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(Adds comments from Grupo Salinas CEO, AT&T CFO, background)
By Marina Lopes and Elinor Comlay
WASHINGTON/MEXICO CITY, Nov 7 (Reuters) - AT&T Inc agreed to pay $1.7 billion to acquire Mexico's third-largest wireless operator, Iusacell, as it seeks to grab a slice of a market with lower cellular penetration than the United States and faster potential growth.
Mexico's government earlier this year implemented reforms to shake up its telecom and broadcast market by weakening the dominance of broadcaster Grupo Televisa and billionaire Carlos Slim's cellphone and fixed-line company America Movil.
AT&T is looking to tap into the growing cellphone market in Latin America's No. 2 economy now that the government is encouraging foreign investment in the sector, Chief Financial Officer John Stephens told Reuters.
"Our focus in investing in Mexico is about the great environment from an investment perspective, the regulatory reforms, the growing population and middle class," Stephens said.
AT&T shares were up 0.57 percent at $35.11 in after hours trading.
The deal, which is subject to approval by Mexican regulators, will occur after Iusacell's owner, billionaire businessman Ricardo Salinas' Grupo Salinas, buys out its partner's 50 percent stake in Iusacell.
Iusacell said in September it would buy back that stake, currently held by broadcaster Grupo Televisa, for $717 million.
"Once we reached that agreement, we started...talking to several companies," said Grupo Salinas executive Luis Nino de Rivera. "One of them was AT&T. We initiated the discussions because we were interested in making good on the next step that we had to find for Iusacell."
Iusacell hopes to complete the sale in the first quarter of next year, he said. He did not mention which other companies Grupo Salinas spoke to about Iusacell.
The deal would be the second major acquisition this year by AT&T, which is also taking over satellite provider DirecTV for $48.5 billion. Prior to the DirecTV, AT&T deal held about 10 percent of America Movil. It sold the shares in June for $5.57 billion to a real estate company controlled by Slim.
The Iusacell deal may pave the way for AT&T to buy up more in Mexico. The company has been tipped as a buyer for America Movil assets that are up for sale as the Mexican operator tries to reduce its market share below 50 percent in order to skirt harsh penalties for dominant players introduced with the reform.
"It is hard to imagine you would go into Mexico and buy Iusacell all by itself. There is probably more of this story left to be written," said Craig Moffett, analyst at MoffettNathanson in New York.
AT&T also said it will trim its 2015 capital spending outlook to $18 billion from $21 billion.
Iusacell, Mexico's No. 3 mobile operator, serves 8.6 million customers and has struggled to gain clients in a market that is almost split between America Movil, with about 70 percent of the market and Telefonica with nearly 20 percent.
Including $800 million in debt AT&T is acquiring, the Iusacell deal is worth $2.5 billion. (Reporting by Marina Lopes and Elinor Comlay; Editing by Alan Crosby)