70 Business The EconomistDecember 7th 2019
T
his is ayear of poignant anniversaries in Spain’s relationship
with Latin America. Exactly 500 years ago Hernán Cortés
launched his conquest of Mexico. In 1939 Mexico’s left-wing presi-
dent, Lázaro Cárdenas, opened the door to Spaniards fleeing fas-
cism at the end of the civil war. It might have been a celebratory
year for Spanish business, too. In 1989 Telefónica, Spain’s biggest
telecoms firm, made its first incursion into Latin America by bid-
ding for a Chilean counterpart, unleashing a flood of Spanish in-
vestment into the region in the 1990s known as la reconquista. In-
stead, it has been a year of pot-banging protests and economic
turmoil in the region. It says a lot that 30 years after it planted the
flag, Telefónica has decided to cut its losses in the former Spanish
colonies, and may sell its businesses there altogether.
Telefónica’s new strategy, announced late last month, is part of
a rethink of the company by its boss, José María Álvarez-Pallete. Its
market value has almost halved over the past five years to €35bn
($39bn). It carries a whopping €38bn of net debt. And, common to
all global telecoms firms, it faces the challenge of offering custom-
ers much faster wireless speeds via 5gand more digital services. As
a result it plans to refocus on four core markets, Spain, Brazil, Ger-
many and Britain, and create separate digital and infrastructure
businesses. On December 4th Orange, its French rival, announced
similar plans to reinvent itself for the digital age.
Yet it is the prospect that Telefónica may sell its businesses in
Argentina, Colombia, Mexico, Chile, Peru and other so-called His-
pano-American countries, that is most significant. They account
for 21% of its revenues. Their sale, which could raise €13bn or more,
represents a historic u-turn that is likely to reverberate in Spain’s
boardrooms. Like Telefónica, Spanish banks, energy firms and
other companies have reason to agonise over the slow growth and
currency volatility across the Atlantic. Their industries, too, are in
the throes of technological disruption. For some Latin America is
no longer a land of opportunity, but a distraction.
For years Spaniards celebrated the revival of their imperial ties
to the New World. When Latin American countries started to liber-
alise their economies in the late 1980s, Spain was a country with a
meagre population, inward-looking companies, and a pressing
need to globalise. Few Europeans believed that it would fulfil itsaim of becoming a bridge to Latin America. However, as Lourdes
Casanova of Cornell University recalls, its companies needed
quickly to build scale there to resist other European firms breath-
ing down their necks at home. Latin America helped turn Spanish
firms into global ones.
Within a few decades Spain had become the second-biggest
foreign investor in the region after America. Its firms have invest-
ments today worth €156bn there. The biggest, such as Telefónica,
Santander and bbvain banking, Iberdrola in utilities, and Repsol
in oil and gas, accounted for most of Spain’s investment in the re-
gion. Their shared language, as well as passable Portuñolin Brazil,
enabled them to operate service industries in places where tele-
communications, banking and utilities were hopelessly back-
ward. Profits from Latin America during a commodities boom
helped Spanish firms through the financial crisis of 2008-09.
That is only half of the story, though. After underbidding in
1990 for Telmex, the Mexican telecoms monopoly that turned Car-
los Slim into one of the world’s richest men, Telefónica went on to
overpay elsewhere, sinking over €140bn in the region, a fortune
compared with what the assets are worth now. The ride since then
has been a rollercoaster. From the tequila crisis in Mexico in
1994-95, through mega-devaluations and political upheaval in Bra-
zil and Argentina, to left-wing dictatorship in Venezuela, Spanish
investors have had a crash course in disaster management. Repsol
may have suffered the worst. In 2012 Peronists in Argentina—who
beat a reformist incumbent in October’s presidential election—ex-
propriated Repsol’s stake in ypf, the national oil company. It was
only partially compensated for the almost $16bn it had paid for the
holding in 1999. More recently it has had such trouble sourcing
heavy crude from Venezuela and Mexico, it is reportedly consider-
ing carrying it from western Canada to its European refineries.
Yet even without crisis, day-to-day business has been a strug-
gle. bbvaand Santander have used their big Latin America subsid-
iaries to help offset zero interest rates closer to home, and have no
plans to pull out. Now Mexico, where bbvais the biggest bank, is
flirting with recession. Santander has done well recently in Brazil,
where it is the largest foreign bank. But it suffers from currency
weakness in many parts of Latin America. Telefónica’s revenues,
returns and cash flows in Peru, Chile and Colombia have flagged
owing to competition from scrappy new entrants putting market
share ahead of profitability.La Noche Triste
Spain is not yet in full retreat. Telefónica’s moves could be a combi-
nation of selling assets, as it is doing in Central America, and form-
ing alliances, as it has recently done in Mexico by agreeing to use
part of at&t’s network as a way to reduce losses. But it may sell up
altogether to reduce debt quickly. Firms such as Liberty Latin
America and Millicom are expanding fast around the region, large-
ly through acquisitions. China Mobile is showing interest in Latin
America as well. Telefónica’s decision to stay put in Brazil, by far its
biggest market, suggests that its new mantra is focus.
Other Spanish firms have made similar calculations: bbvaby
concentrating mainly on Mexico, and Santander on Brazil. As pres-
sure increases on banks to adapt to the fintech era, and on energy
firms like Repsol and Iberdrola to reduce carbon emissions, focus
makes more sense than empire-building. Even Cortés was forced
to make a tactical retreat in 1520 in what is called “La Noche Triste”.
For Telefónica, this is undoubtedly a “sad night”. But if its retreat is
more than tactical, other firms may sound one, too. 7Schumpeter Conquistadors in a quandary
The agonising dilemma of Spanish firms in Latin America