MEXICO CITY-Imagine the following scenario: A company enters into a government auction to obtain spectrum. After an extremely long process, it wins frequencies because other participants couldn’t follow the pace of its high bids. Everything seems OK, until the deadline to pay for the spectrum draws near. On the due date, the company announces it can’t pay. What should the government do? Take the spectrum away and restart another bidding process or extend the payment period?
This story began in September 1997, when the Mexican government announced a process to grant spectrum for PCS (personal communications services) and wireless local loop (WLL).
Traditionally, spectrum assignation in Mexico has been made on a discretionary basis, something that resulted frequently in inefficient usage and in not-always-so-transparent decisions. However, since the new Federal Telecommunications Law was published in June 1995, it’s now mandatory for assignments to be made through a public process.
The Comision Federal de Telecomunicaciones (Cofetel), the regulatory authority, chose to conduct auctions for the PCS and WLL spectrum-to ensure not only that the processes were fair and transparent, but that the participants acted in a responsible way with enough time to prepare their bids and strategies.
The auctions started on time, 17 November 1997, with two rounds per day, and continued through 8 May 1998. It was a long process, but in the end everybody seemed satisfied with the way it developed. The bids offered in the auctions added up to nearly US$850 million.
One of the winners was Servicios Profesionales de Comunicacion (SPC), owned by Grupo Elektra, which runs a number of companies in the retail and telecommunications sectors. It won a nationwide PCS license, bidding US$220 million, as well as WLL spectrum for US$21.5 million. Along with the other winners, the company paid a 20-percent downpayment in days following the auction.
Ricardo Salinas Pliego, chairman and main stock holder of Grupo Elektra, is well-known in Mexico for his aggressive style, and his announced excursion into the telephony sector promised to be another example of it.
Salinas’ main business has been a network of retail furniture and electric home appliance stores, with a presence country-wide. His empire also includes TV Azteca, with two national networks, as well as paging and trunking operators.
Elektra built its success selling products to a very specific group: the low-income working class, and Salinas’ intention has been to sell telephony services to this same market he knows so well. His plan is to not only use each of the 700 Elektra stores in the country as points of sale, but also as locations to install the infrastructure for providing the wireless service. This is possible because the stores are located strategically in low-middle class neighborhoods in dozens of Mexican cities, where its traditional customers live-areas where the line density needs to be raised dramatically.
However, between May and 30 September 1998, which was the deadline to pay the balance for the frequencies, a series of financial turbulences happened worldwide. Things started to appear more difficult for Grupo Elektra, to the point where TV Azteca had to stop some expansion plans for Central America. Rumors grew that SPC would not be able to pay for the PCS/WLL frequencies.
Of course, the other participants expressed they would disapprove of any movement away from the original auction rules.
“We understand it’s a tough decision for them, but our position is that the rules should be followed,” said Tom Degnan, alliances vice president for Qualcomm Inc., a participant in the winning Pegaso consortium. “They committed themselves to do certain things, and if now they have to look deeper in their pockets, that is what they should do.”
Alestra, a consortium including AT&T Corp. that quit from the auctions due to the high bids offered by SPC, asked for a whole new process and rejected any tolerance from the authorities.
But nevertheless SPC and another auction winner, Midicell, officially solicited extensions, and Cofetel allowed 180 days more-up to March 31st-under the following conditions:
During the first 90 days, the debt would be subject to an interest rate 10 points above the mean interbank interest rate. After that, 2 additional points would be applied.
The government would grant the license in June of this year if payment came within 90 days-by 31 December 1998. If it comes later, the license would be held up until the first day of 2000.
If SPC doesn’t pay by 31 March, it will lose the frequencies and the 20 percent downpayment.
SPC didn’t pay by 31 December, but insists it will pay by 31 March.
Midicell didn’t pay either by 31 December, but assures it will pay.
“We do have a credit line with a foreign bank, which guarantees we’ll have the money on time,” said Miguel Angel Lira, spokesman for Midicell. “But due to the conditions of this credit line, it is not our first option, so we’re looking for another money source.”
Last year Korea Telecom withdrew from the joint venture that created Midicell consortium, and the company now is looking for a new international partner. If that happens before 31 March, the partner most likely would be the financing source.
