Mexico's largest fixed-line telephone company, Telefonos de Mexico SA (TMX), said Tuesday it will slash its capital expenditures for 2009 by about a third to 8 billion pesos ($559.5 million) due to a weak economy and regulatory red tape that is delaying its entrance in the pay-TV market.

Speaking in a conference call to discuss the company's fourth quarter results, Chief Financial Officer Adolfo Cerezo said the company had originally budgeted around MXN12 billion for capital expenditures this year.

Telmex, as the company is also known, made capital expenditures of about $879 million last year, of which 76% went to expand its voice and data businesses.

Telmex is more vulnerable to a recession in Mexico after it spun off of its faster growing international arm Telmex Internacional SAB (TII) into a separate publicly traded company in June.

The Bank of Mexico has forecast an economic contraction of between 0.8% and 1.8% this year.

The company's plan to directly offer pay-TV has been delayed as it awaits a decision from the federal government over whether it has to pay a fee to change its concession so it can offer that service.

Telmex is eager to add pay-TV to its lineup of broadband and phone services as it faces growing competition from rival fixed-line companies and cable TV operators like Megacable Holdings SAB (MEGA.MX) that sell all three services.

Cerezo said Telmex is ready to offer pay-TV as soon as it receives regulatory approval.

In November, Telmex signed a contract to distribute the satellite TV services of Dish Mexico, a venture between Mexico's MVS Comunicaciones and EchoStar Corporation (SATS), which critics say is an attempt to evade regulations that prohibit it from offering pay TV.

Telmex says its arrangement with Dish Mexico is no different than the billing, collection and distribution services it provides for 980 government institutions and private companies.

According to Telmex, about 51% of Dish Mexico's customers pay through its telephone bills.

"Based on the information we have at the end of December, Telmex provides billing and collection services to 7,300 Dish customers," said Cerezo, who put total Dish Mexico customers at around 14,000.

Telmex said Monday that its fourth quarter net profit from continuing operations slid 55% on the year to MXN2.98 billion, or MXN0.16 pesos per local L shares, largely on foreign exchange losses.

Sales fell 2.7% on the year to MXN30.97 billion in the quarter as the result of lower local and long distance revenues.

The market had expected quarterly net profit of MXN4.60 billion, or MXN0.25 a share, on revenues of MXN31.05 billion, according to the median estimate in a Dow Jones Newswires survey of seven analysts.

"We believe Telmex is not a defensive stock due to the significant reduction in voice revenues. We also believe that the slowdown in the economy is likely to have a larger impact on the wireline providers than it will on wireless providers," Morgan Stanley telecoms analyst Vera Rossi said in a note.

Telmex, which controls over 80% of the country's fixed phone lines, saw its lines in service fall 1.2% to 17.6 million at the end of December as a result of competition from other telecommunications companies and number portability rules that went into effect in July.

Ironically, Telmex's main competitor is the local unit of Latin America's largest wireless carrier, America Movil SAB (AMX). Both companies are owned by Mexican billionaire Carlos Slim.

"Should we continue to see a decline in lines?... Probably in the short term yes, we should," Cerezo said.

Data services, namely residential broadband, have been one the few bright spots for the company amid a decline in its core local and long distance businesses due to the migration of traffic from fixed to mobile services and Telmex's aggressive marketing of discounted multi-service packages.

The number of broadband accounts rose 71.3% on the year to 5 million at the end of December, while Internet revenue grew 20.4% to MXN13.17 billion in 2008. However, Internet sales still represent just under 11% of overall revenues.

Cerezo said the company will continue to finance the sale of computers in installments to drive its broadband business as only one in four Mexican families own a computer.

"We are changing this company from depending on making additional (phone) calls to a company in which we provide a lot of features, a lot of services, using a wireline," he said, adding that growth in broadband accounts this year will probably be lower than in 2008.

Telmex's shares traded on the Mexican Stock Exchange were recently down 3.1% at MXN12.08 Tuesday amid a broad market decline.

By Ken Parks, Dow Jones Newswires, 52-55-5001-5723, ken.parks@dowjones.com