In February 2017 the Federal Institute of Telecommunications (IFT) approved the final programme for the functional separation of Mexico's fixed incumbent companies, Teléfonos de México, SAB de CV and Teléfonos del Noreste, SA de CV (collectively, Telmex),(1) as a consequence of the asymmetric regulation imposed on the América Movil Group (AMX).

Functional separation

In 2014 AMX was declared the dominant economic agent in the Mexican telecoms sector. In the 2017 biannual review of the asymmetric regulation, the IFT decided to functionally separate the fixed companies in order to improve the measures imposed on the AMX.

In March 2017 AMX was notified of the functional separation and provided with the terms and conditions imposed on Telmex so that it could legally and functionally separate the provision of its fixed wholesale services, within the next two years, through the creation of two new companies. The new companies will constitute wholesale divisions of Telmex and must have a corporate governance structure which is independent from that of AMX.

Wholesale companies' obligations

The new companies must provide wholesale services exclusively to other concessionaires, including:

  • interconnection services;
  • co-location services for interconnection;
  • dedicated links between localities and international long distance;
  • resell telephonic lines;
  • broadband; and
  • passive infrastructure sharing (including ducts, posts, rights of way and towers).

Telmex will transfer the relevant assets and employees to the new companies in order to enable them to provide the wholesale services. Their structure costs will be covered by the services provided.

The new companies must, among other things:

  • submit quarterly compliance reports;
  • establish non-discriminatory procedures, systems and codes of conduct;
  • establish an independent board of directors;
  • integrate auditing and compliance committees;
  • hold separate trademarks;
  • have their own independent operative systems and customer service teams; and
  • ensure that their employees are independent from AMX (although the union has threatened to carry out strikes against the functional separation).

Challenge

AMX has informed the Mexican Stock Exchange that it will challenge the approval of the functional separation programme on the basis that:

  • the IFT's plan differs from that proposed by Telmex; and
  • the pricing established is substantially lower than international references.

However, this challenge will not suspend the implementation of the functional separation.

If AMX fails to comply with the functional separation programme, it will be fined between 0.3% and 10% of its annual income.

Telmex must submit an asset transfer plan to the IFT, including plans for the transfer of its employees and infrastructure. Further, it will be responsible of the technical, economic and financial viability of the new wholesale companies.

Comment

AMX shares fell by 4.46% as a result of the functional separation. In addition, there has been some scepticism as to the results and practical consequences of the separation and the final outcome has yet to be seen. At any rate, the two-year period (which can be extended for an additional one year) is expected to be difficult for all involved.

For further information on this topic please contact Federico Hernández Arroyo at Hogan Lovells BSTL by telephone (+52 55 5091 0000) or email (federico.hernandez@hoganlovells.com). The Hogan Lovells website can be accessed at www.hoganlovells.com.

Endnotes

(1) Telmex covers all of Mexico, except the states of Baja California and Sonora, which are covered by Telnor.

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