Inc. and its offshoot Leap Wireless International Inc. into Mexico’s highly competitive market.
In acquiring 65% of Pegaso and access to its 1 million clients concentrated in and around the capital, Telefonica accomplishes its goal of expanding its coverage area from northern Mexico into this dense metropolitan area, where more than one-fifth of all Mexicans live.
Adding to the 1.2 million customers it already has, Telefonica becomes Mexico’s second-largest cell phone company.
But it still ranks far behind leader America Movil, the wireless spinoff of Telefonos de Mexico whose Telcel brand has upward of 18 million customers.
Telefonica is paying $87 million for stock owned by several equity investors including Leap Wireless, Qualcomm, Sprint PCS Group, Nissho Iwai Corp. and investment fund LAIF.
It also is assuming 65% of Pegaso’s outstanding $1.25-billion debt, about half of which is owed to Qualcomm, according to recent government filings.
Qualcomm and Leap Wireless, which was spun off by Qualcomm in 1998, are exiting from a market that proved much more difficult than expected. They and their partners hoped Pegaso would become a major competitor to Telcel, but they ran into problems early on.
The cost of building out Pegaso’s coverage proved to be much greater than expected against a competitor such as Telcel, whose market share has increased to 80% from 70% since Pegaso was launched in 1998, said Bryan Prohm, senior analyst at Gartner Dataquest in Raleigh, N.C.
“Telcel’s advantages are brand, legacy, distribution, history. Everything you can think of,” Prohm said. The preference of Mexican consumers for prepaid service has meant much smaller revenue streams than service providers had expected, he said.
The upshot is that the Pegaso partners have lost enormous sums. Although Leap Wireless will receive $33 million in cash for its Pegaso stock, it has written off some $120 million in Pegaso investment.
According to its recent filings with the Securities and Exchange Commission, Qualcomm lists some $700 million in loans to Pegaso, some of which are in technical default.
The company has not charged off any of the debt as losses but late last year stopped booking loan interest as revenue, Qualcomm treasurer Dick Grannis said Monday. He would not comment on whether loan write-offs are forthcoming now that the long-awaited sale has closed.
Leap Wireless spokesman Dan Pegg said the sale frees the company to concentrate on its rapidly expanding U.S. wireless business called Cricket, which has 1.4 million customers in 20 states.
Telefonica already is Latin America’s second-largest wireless operation, with units in eight countries and 17 million customers, more than any company in the hemisphere except America Movil.
Last year, Telefonica bought a foothold in Mexico’s cell phone market by acquiring controlling interest in four regional wireless telephone operations from Motorola Inc. for $1.8 billion in Telefonica stock.
Those four comprise a service area stretching from Baja California to the Gulf of Mexico.
