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Special report: New Mexican TV probe hits embattled Slim

Mexican tycoon Carlos Slim arrives to attend the opening of the Soumaya museum in Mexico City
Mexican tycoon Carlos Slim arrives to attend the opening of the Soumaya museum in Mexico City

By Patrick Rucker and Elinor Comlay

MEXICO CITY (Reuters) - First they handed him a record fine. Then they denied him a television license. Now Mexican regulators are investigating whether business tycoon Carlos Slim has already snuck into the TV market by the back door.

Three years since Slim's phone giant Telmex and satellite TV firm Dish Mexico formed a powerful alliance to offer a cut-rate television service, regulators are giving the deal a second look.

Telmex rivals have complained loudly for years that the partnership is improper and runs against rules that bar Slim's company from putting a foot into the TV market. Now a Reuters investigation has discovered that the Mexican competition regulator is questioning whether the world's richest man's joint enterprise with Dish Mexico is legitimate.

Early on Tuesday, the agency said it was probing monopolistic practices among telecoms companies that bundle TV and phone services. It did not name any firm.

Mexico's dominant TV broadcaster, Televisa, and its telephone and cable TV allies filed a 115-page complaint with the Federal Competition Commission (Cofeco) over Telmex's involvement with Dish Mexico earlier this year. The country's other leading TV broadcaster, TV Azteca, followed suit just weeks ago.

A Cofeco spokesman, told Reuters this month that it is investigating the Dish Mexico accusations. All the parties in Slim's Dish Mexico deal declined requests to explain their financial ties, although clues can be found in the companies' public statements.

For decades, Slim has had a dream run through Mexico's corporate landscape, much of it under the radar as he gradually built the empire that ranges from telecoms giant America Movil to banking group Inbursa, restaurants and firms that make cigarettes, floor tiles and car parts.

However, in recent months regulators have started to come good on longstanding threats to shake up competition and rein in Mexico's oligopolies. Slim has borne the brunt of it. "Carlos Slim has grown a lot. But I think that he has reached his limit and has lost part of his power - or maybe the competition is getting stronger," said his biographer, Jose Martinez, who has been writing about Slim for over 20 years.

These smaller fish have been taking bites out of the shark that was Carlos Slim," he added. "Slim is in a war."

Dish Mexico could be the latest fight to draw blood from the 71-year-old tycoon, who eschews many of the trappings of modern technology, even though he has built an empire on it.

Slim has a Twitter account but does not use it; loves his Blackberry but shuns laptop or computers; and even drives himself in an old Mercedes, shunning the combination of high-tech car and driver beloved of most Mexican businessmen.

Telmex insists it only has a narrow deal with Dish Mexico to print a single bill for shared services, but financial reports and analysis of the partnership indicate Telmex has a large interest in the enterprise that could breach the rules.

Mexican regulators' concerns about the Dish-Telmex deal extend from its very inception to whether the deepening ties between the two companies are proper. The misgivings of two senior officials were ignored in the weeks before the companies jumped into the market together without having had any formal blessing from the telecoms watchdog Cofetel, according to memos obtained by Reuters.

Since then, Telmex has taken control, rivals say. "(Telmex) is doing everything. Dish is just the brand and the legal entity," said Luis Antonio Zetter, chief financial officer of cable operator Megacable, who says the disclosed financial terms of the arrangement do not add up.

Competitors of Slim have long taken potshots, but deft legal maneuvering has ensured his businesses were never under siege for long. Suddenly, though, accusations that the son of Lebanese immigrants Slim has flouted competition rules and abused his dominance of the Mexican telecoms market have begun to hurt the billionaire.

In the last three months, regulators have launched four drives to curb Slim's power in the telecoms market, including a record $1 billion fine from Cofeco against America Movil for allegedly abusing its power.

Slim's lawyers, who are challenging the fine, won a small battle last month when they convinced competition commissioners to remove the commission's chief from the panel reviewing the fine.

In late May, the government blocked Slim's bid for a television concession he had been wanting for years. Authorities have also ordered Slim to lower the fees charged to competitors for using his vast network - a material risk the company recently pointed to in its annual report.

That could cost Slim big money while benefiting rivals such as Televisa, as well as cable companies. Deutsche Bank analysts estimate lower interconnection fees could cost Telmex 4.6 percent of its 2010 revenues and America Movil another 1 percent -- some 11 billion pesos ($933 million) in total.

FAVORITE VILLAIN

Known as "the Engineer" to his close friends, Slim may be a victim of his own success in Mexico, a country where roughly half the population live in poverty. Most Mexicans cannot go a day without using one of his phones, shopping at one of his shops or eating at his cafes.

"The worst thing to happen to the Engineer recently is the discovery that he's the world's richest man," said Jana Palacios, consultant at competition lobby group IMCO. "That's made him visible, when before he was invisible. In Mexico there are many monopolies and many concentrated markets ... but from my perspective, Slim is the favorite villain."

President Felipe Calderon's conservative government has beefed up competition laws, introducing jail terms for those convicted of price-fixing and making it easier to impose hefty fines.

The government denies that the record fine, the rejection of Telmex's TV request, the probes and new laws constitute an attack on Slim. However, Calderon has made it clear he wants to break open Mexico's system of family-run dynasties and oligopolies.

"I really respect Carlos Slim. But I am the authority and I need to regulate the market," he said in May.

The complaints surrounding Dish Mexico and Telmex are typical of the broadsides fired at Slim, whose companies account for more than one-third of the capitalization of the Mexican stock market. Critics say Telmex is wrongly using its financial heft to bankroll the other firm's business.

Besides Telmex, the Dish Mexico deal is backed by two other partners: the Colorado-based satellite company EchoStar and Mexican media company MVS Comunicaciones.

Telmex has an option to participate in Dish Mexico if regulators allow it, Telmex chief financial officer Adolfo Cerezo said earlier this year. The option gives Telmex a significant financial interest in the firm.

Telmex has a strong incentive to see Dish Mexico succeed and it has taken many steps to give it a boost Dish Mexico customers who sign up to Telmex get discounts and perks like short-term financing and free premium channels. Telmex offers Dish Mexico contracts at its storefront locations and openly promotes the discount phone/television combo.

Regulators had expressed concerns about the tight bonds between Telmex and Dish Mexico as long as three years ago.

If they successfully challenge the partnership, it could eliminate Slim's toehold in the television market and drive more customers into the arms of his TV broadcaster rivals.

DIMINISHING RETURNS

Should the regulatory blows continue to rain down on Slim it may encourage him to cut back investment in Mexico and look elsewhere for opportunities in the Americas.

A sizeable realignment of his outlays would be keenly felt in Mexico, where Slim's corporate revenues are worth more than 8 percent of Mexican gross domestic product.

Worries that tighter regulation will crimp his companies' earnings have cut into Slim's fortune, at least on paper, which Forbes had estimated at $74 billion. America Movil's U.S.-traded shares have fallen more than 12 percent since the start of the year.

Thomson Reuters data shows Slim's telecommunications' companies have not been doing much for their investors in recent years, though his bank Inbursa has risen to become Mexico's seventh-largest bank.

Inbursa's share price has risen 157 percent in the last five years, compared to just 5.2 percent for Telmex, now largely owned by the umbrella group America Movil.

Led by Slim's nephew, Hector Slim Seade, a professional hunter who serves boar from his ranch at company shindigs, Telmex has had to freeze prices while Mexican families increasingly opt to drop landlines in favor of mobile phones.

Telmex, which still has some 80 per cent of fixed lines in Mexico, lost customers at the rate of 10,000 a month in the first quarter of 2011. Some were picked up by America Movil.

America Movil has 70 percent of the Mexican mobile phone market, and is also dominant in other Latin American countries. It has pay TV services in at least 11 Latin American nations, where it is hoping to increase its market share.

Slim's Mexican rivals already bundle telephone and internet services together with their pay TV offerings. This makes policymakers' refusal to allow Slim to offer cable in his home country particularly galling to his company.

Nine of 10 Mexican households have a TV set but only four in 10 have cable, and internet access is restricted to half that number again, underlining the potential for growth.

All the while, Telmex rivals have many unsettled complaints against the company for its high fees and poor service when their customers tap its lines.

"The biggest question is how far will the regulator go to reduce prices in general," said Nymia Almeida, analyst with Moody's ratings agency in Mexico City.

Fixed-line rental and telephone usage costs in Mexico are the fourth highest in the 34-nation Organization of Economic Cooperation and Development, according to 2009 data. Average broadband speed is the lowest in the group, it showed.

SUCCESSION WORRY

Slim draws the bulk of his wealth from telecommunications, an empire begun two decades ago with the purchase from the government of Telmex, then a rusty fixed-line phone company, and it is precisely here that he has had the most problems.

The Telmex-Dish probe is merely the latest headache. Questions about that partnership pre-date the phone company's November 2008 announcement that it would offer billing services to the satellite company.

"(Your) concession prohibits the direct or indirect exploitation of television services," Fernando Gay, head of supervision at Cofetel, wrote in October 2008, according to a letter obtained by Reuters. "Any contract concerning this matter must be previously approved by regulators."

In early December, after Telmex announced the billing arrangement, one of Cofetel's five commissioners wrote a memo stressing that Telmex could not enter the television market and that the Telmex/DISH Mexico deal must be reviewed.

"The aim would be to guarantee that (Telmex) complies with legal and administrative requirements," commissioner Gonzalo Martinez wrote, according to the memo obtained by Reuters.

Despite these concerns, Cofetel did not examine the partnership between Telmex and DISH Mexico in 2008 and has not reviewed the issue since, a former Cofetel official said.

Helped by cut-rate promotions and advertising on Telmex's Website and in the phone company's branches, Dish Mexico has reached 2.2 million subscribers in under three years - about 20 percent of the market. Sky, the market leader with 26 percent, took 15 years to gain its 3.3 million customers.

Dish Mexico's basic package costs 109 pesos, or $9.40 a month. The package including a Telmex line and 50 minutes of national calls costs 299 pesos, still well below Sky's cheapest offering of 399 pesos, although that firm has more channels.

Slim has navigated his way through troubled waters many times in the past, but investors increasingly wonder whether he has a successor to replace his steady hand on the tiller.

More than six years ago, Slim stepped down from the top positions of many of his companies, handing the jobs to his three sons: Carlos, Marco Antonio and Patricio. The reshuffle had little effect on share prices, suggesting analysts believed the next generation were up to the job. But the succession plan may have been too short-lived, as Slim soon had a tight grip again on the businesses he grew from scratch.

The worry for investors is that the sons might not have the same business acumen as their father, who suffered serious heart problems in the 1990s and had to be revived in hospital three times, according to his biographer, Jose Martinez. "Carlos Slim created his empire with a lot of sweat and hard work, the sons are just administrators," he said. "I don't think the children have the father's vision."

(Additional reporting by Cyntia Barrera Diaz, Dave Graham, Krista Hughes and Rachel Uranga; Editing by Michael Williams and Claudia Parsons).

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