Telecom dispute resolved.

After nearly four years of bitter dispute, Mexican telecommunications giant Telefonos de Mexico (Telmex) and long-distance service rivals Avantel and Alestra have finally reached a sweetheart deal that should encourage healthy competition in the industry.

The three companies ratified a broad agreement on matters including interconnection fees, resale tariffs, local and long-distance service, asset usage, quality standards and international tariffs. They also settled long-pending debts in the wake of the deal, with Telmex receiving payment in cash of some US$180 million in accounts receivable.

Heralded as "a new age" for the telecommunications industry by Mexico's new Secretary of Communications and Transport (SCT) Pedro Cerisola, the deal could lead to the cancellation of an upcoming panel and hearing by the World Trade Organization (WTO), according to analysts.

The WTO was set to investigate Mexico's fair trade practices in the telecom sector at the request of the U.S. Trade Representative, who was acting on complaints from Avantel and Alestra, both part-owned by U.S-based MCI WorldCom and AT&T, respectively.

Cerisola recently said, however, that the companies' settlement may not resolve the dispute before the WTO, since that issue is "between the countries, not the companies."

Either way, both investors and analysts seemed happy enough the dispute was over, rallying Telmex stock in the days afterward.

"In our view, this deal is positive for all parties involved," says Luiz Carvalho, Latin American telecom analyst for Morgan Stanley Dean Witter. "The agreement lifts the conjecture as to possible dramatic changes in the regulatory environment in Mexico and shifts the market focus to operational execution. We believe investors should focus on the future."

Under the deal, the companies accepted a new interconnection rate of 1.25 U.S. cents per minute in 2001, down from the previous 3.36 U.S. cents, and reduced the settlement rates from the current 19 U.S. cents per minute.

The companies are also cancelling all existing lawsuits among them, and have agreed to recognize their commitments regarding investments for interconnection services, including long-distance services.

"We see this news as highly favorable from a strategic and financial point of view," says Martin Lara, telecom analyst for Valores Finamex brokerage. "Telmex and its main competitors have reached an agreement that promises to help improve the sector's competitive environment in Mexico."

Analysts say they also remain positive on Telmex's performance, despite what is seen as more open (and stiffer) competition starting this year. Telmex, with hooks gripping deep into other Latin American telecom markets, is expected to maintain strong profits, especially with the spin off of its well-poised cellular subsidiary America Movil, which is due to be completed by the end of the first quarter.

Most important, the changes will likely force a more rational, growth-oriented approach in the telecom system, ultimately benefiting consumers and line growth. With just one telephone per 10 people in the country, plenty of market share remains for smaller competitors, analysts say.

Cellular, wireless and digital telephone service providers are seen slowly consolidating operations and expanding coverage. Telecom and data service provider Pegaso currently has some 570,000 users and expects to open coverage in nine regions throughout the country by the end of 2001.

Mexico wireless company Unefon is also seen as a major contender in the market. With Ricardo Salinas Pliego-owned broadcaster TV Azteca as its principal shareholder, Unefon has affordable publicity options and distribution through Salinas Pliego's retail chain Grupo Elektra. Unefon recently raised US$98 million in an initial public offering for 176 million shares of Unefon series A shares on Mexico's PC stock index. The company said it will use the funds for more aggressive investment and expansion.