Telefónica becomes latest victim of Chile’s mobile phone curse

Telefónica Moviles Chile SA’s dollar bonds tumbled to the lowest in just over a year last week as fierce competition in the mobile phone market pushed up losses and the parent company unloads assets across Latin America.

The company’s notes due 2031 have dropped 7.2 cents on the dollar since August to 74.5 cents, the lowest since February 2024. In just the last month, the bonds have tumbled 2.5 cents, one of the worst performances among Chilean hard-currency debt. 

The Chilean unit of Spain’s Telefónica is the latest victim of cut-throat competition in Chile’s mobile phone market, which pushed rival WOM into Chapter 11 bankruptcy proceedings last year. The extent of Telefónica Chile’s troubles became apparent on Feb. 27, when it reported a loss of US $446.6 million for last year, a six-fold increase on 2023. Now, investors are questioning Telefónica’s commitment to Chile as it sells assets in Argentina and Colombia.

“When we add the exit of Telefónica from the region, plus the poor performance of Telefónica Chile in recent years, it makes sense that the bonds are starting to reflect what’s happening more grimly,” said Juan Djivelekian, an analyst at Balanz Capital Valores. 

Revenue from Telefónica Chile’s mobile services, its main business, slid 7.4% in 2024 as tough pricing competition in the industry prompted a drop in client numbers.

Movistar, as their mobile phone service is known, saw its market share dip to 23.7% in the 12 months through September from 26.9% the year before, according to the latest data collected by the regulator.

In response, Telefónica Chile has cut operating costs to improve margins in the past year, according to a person with knowledge of the company, who asked not to be named. Regulatory changes should also ease competitive pressures in the industry, the person said.

Rock Bottom  

For now, the company's response hasn’t convinced investors. In the last month, Telefónica Chile’s dollar bonds have handed them a 4.76% loss. Only WOM’s bonds did worse. 

The company’s dollar bonds now have a spread of more than 250 basis points over competitor Empresa Nacional de Telecomunicaciones’ notes, a record high. Their spread to US Treasuries is also at their peak. 

Last year’s losses and the decline of market share led S&P Global Ratings to downgrade Telefónica Chile to junk in October, while Fitch Ratings lowered its outlook to negative in September. Should Fitch now cut one notch to junk, Telefónica Chile becomes a fallen angel. 

“The negative results in Chile in 2024 exacerbate the situation and raise questions about Telefónica’s future in the country,” said José Ignacio Díaz, senior analyst for telecommunications in Latin America at advisory firm IDC.

The Exodus

Last month, the Spanish company announced the sale of its stake in Telefónica Moviles Argentina for US $1.25 billion. That came just nine days after its Peruvian unit filed for Chapter 15 bankruptcy protection in the US after it declared itself insolvent in Peru. 

Cinco Días also reported that Telefónica hired JPMorgan Chase & Co. to look into the sale of its Mexican unit. Lastly, Telefónica agreed to sell Colombia Telecomunicaciones SA ESP to Millicom International Cellular, the owner of Tigo, for US $400 million last week. 

“So, this begs the question: Is Telefónica really in a hurry to get out?” Djivelekian said. “Is it out of options and is selling whatever it can at whatever price it can?”

If there is a sale, Telefónica Chile may not prove as attractive to investors after it sold 60% of its fiber optic to KKR & Co. in 2021, Djivelekian added. 

“Who wants to enter a market where there is very little growth, there is a lot of pressure from inflation and there is a lot of pressure to transfer the inflationary effects to the end customer,” he said.

WOM received a single bid in its sale process in November, and that was from its own creditors. Not only does that sale bode badly for any attempt to offload Telefónica Chile, it also squashed any hopes of consolidation in the industry.

Elsewhere in the mobile phone market, Liberty Latin America Ltd. opted not to inject more capital in ClaroVTR last year, effectively backing out of a company that had lost money. 

For now though, Telefónica hasn’t given any indication on what it will do with its operations in Chile, with that uncertainty weighing on the bonds.

“It is essential that Telefónica defines a clear strategy for Chile,” Diaz said. “Investment in innovation and the development of new services will be key to maintaining its competitiveness in an increasingly dynamic environment.”