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Slim's Chance for Troubled Carriers

There is a reason Mexico's Carlos Slim Helu is called Midas: he takes investments few would touch and turns them into gold.

Lately, his golden touch has been working north of the border. Slim owns 13.5 percent of MCI Inc. (Nasdaq: MCIP), and last week, when the carrier announced a dividend to shareholders, it meant a $68.1 million payout to Slim as MCI shares rose 16 percent on the news.

Slim's interest in U.S. interexchange carriers is noteworthy. Not long ago, MCI and AT&T Corp. (NYSE: T) were among the biggest competitive threats to Slim’s Teléfonos de México (Telmex), Mexico's largest phone company.

But Slim began buying WorldCom (now MCI) bonds in 2002, when the company was mired in bankruptcy and financial scandals and most everyone was planning its funeral. Some think that when the price is right for AT&T, he’ll take a chunk of that as well.

In July, Slim added 390,000 shares of Global Crossing Holdings Ltd. (Nasdaq: GLBC) to his own holdings, through his companies, Orient Star Holdings and Carso Global Telecom. This increased his stake to 19.9 percent (see Slim Can Buy More Global Crossing Shares and Global Crossing Leans on Loans).

In mid-July, more than three-fourths of Global Crossing's shares were in the hands of short sellers. But when Slim started buying, the shorts got scared and on July 30, the stock rose 9.3 percent on the news of Slim’s interest.

Short-term gains on dividends and share spikes are one thing. Slim's long-term -- and yet unknown -- plan for MCI and Global Crossing is another story. “For MCI the fundamentals remain difficult,” says analyst John Hodulik of UBS Investment Research. “In my opinion, it doesn’t seem that we are reaching any inflection point in terms of the supply-and-demand equation.”

Hodulik says a vulture investor getting into the long-distance carriers has got to be looking at a very long time frame. For now, he says, these companies’ stocks seem to be headed in the wrong direction.

Still, Slim has such a strong record, few will second-guess him, particularly since he made his fortune in telecom.

When he took over the newly privatized Telmex in 1991, he was faced with the prospect of modernizing a company that made customers wait for a year to get a new long-distance phone line. He only had four years to turn Telmex around, since its monopoly was set to end in 1997, when it would compete with AT&T and other U.S. telecom giants. By 1993, Telmex was profitable and Slim's 20 percent stake soared in value from $1.8 billion to more than $6 billion.

In 1997, Slim bought 3 percent of Apple Computer Inc. (Nasdaq: AAPL), just before Steve Jobs returned and Microsoft picked up a 15 percent stake -- two events that resuscitated the company and sent shares soaring. Among other U.S. holdings, Slim's companies and his family have stakes in CompUSA, Prodigy (bought by SBC Communications Inc.), Officemax, and Saks Inc.



But how good is Slim’s timing these days? That depends on whether the telecom sector has really hit bottom. “The industry is ready for more restructuring,” says Mark Jamison, director of telecommunications studies at the University of Florida.

Slim may have bigger ambitions than just turning a cash profit, says John Ryan, chief analyst at RHK Inc.. Ryan says Slim's interest may be in companies that give him access to the underserved immigrant Latino population in the U.S. and the ever-growing cross-border telecommunications traffic. “I don’t think its just bottom feeding,” Ryan avers (see Better News on Internet Backbones).

In July, when Slim resigned from the board of SBC, a position that often put him in conflict with his MCI interests, he gave the seat to his son, Carlos Slim Domit. A Telmex spokesman says Slim senior wants to devote more time to infrastructure, health, education, and environmental issues in Latin America. This year he also handed Slim Domit the reins of Telmex, though he retains the title of honorary chairman for life.

Meanwhile, big Slim hasn’t stopped shopping in Latin America, where he has wide-ranging telecom holdings (see Global Crossing, Telmex in Voice Deal). This month Telmex bought Embratel (see Telmex Buys Embratel From MCI).

As telecom value hunters go, Carlos Slim (and family) are always worth watching. “He’s got a pretty strong near-monopoly situation in Mexico, and that kind of gives him a strong profitable base to be a good bottom-feeder here,” says Eli Noam, director of the Columbia Institute for Tele-Information at Columbia University. “Even in Europe, most of the companies are heavily in debt and can’t make major investments.”

— Marcy Burstiner, special to Light Reading

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