Slim's golden pickings: free-spending billionaire expected to further diversify his wide-ranging portfolio, enter new markets in 2004.

As the Mexican economic train finally accelerates its way out of recession, it is now becoming fairly obvious who is wearing the engineer's hat.

Known to his friends as "El Ingeniero," Mexico's richest man Carlos Slim Helu, has maneuvered his bulky frame into center stage in recent months. When he has spoken, people have listened. His Midas touch is legendary across the Americas, as Slim has succeeded in turning foundering companies into solid workhorses for his stable of businesses. Born and educated in Mexico City, the multi-billionaire has also become prominent in the political field recently, describing himself as a philanthropist and garnering fame and accusations as he lent his weight and capital to a high-profile restoration of some of the capital's downtown archaelogical glory, forming an unlikely bond with the Mexico City mayor.

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At the same time, Slim has been speaking openly to attentive audiences about his political and economic vision for the region. While Congress remains divided by political jostling, the public is warming to the small voice of calm, giving the man a newfound popularity among the chattering classes.

We will now endeavor to look into the crystal ball for 2004 and speculate over what we can expect and what surprises Latin America's richest person may have in store for us.

IT ALL STARTS WITH TELMEX 

Slim's success has been built on a solid telecommunications foundation, and this is still his core business. He made some very powerful friends years ago, enabling him to effectively take over the Telefonos de Mexico (Telmex) monopoly for fixed line telephony and from there branch out into America Movil, which has now become Latin America's biggest wireless firm with over 35 million users.

Mexico, however, is the lush grazing ground for cash cow Telmex, the country's monopolistic fixed-line operator, which has comfortably plodded through the worldwide downturn. The telecom giant watched earnings slip by only one or two percentage points, while operating margin has averaged 43% in the last five years--leaving Slim with almost limitless pocket money to go on spending sprees.

Its dominant market position meant that Telmex did not have to rush headlong into new technologies in an attempt to get a jump on the competition and as a result did not throw money down the drain of new technology. Rather, it is now clear that the giant has waited for the technology to come through on its own, and in 2004 we will likely see the increased spread of 3G wireless phones, a burgeoning uptake of SMS, especially among younger wireless users and significant growth in Internet and broadband usage--one of the few sectors that has shown an improvement in recent quarterly reports.

Of course, Slim has his finger in many more pies--his clutch of companies represent nearly half the total capitalization on the Mexican stock exchange. During the recent downturn, Slim has streamlined his holdings, leaving the companies lean and poised to take advantage of the economic rebound.

As Ramon Ruiz, head of equity sales at BBVA Bancomer, points out, "There is little doubt on the street that Mexico will follow the course of the U.S. economy and join a strong uptrend. Slim's portfolio in telecom, retail and industry should do very well with the economic resumption in Latin America."

With the government forecasting GDP growth of 3.5% for next year, Ruiz expects to see similar growth in Slim's Mexican holdings, especially telecoms "Telecoms are a very good barometer of economic health," he said.

However, while Mexico gets back on track, Latin America is most likely the region where his telecom story will write its next chapter.

SOUTHERN BOUND

In 2003 Slim's wireless giant America Movil expanded aggresively across the continent (see box, below), and according to Leo Lobato Kelly, CEO of Boulder Information Technologies, a Montererey-based telecom company, we will see more of the same in 2004".

"I think Slim will continue to eliminate his competition in telecoms by buying them out," Lobato said. "That way he will ensure profit at the highest levels."

Therefore, it would not be a surprise to see Slim eyeing up markets where he currently does not participate directly and fishing for bargains. For example, Slim has been seeking permission to apply for a concession in Uruguay recently, while markets such as Chile and Peru remain untapped. But while we may see America Movil make a few such opportune purchases next year, Ruiz believes the company will spend most of 2004 confronting the demanding task of stabilizing his newly acquired assets in the region.

"I think Slim has his hands full with Brazil for a while--the telecom market there is not so simple as just buying an asset and making it operate. It's a big country with lots of regions, and he's competing with larger companies such as Telecom Italia and [Telefonica's] Telesp."

The nature of markets below the equator is also a potential banana skin upon which to slip.

"In South American countries, economic reform is highly inconsistent," Ruiz said. "So your risk exposure there is extremely high."

Ruiz sees Slim happy to just consolidate his purchases and optimize his positions, both in fixed line and wireless telephony. "Slim will typically realign the assets of AT&T Latin America [which he recently bought for US$200 million] and merge them with all the fiber optic networks and data services at his existing companies."

This streamlining will not occur overnight.

TOYING WITH UNCLE SAM

Peering over Slim's other shoulder, of course, is the lucrative U.S. market, where "El Ingeniero" has operated with varying degrees of success and where he is on the board of directors of a couple of Big Board companies. Success has been limited so far for Slim with CompUSA his most notable holding, but as Ruiz points out, "He has an eye on consumption in the United States, especially as related to the Hispanic population," which is currently the largest ethnic group in the States. Slim continuously tests the water with purchases of small stakes in companies attempting to tap this market.

For example, he already holds a small stake in Televisa, as well as holdings in Circuit City Stores, Office Max, SBC Telecommunications, Saks and bonds in WorldCom. Any moves in the U.S. market are likely to play to his strengths: telecoms and computing.

Lobato named some potential targets for Slim next year. "I can see Slim expanding his RedUno organization by buying some medium-large IT integration companies. He might buy companies simliar to Net Zero One or Intersurf or other major competitors in the field."

Slim has already proven success in the IT field with the purchase and turnaround of US ISP Prodigy in 1997. His keys to cracking the U.S. market, according to Ruiz, are "associations and money."

While most of his attention will be focused on fortifying his holdings at home and in his backyard, Lobato speculates "El Ingeniero" may also be casting an eye over developments in the Far East.

"Carlos Slim was seen at this year's World Series in the company of Lorenzo Zambrano (CEO of cement giant Cemex) who owns plants in the Phillipines and Indonesia," noted Lobato. "I can easily see Slim moving into these markets next--if anyone is positioned for Asian markets, it's him. I think it's a matter of minutes before he starts looking."

PULLING THE POLITICAL STRINGS

This ability to rub shoulders with other top players brings to mind the old adage, "It's not what you know, but who you know," a fortune-cookie sentiment that has served Slim well over his career. Recent occurrences in Mexico City's Historic Center have reinforced this view and brought Slim together with a man widely touted as the nation's president-in-waiting, Mexico City Mayor Andres Manuel Lopez Obrador.

The collaboration between the two center-leftists has set people talking more frequently about the political power Slim wields. Recently, he has been increasingly outspoken about his macro-economic model for the region, much of which is based on consumer spending power. Slim has frequently been quoted stating that Mexico's economy is going nowhere until workers have more purchasing power.

However, this round of high-profile speeches doesn't neccesarily mean he wishes to become president himself--as an editor of a leading political magazine told BUSINESS MEXICO, "I'm sure he'd rather have his policies implemented via a proxy than be directly elected himself. There are laws restricting what business interests a Cabinet minister can have."

Most business observers agree that Slim would rather be the power behind the throne. "Why would he want to become president? The guy can own presidents. With the power and people he has, he is effectively in the position of kingmaker" Lobato said.

His activism at present seems to be fully aligned with Lopez Obrador. According to our political source, "Felipe Gonzalez, former center-left prime minister of Spain and political adviser to Lopez Obrador, is tucked up in one of Slim's apartments as we speak."

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BREAKING NEW GROUND

As always, this kind of relationship is founded on a mutual back-scratching deal, and one of Slim's most recent corporate bids (should be cemented by early December) may have been made with an eye on the country's impending reforms (see preceding article, p. 34). Slim's Grupo Inbursa has agreed to take a 51% stake in struggling construction firm ICA, a company with dreadful cash flow but some juicy government contracts in its in-tray.

While the purchase may just have seemed another of Slim's inspired bottom-fishing moves, Lobato has a far clearer idea of what "El Ingeniero" is up to.

"Given the high probability of structural reforms in the electric industry, I think we're going to find him building power plants and producing energy next year. He's looking to go after all the major power plant construction. Not only that, but he will use his influence to control as much of the distribution of power as possible," Lobato said.

Not only is this a chance for Slim to repeat his privatization success story (as he did with Telmex), but it will give him the possibility of getting even more involved in the latest technology. "Slim is already familiar with the distribution of cable TV and data through power cables. They're already doing it in Europe," Lobato added. There is a good chance that this is his focus in entering the volatile sector.

Although the ICA purchase is possibly a longer-term investment, Slim does insist he is in it for the long run. Fortunately for Mexico, the business could end up in far less capable hands. And that is where the big man's skill lays: maximizing his assets and making silk purses from sow's ears.

"He has such a well distributed organization, that he buys something at the bottom of the bell and he infuses great young talent that go off the page with ideas--they get creative--and they have the capital and publicity to promote new businesses to no end," said Lobato.

Whatever the crystal ball may forecast for Slim, the likelihood that he will continue to surprise the market is a certainty.

"The ICA purchase completely caught us by surprise," said Ruiz, who sees a bright future for the company under Slim's management. Even as BUSINESS MEXICO goes to print, there are rumors in the market that Brazil's second-largest fixed-line operator, Embratel, controlled by U.S. firm MCI and valued at US$1 billion may be a takeover target for Telmex.

If Slim were to be interested, he could simply pay the full amount out of the estimated US$1.7 billion worth of MCI bonds he already owns. Sometimes, driving the telecom express looks so easy.

* chairman of the board

RELATED ARTICLE: A Year Spent Spending

America Movil's purchases in 2003:

Feb. 13: Completes the acquisition of Colombian operator Celcaribe from Luxembourg-based firm Millicom International Cellular.

March 5: Buys a 95% stake in BSE, the Brazilian affiliate of U.S. telephone company BellSouth Corp., for US$180 million in cash and debt.

July 24: Acquires an option to purchase 60% in Argentine cell phone firm CTI for US$90 million.

July 29: Buys the remaining 20% stake in Ecuador's Conecel. America Movil already held 80%.

Aug. 29: Agrees to buy Brazil's BCP for US$625 million, with the deal being finalized on Nov. 15.

Oct. 22: Buys 51% stake in El Salvador's CTE from France Telecom.

RELATED ARTICLE: * Running the Show

Carlos Slim sits on the board of the following companies:

Altria

SBC Communications

Alcatel

Telcel *

America Telecom *

America Movil *

Carso Global Telecom *

Grupo Financiero Inbursa *

Grupo Carso *

Telefonos de Mexico *

Philip Morris

Petroleos Mexicanos

Fundacion UNAM

NYSE Advisory Council

Hospital Infantil

Soumaya Museum *

Restoration of Mexico City's Historic Center *

Gianluca Baratti covers the Mexican stock exchange for BUSINESS MEXICO.