LILA - Liberty Global Latin America tracker

[alwaysinvert]

I heard somewhere that upwards of 50% of subscription rights go unused sometimes in US rights offerings... Maybe it will not be that much in this case but with oversubscription it could be a very effective value transfer and I think already the basic proposition is attractive. This is the most simple explanation.

 

However, continuing with the Tigo angle, working towards equalizing their respective leverage ratios would make a theoretical all-stock deal an easier route.

 

edit: This recent Liberty rights offering was 97% subscribed https://www.businesswire.com/news/home/20200616005290/en/Liberty-Media-Corporation-Announces-Completion-Rights-Offering

[ander]

The S-3 isn't out yet and I have not participated in other liberty style rights issues so had questions on the mechanics. If I want to increase my investment in LILA what is the optimal way and considerations? As in is it better to buy more stock now and get the rights, or buy the rights by themselves, or just buy the proportion I want in stock?

[Munger_Disciple]

Can anyone share their estimates of proportionate debt and proportionate EBITDA attributable to LILA shareholders by taking out what is attributable to minority interests (not including the pending AT&T and Telefonica acquisitions)? TIA

[NotSoWise]

Also to add one question - is it possible to oversubscribe rights issues - i.e. not all shareholders might participate.

[WayWardCloud]

It supposed to be an all cash deal, but recently they realized that things were worse (Q2 results) and will take longer to recover. Without additional money they could potentially breach covenants (OCF decline, acquisition costs, more debt) and were short cash to close. Buying a mobile at ~7x pre synergies and issuing stock at low bottom valuation would not make it a good return deal. Strategically makes sense, but return wise its not great.

 

So far they did possibly one good deal (AT&T) and rather two mediocre (C&W - Malone forced, Costa Rica).

 

"Funny" thing was announcing buybacks (not buying back anything) and then right after issuing stock.

 

All the above put some question marks on CEO competency. The sooner they merge with TIGO the better - so TIGO CEO could take over (subject to valuation).

 

The Costa Rica deal was finalized a week ago - I think they would have had a pretty good idea what Q2 results were by then. I suspect that insiders (who have committed to taking their pro rata shares) want to buy more stock at current prices and the deal structure makes sense for that reason even if the deal is value neutral to the company.

 

What would make further sense if Tigo-LILA is not happening soon would be for them to swap their Panama and Costa Rica assets.

 

Or maybe the extra money is meant to cover yet another unannounced deal? Telefonica said they wanted to exit LatAm, excepted Brazil, entirely and quickly. The two natural buyers were TIGO and LILA but TIGO just opportunistically walked back from the Costa Rica deal on some shady technical grounds, so I imagine Telefonica wants nothing to do with them anymore. That leaves the door wide open for LILA to grab some assets cheaply, hence the capital raise?

[alwaysinvert]

Or maybe the extra money is meant to cover yet another unannounced deal? Telefonica said they wanted to exit LatAm, excepted Brazil, entirely and quickly. The two natural buyers were TIGO and LILA but TIGO just opportunistically walked back from the Costa Rica deal on some shady technical grounds, so I imagine Telefonica wants nothing to do with them anymore. That leaves the door wide open for LILA to grab some assets cheaply, hence the capital raise?

 

It's possible since the raise is relatively large, but I don't know that there are any opportunities with within country synergies there. Telefonica's Chile business is too big probably ($2.2b revenue) and seems like the kind of merger which would face regulatory issues.  Maybe there are some smaller assets that they can get on the cheap from Digicel (which is in bankruptcy), but that would probably make those markets outright monopolies so that could also be an issue.

 

The most immediately logical to me is as I said that Tigo sells Costa Rica to LILA and LILA sells Panama to Tigo. If they aren't still aiming for a full-blown merger ofc.

 

The S-3 isn't out yet and I have not participated in other liberty style rights issues so had questions on the mechanics. If I want to increase my investment in LILA what is the optimal way and considerations? As in is it better to buy more stock now and get the rights, or buy the rights by themselves, or just buy the proportion I want in stock?

 

It's an impossible question to answer 100% but stocks that are under an ongoing rights offering tend to trade pretty weakly before and then trade down as highly motivated sellers empty their accounts of the rights, resulting in a negative feedback loop for the common price due to the arbitrage opportunity. But I have seen exceptions to this too and maybe there will be some committed buyers in this one who like it even if the rights don't trade down a lot. Take from that what you will, it's not like it is easy to predict stock price moves any which way.

[NotSoWise]

Given USD 350m raise and that CR deal needs some USD 100-200m from capital raise, it leaves remaining for other M&A. I think they are in the process already or expect something to come soon, thus larger capital increase. Since they are maxed out on debt (also given Covid decline in Q2), they needed capital raise to get strategic assets (quad play/ consolidation). There were willing sellers and they couldnt wait.

 

Despite being an unhappy shareholder so far, I think LILAK will get there at some point (5-10 years) - given economics of marginal customers (almost pure cash) and growing scale. Slowly the new customers will start to show up in FCF. They will try to replicate what CHTR did - but I am not saying the results will be the same.

 

Bad deal C&W plus 3 bad lucks (hurricane, Chile demonstrations, Covid), delayed things by some +/- 3 years.

[ratiman]

The Digicel B2B and cable/FTTH assets make sense. B2B has suffered due to Covid so I imagine the Digicell bondholders aren't keen on holding onto it and it doesn't fit with Digicel's consumer mobile focus.

[alwaysinvert]

Our goal is to create value. If we wanted to get bigger, we would have actually announced some other deals in the second quarter of this year.

 

This was a curious comment from Nair on the last conference call. I don't think that can be interpreted as anything other than some big talks going on, at least at an informal level, in Q2. I obviously have no idea what that refers to in reality, but I do have an elaborate theory.

 

However, continuing with the Tigo angle, working towards equalizing their respective leverage ratios would make a theoretical all-stock deal an easier route.

 

Mind you, I'm changing my mind here because I have been skeptical of the combination being imminent really ever since the last talks broke down in early 2019 because there always was a rather large difference both in market valuation and in leverage. And a deal with a big cash component was realistically never on the table.

 

So here's the puzzle I'm laying:

 

Tigo at this point would have had to have enough visibility to restart the share buyback program that they so conspicuously shifted to, and then later even cancelled the smaller dividend completely. So why are they not reinstating the dividend or restarting buybacks? It's not like going back in with share repurchases needs to be a big capital commitment - if the thesis is intact it would be extremely accretive even if they just used say 1/5 of the current cash on hand to buy back stock through the rest of the year.

 

It could be that they are just ultra cautious about working capital rewinding, but Q2 results were really benign compared to worst fears and all indications were that early Q3 kept on improving, so I don't know where all the new bad debt is gonna come from. There is no real reason to think that trend reversed as of now. And now Colombia is opening back up and so on. Will Latam lock down in a big way ever again? Most probably not, they can't afford it and, putting to the side its theoretical efficacy, the adherence is poor anyway.

 

With all of that said, Tigo's cash hoard is just way too big to be sensible at this point. And it would surprise me mightily if credit markets weren't open to them currently if they wanted to tap them at the holdco level. So what gives? Well, radio silence - Tigo said nothing about its cash position in the last cc despite bragging extensively about its size in the spring.

 

Multiples and leverage will probably be very similar between the companies when LILA's raise is finished.

 

The extra cash raised vs needs from the Costa Rica deal can with some imagination be construed as a premium paid in advance by LILA (or more correctly, by LILA's owners) in a later no to small premium deal structure, when the leverage ratios have converged.

 

Let's see what happens.

[NotSoWise]

Alwaysinvert - I thought about the points you raised many times - I have been in LILAK since four years already... and since recently in TIGO as well.

 

1. re buybacks - I think both Tigo and LILAK wont do any buybacks until they are done with consolidation/ adding pieces to their countries offer to have full scope - mobile/ internet/ cable. Given fixed/ mobile convergence, its strategic imperative to collect the various pieces first rather than to buyback stock even at low price. Stocks you can always buyback, but if you miss an asset put for sale, then you have missed it.

 

2. re Costa Rica - its USD 350m only if 100% shareholders would respond. If some 60% respond, then you have the equity portion needed (EV 500, implied EBITDA pre synergies of USD 70m (7x), of which 4x is debt and 3x is equity => so USD 210/220m equity portion). Given that nobody knows how many will respond, they asked for USD 350, to be on the safe side. If they raise more, then they could potentially spend it on something else.

 

3. re TIGO/ LILAK combination, I think its almost certain it will happen, just hard to say when - interesting Tigo backed off from CR so LILAK could buy (seller missing antimonopoly deadline is just a nice story for the press - still, I am no local so dont know for sure if it was true or not what they explained).

[alwaysinvert]

Tigo already is an integrated player in all their countries except... Costa Rica. So, it would not make any sense to put off buybacks for that reason and they didn't until the full covid effect struck - they were fully committed to repurchases. Like I wrote somewhere earlier, either Tigo and LILA can swap assets to both integrate more markets or they can do the full merger. Tigo also has some more slack in non-core assets left to dispose of.

 

The only major strategic goal Tigo has left to achieve in their markets is competitive stability in Colombia, which has been put in question again now by WOM buying up the bankrupt Avantel and, perhaps illegally, lending them spectrum. There is a court case initiated by Claro trying to curb their progress.

 

On the subscription - my assumption is that there will be a possibility to subscribe to shares without rights which will be filled by insiders provided that some rights go unused. LILA will likely get the full sum in the end. But we will see when the complete terms are out and maybe they change the number before that.

[dcollon]

Anyone having an opinion on the rights?

[jgyetzer]

It depends on your view of LILA itself.  I am participating and will oversubscribe if available.  The company looks cheap to begin with and there is also a bit of a "play the man, not the cards" component.  I see Malone and management taking an opportunity to put cash into the business to be used for ongoing network expansion and upgrade along with acquisitions.  I think the market has a much dimmer view of the company's prospects and ability to survive COVID as well as its reasons for the rights offering (i.e. it needs cash to survive and will just result in dilution).

 

As for the rights pricing, it seems about right compared to current LILAK price.

[CorpRaider]

Yeah seems like it's priced "fully" peeps must be ascribing some option value to the potential over-subscription rights.  IDK at $9 ($10 bil), I'm kind of thinking why not just buy $CMCSA?

[jgyetzer]

Yeah seems like it's priced "fully" peeps must be ascribing some option value to the potential over-subscription rights.  IDK at $9 ($10 bil), I'm kind of thinking why not just buy $CMCSA?

 

I'm not sure I follow.  Are you saying that if LILA has an EV of $10B, then CMCSA is your preferred investment?  I agree US cable seems attractive.  Just wondering why it's CMCSA vs. LILA.

 

And yes, I think you're correct about the option value of over-subscribing.  I bought a small amount for that reason yesterday.

[CorpRaider]

Sorry. Yeah, basically if I'm not getting a material/any discount (not enough $$$ to really hammer any oversubscription I'm offered).  Just using cmcsa as the opportunity cost/hurdle bc it's trading cheapish/in the same zip code (if I'm getting no discount).

[Munger_Disciple]

Yeah, basically if I'm not getting a material/any discount (not enough $$$ to really hammer any oversubscription I'm offered).  Just using cmcsa as the opportunity cost/hurdle bc it's trading cheapish/in the same zip code (if I'm getting no discount).

 

Comcast is trading at a discount mainly because of NBCU and Sky. The cable division is trading for an EV of 9.7 times EBITDA on a look-through basis if you assume a current multiple of 7 for NBCU+Sky. It is amazing that they paid nearly 20 times EBITDA for Sky; a very poor capital allocation decision. Instead they should have just bought back a ton of stock like Charter. 

[CorpRaider]

Yeah, I don't get Sky.  I feel like, go forward, that capital burned via a bad move is largely the problem of the guy selling to me at a price discounting that move. 

 

I'm not sure about Roberts (I had no idea McDonalds CEO was reportedly faxing nudes all over the place either) but I do like that he seems to understand the Disney model, was smart enough to try and buy it; having failed in that endeavor is trying to (sort of) replicate it, and is probably the only guy in media with the potential to actually do it (given the whole lifetime tenure thing).  I wonder if he can get more of the potter rights over time.   

 

I am not as negative on the legacy media providers (not saying it should be valued the same as chtr).  I think once things settle down and re-aggregate and/or the capital markets enforce some financial discipline on some new entrants (and the dumb money, i.e. AT&T) it will be ok.

[alwaysinvert]

I think this is now a potentially very good situation. Price is below the post-covid lows of the spring, whereas TIGO, which it usually pair trades with, is up 50% from them. The stock never got a chance to find its proper market price off of perfectly fine Q2 results due to the rights offering (not accidentally in my view). LILA, just like TIGO, has improved its position significantly with recent m&a and potentially has a chance to do more in the next little while.

 

I know everyone and their mom have been burned on this name by paying up for growth which never materialized and instead got hit with a stinging multiple contraction. But I'm sticking my neck out now and saying there is value here at this point. It's cheap on all the classic metrics, covid wasn't a giant catastrophe, the business is way stickier than it gets credit for and management is bullish. If this goes from approx a 5x ev/oibda at $8 with 231m shares outstanding to a 6x the stock is almost a double. A price pop like that can be achieved via some better sentiment, which has already happened to the rest of the sector, or via delevering or via m&a. Multiple outs.

 

To me it seems extremely likely that this rights offering was partly constructed for insiders to get more money into the situation without paying up. I can't oversubscribe the rights offering due to my jurisdiction, but I hope all US holders are strongly considering doing it.

 

Just so I don't sound unreasonably bullish; yes they are in s-hole markets; yes the multiple can contract further; yes they are very levered; yes you should probably buy CHTR and triple your money instead because nothing outside of the US can ever give good returns.

[NotSoWise]

After being 4 years too early in LILAK, I pretty much have same view as alwaysinvert - I hope it is not a nice, self-reinforcing groupthink.

 

I run some simple model to see how it works on the returns, with key assumptions below:

- no disruption to the business - so no hurricanes, much less COVID and no Venezuela in one of the countries they operate in, no overpaying for some other business from Malone

- 3% OCF growth

- leverage at 3.9x

- 10-12x FCF exit multiple

Other: no TIGO merger, no M&A and all money to buybacks at reasonably conservative and increasing prices going forward, reasonable OCF to FCF conversion plus on top 30% of business FCF taken off arbitrarily - but not from extra debt (cash from extra debt taken at 100% value).

 

=> you get to USD 38-48 per share in 5 years. If you put 0% OCF growth and 7x FCF exit, you get to USD 18.

 

Dont want to get into discussions about assumptions, my point is if you run the model yourself, you will end up more or less at similar level of returns.

 

The key assumption is no business disruption over the next 5 years - something which is close to random and independent to some degree from each other and between years. Given its LATAM, disruption is more likely to happen there than e.g. in US. Just to remind, in the past 4 years we had: PR hurricane, C&W fu... up (from LILAK side, from Malone side was ok), COVID. Its a big and optimistic assumption, driving the returns.

 

 

[Spekulatius]

^ Has there ever been a time in Latin America or the Caribbean with no major disasters ( political, natural , economical ) of any kind within a 5 years timespan?

[NotSoWise]

I think last time it was XIV century.

 

Agree, its big assumption nothing major disrupting the business will happen over the next 5 years.

[Liberty]

I think last time it was XIV century.

 

I bet things were pretty rough then too... Warring empires and tribes, famines, epidemics, etc.

[morob]

you guys are a wee bit dramatic. Puerto Rico, Caribbean, Chile, Panama, Costa Rica are stable jurisdictions and 60% of OCF is in USD. The T deal will only increase this. Less hurricane risk would be preferable and I would expect any further major acquisitions to go into that direction (hopefully something like Megacable)

[WayWardCloud]

If you have signed up your LILAR for over-subscription you might want to double check your order just to be safe.

It took two hours over the phone today for Interactive Brokers to allow me to enter a value superior to zero under that box (nb.3).

I had signed up my shares already a couple weeks ago without a problem but the terms of the deal have been updated and somehow my order didn't transfer and I was "locked out" from entering it again.

 

It was probably just a glitch with the broker but my conspiracy theory brain says maybe Malone is trying to yet again stick it to other shareholders with some last minute small change in the terms trickery since the deadline is tomorrow  :-X