Retreat from LatAm: Euro telco giants head homeward to think again

Major European telcos are pulling out of Latin America and seeking to achieve growth via digital transformation.

At the end of March, BT announced its intention to sell a significant portion of its Latin American operations to CIH Technology for an undisclosed sum. This signals BT's intended exit from 16 of the 28 LatAm nations it currently operates in, representing about a quarter of the 60 countries worldwide in which the telco does business. The UK's largest operator will still retain a presence in LatAm, however, with CIH agreeing to serve as a channel for BT's products and services.

"Today's announcement is a key milestone in the execution of our strategy to become a more agile and focused business," said Bas Burger, Chief Executive of Global at BT, announcing the deal.

"It comes at a particularly challenging time for the global economy. As such, it is a sign of our determination to keep the business moving forward and continue connecting communities, businesses, and governments. I am pleased to begin a new chapter in the region with CIH, providing continuity for our people and our customers."

The agreement includes the sale of two fibre networks, 2000km of leased fibre, and four data centres. Regulatory approval will be necessary and provided this is forthcoming the deal is expected to close later in the year.

BT is not alone in retreating from Latin America and refocusing on its original market. Both Deutsche Telekom and Telefonica have been doing likewise in recent months, as the large Western operators struggle to compete in the challenging markets south of the US border. Rumours circulated in January that a group of regional billionaires might bid for Telefonica's holdings in the LatAm, though no such alliance has yet disclosed itself.

Meanwhile in the UK, BT's domestic network appears to be coping well with the strains of millions of people working from home and communicating virtually with friends and family due to the coronavirus lockdown. In a statement released alongside the announcement of the Latin deal the company said that usage levels were still "well within manageable limits" and insisted that they had "plenty of headroom for it to grow still further".

‘A company for the next century'

Telefónica for its part has announced a major restructuring, in which it too will withdraw from the Latin American markets that were supposed to deliver new growth and so offset the effects of slowdown and saturation in Europe.

The debt-burdened Spanish telco has set out a five-point plan which emphasises growth from enterprise customers, while seeking to consolidate infrastructure such as cell towers in order to maximise opportunities.

Chairman and CEO José María

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lvarez-Pallete said the plan would create "a company for the next 100 years".

Telefónica's retreat from LatAm is not total, however. The company will now focus on Spain, the UK, Germany and Brazil, "where our scale and leadership allow us to be more ambitious," according to

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lvarez-Pallete. In 2018-19, these nations accounted for more than 82pc of Telefónica's operating income and nearly 76pc of revenue.

Brazil was once thought to be an obvious space for growth in businesses of almost all kinds, but the stellar trajectories of the BRIC economies have all faltered in recent times. Nonetheless, Brazil remains a huge economy - the giant of LatAm, in fact - and sooner or later it will surely need more and more mobile communications, cloud services and the networks to carry them. Telefónica's decision to remain in Brazil seems reasonable.

Other countries in Telefónica's former Hispanoamérica group have been rearranged under an autonomous unit and placed under review, which is widely taken to be a first step towards exiting these markets. Telefónica had already sold some of its central American operations to América Movil and Millicom in 2019: Millicom paid $1.65bn for units in Panama, Costa Rica and Nicaragua and América Movil bought the Guatemala subsidiary for $333m and the El Salvador operation for $315m.

Telefónica's Movistar mobile brand continues to operate in Argentina, Chile, Colombia, Ecuador, Mexico, Peru, Venezuela and Uruguay. As of 2018 Telefónica's Latin American customer base outside Brazil was reported at just over 130m with revenue down 14.8pc year-on-year and operating income down by 29pc: it was this situation which led the group to implement its new strategy.

We will transform ourselves into a tech company, for real this time

The Spanish telco intends to reduce costs and debt, and says it will respond more quickly to new commercial opportunities. It has to be noted that Telefónica has said such things before: the creation of UK-based Telefónica Digital in 2011 has so far failed to transform the group from a traditional telco toad into a high-margin digital prince.

Another potentially transformative move, Telefónica's migration to its new cloud-native infrastructure, Unica, has indeed been carried out boldly. But some analysts suggest that by the time Unica is fully rolled out it may look expensive and unwieldy compared to more modern, containerised architectures running in public or hybrid clouds.

The march away from traditional telco into the digital world will be led by a new organisation, Telefónica Tech. This will focus on harnessing modern IT and connectivity platforms to tap into the potential for new revenues from B2B and IoT services. The unit will handle the group's operations in cybersecurity, big data, cloud platforms, IoT and enterprise 5G, bringing them all together as a coordinated platform.

Telefónica says these businesses are currently enjoying better than 30pc annual revenue growth and this should add up to more than €2bn ($2.2bn) in new revenue by 2022. Its cloud business is outperforming the market in every country, it claims. Telefónica Tech will be headed by José Cerdán, currently global head of B2B, reporting to COO Angel Vilá.

The other new division is Telefónica Infrastructure, which will imitate Vodafone, Telecom Italia and Orange by moving cell towers, submarine cables and other physical assets into an arm's-length subsidiary that should be able to monetise the hardware more easily. In 2019 Telefónica said it was considering options for about 50,000 towers including 19,000 in Germany and 7,000 run by Cornerstone, Telefónica's 50/50 UK joint venture with Voda.

‘One of the largest telco infrastructure units in the world'

These towers, and other infrastructure assets including a majority stake in tower operator Telxius, have been placed under Telefónica Infra.

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lvarez-Pallete says that this will become "one of the largest telecommunications infrastructure units in the world, ready to channel the traffic explosion, and it will allow us to exploit the value of a unique portfolio of assets and attract potential partners."

Telefónica Infra now controls 68,000 towers, making it the biggest tower operator in Europe. It is headed by Guillermo Ansaldo, most recently Head of Global Resources, also reporting to Vilá. Meanwhile Enrique Blanco, CTIO, moves up to become another of Vilá's direct reports as boss of the Technology and Architecture unit.

Vilá's portfolio has been extended significantly and he is, in effect, now in charge of the entire transformation. He oversees the two new units and also the four main national businesses; also the Digital Consumer unit (headed by Chema Alonso, currently Chief Data Officer); and Business Solutions, reporting to Telefónica Tech chief José Cerdán.

It remains to be seen whether Telefónica, BT and other companies like them can achieve the growth they need in B2B tech, much of it cloud-based, and exploit the expected boom in IoT. It has to be at least possible: the digital world of today grew in large part from the traditional telecoms industry, after all. UNIX, whose descendants power a majority of the world's smartphones and huge amounts of other modern technology, was originally developed at Bell Labs.

One thing that appears clear, however, is that the major European telcos can't achieve the growth they seek by battling Chinese giants like Huawei and ZTE for customers in Latin America.