TIGO - Millicom

[jgyetzer]

I happened to catch live most of the Morgan Stanley presentation on Thursday. The recording has for some reason not been reuploaded yet, so I'm working entirely from memory here. There was a question on the dividend from the moderator towards the end. The CFO basically answered that they were not going to revise the policy until the end of the year ("as usual") due to the technical overhang and turbulence connected to the Kinnevik transaction. This is a curious thing to say if they don't plan on changing it in a negative direction, so I take this as almost complete confirmation that they will at the very least lower the dividend but most probably cut it completely.

 

Will this eventual "news" put even further pressure on the stock at that point? Typically the Swedish investor base is very dividend focused and companies who cut their dividend get severely punished on the day even when it was perfectly obvious beforehand that they would do so for anyone who could care to look. Most likely some former Kinnevik owners who has elected to hold onto the stock will throw in the towel on a dividend cut, especially considering the current juicy yield on historical numbers.

 

Of course, all this may be superceded by other events and the stock price could very well rise a lot in the interim. Who knows?     

 

As an aside, this answer in a circuitous way also extinguished the small hope I held out that they would do some buybacks into this recent price weakness - we will probably have to wait until next year for any buybacks. The reasoning being: why not sink the stock price even more if you are going to do repurchases?

 

I think you are right that a dividend cut is likely.  There are a number of reasons technical/special situation reasons to expect the stock price to continue declining.  That said, if we have figured that out, I'm sure others already have as well and so it's tough to guess at when it's "safe" to invest.  I've been buying small amounts each time it decreases since about $50.  I'll let you know when I've reached a full position so you can expect the usual 20% drop thereafter ;)

[maybe4less]

TIGO look cheap based on EBITDA

 

It also has a ton of mobile revenue, which probably deserves a lower multipole.

[heth247]

This is an interesting idea and I started to look at the numbers. I think they should definitely cut the dividend to zero because it is not covered by free cash flow. Looking at their numbers, for the first 9 months of 2019, they generated 252M "operating free cash flow", which by their definition, does not include interest expense. And their interest expense (they called it "finance charges") in the same period is $347M. So they had negative free cash flow of 252-347 = -95M for the 9 months in 2019. And this is before the $133M semi-annual dividend paid! 

 

I think the reason of negative FCF is that interest expense increased due to their recent acquisition, but the full EBITDA of the acquisition has not come in yet. But still, look at the same 9 months in 2018, their operation free cash flow is $260M, and finance charges is $229, meaning they only generated about $30M FCF for that period, before increasing the debt for acquisition in 2019. That is still not enough to cover the annual $266M of dividend.  They need to cut the dividend!

 

Regarding the EV/EBITDA, I think the best measure should be using the proportionate debt/ebitda, not the gross. In their 3Q financial data, they reported proportionate net debt = 5,193 (before IFRS lease adjustment), and leverage ratio = 3.14. So this implies that their LTM of "proportionate" ebitda = 5,193/3.14 = 1,653M.  Therefore, the following is my calculation of proportionate EV/EBITDA (non-IFRS):

    (5,193(proportionate net debt) + 4,150(market cap))/1653(proportionate ebitda)=5.65X

 

This is by using LTM EBITDA, not forward EBITDA, so not including incremental EBITDA from the acquisition. But still, I don't think that is a number that strike me as "too cheap", certainly not the 4.8X or 4.4X number that were shown on this board.  What am I missing?

 

[kab60]

You need to look at it on a 2020-basis so the benefits of the acquisitions are in the numbers. Possibly that is the discrepancy?

 

I'd also expect the dividend to be cut, and then we might get a no-brainer offer.

[heth247]

You need to look at it on a 2020-basis so the benefits of the acquisitions are in the numbers. Possibly that is the discrepancy?

 

I'd also expect the dividend to be cut, and then we might get a no-brainer offer.

 

What is your estimation of their 2020 proportionate EBITDA? It needs to increase by $200MM to decrease the proportionate EV/EBITDA to 5X or below.  My point was, the proportionate EV/EBITDA is much higher than gross EV/EBITDA. The VIC write up was using the gross EV/EBITDA.

[alwaysinvert]

This news from last week is major for the sector: https://www.reuters.com/article/us-telefonica-meeting-plan/we-need-to-reinvent-spains-telefonica-eyes-2-2-billion-sales-boost-idUSKBN1Y129Q

 

Millicom most significantly overlaps with Telefónica in Colombia, where they are #2 and #3 respectively behind America Movíl (Claro). Colombia is right now a structurally less profitable market than Millicom's other markets and consolidation there would be a major positive, most especially in light of the huge cable rollout which Millicom has ongoing in the country. This would be pretty much the final puzzle piece in the merger story transformation which has been playing out in the last year.

 

Also note that Telefónica splits its new Hispam division in a North and South part, where the first in its entirety could be good fit for a mega merger with Millicom. Although, that would be heavily price dependent since it also contains some real turnaround dogs (Mexico, Peru, Venezuela). Here's a good graphic overview:     

[alwaysinvert]

The Stenbeck family office (controlling shareholder in Kinnevik) has bought an additional 350.000 shares in Millicom. If I'm adding it up correctly, this would make them a 3.3% holder in the stock across their vehicles once the distribution shares are merged in on Thursday.

 

https://www.di.se/live/stenbeck-okar-sitt-privata-agande-i-millicom-genom-storkop/

 

Even if it is not a major purchase this is still a bit surprising. They were likely a driving force for the Liberty transaction (which Kinnevik is said to have been positive towards) and have certainly greenlighted the plans of separating Millicom from Kinnevik.

[jgyetzer]

Has Kinnevik already executed the distribution of TIGO shares?

[alwaysinvert]

Has Kinnevik already executed the distribution of TIGO shares?

 

Yes.

[alwaysinvert]

Colombia is a very interesting market and some kind of change to the market structure there would be immensely valuable to Millicom.

 

ETB is publicly owned by the city of Bogotá. They are a fiber player with some legacy copper and would naturally make for great synergies in a full integration with Tigo, which is the most natural buyer.

 

The former mayor of Bogotá has tried to sell ETB throughout his term (ostensibly to finance hospitals and daycare) but gave up early this year. His successor, the newly elected Claudia López ran on a promise not to sell out ETB. However, curiously enough her and her party voted for a sale a couple of years ago (which was later stopped in courts). All in all, if there is no huge about-face, it seems like this opportunity is lost for the next couple of years.

 

Likewise, there seems to be no real movement towards a purchase of the other half of Tigo Colombia, which is owned by state-controlled EPM (Empresas Públicas de Medellín). This is a real shame since Millicom could really do with cleaning up their corporate structure in order to get a better stock market valuation.

 

________

 

https://www.larepublica.co/empresas/numero-de-operadores-actual-deja-ver-como-esta-el-mercado-colombiano-2941618

 

On the mobile side, there is a spectrum sale imminent in Colombia, set for Dec 20. Only three incumbent players have entered (Claro, Movistar and Tigo - the big three). A fourth player, Novator Group (owner of Chilean WOM), is also in, though. The speculation seems to be that they are angling to take over Avantel, which is a smaller player that has been in a dispute with Tigo and the two others over roaming fees which they have failed to pay for use of their networks. This is the bad debt charge Millicom took in Q3, which had a role in making the Colombia figures look so bad. Here's what Mauricio Ramos said about that in the Q3 conference call:

 

And lastly on the Colombia MVNO situation, the answer is very simple. We disconnected an MVNO that was simply not paying the bills that we hosted. And there's no more to it than that.

 

When and if they pay, we will reconnect them. The loss of that revenue has had an effect on our numbers in this quarter. It does have an effect on our outlook for the rest of the year, and that's why you've seen us correct that. And the last comment I'll make is that of course this is MVNO revenue.

 

It's not part of our strategic design going forward. And perhaps part of what's going on here is that the industry structure in Colombia simply needs to be reshaken because there's just no room for everybody.

 

Here is Avantel's version of the dispute: https://www.rcnradio.com/economia/avantel-responde-usuarios-por-decision-de-tigo-de-suspender-redes

 

After disconnecting voice service back in October, Tigo also disconnected data service last week: https://www.telesemana.com/blog/2019/12/12/tigo-colombia-tambien-desconecta-ran-de-datos-a-un-avantel-en-problemas/

 

Avantel is now being forced into restructuring: https://www.valoraanalitik.com/2019/12/18/reorganizacion-de-avantel-no-afectara-a-usuarios-refinanciara-deuda-a-17-anos/ 

 

But for a restructuring to be feasible at all, the roaming expenditures will have to come down. It seems like Avantel has been aggressively pricing for customer growth and if that is now coming to an end, margins will rise for the big three. Avantel's whole strategy seems untenable from the very beginning. However, I'm not going to pretend that I understand all the intricacies and dynamics at play here - I'm just sittting on the other side of the world googling and using some minor Spanish skills and translate tools to try to get a grip on the situation. Maybe there is someone out there with more on the ground insight into the situation.

[alwaysinvert]

Likewise, there seems to be no real movement towards a purchase of the other half of Tigo Colombia, which is owned by state-controlled EPM (Empresas Públicas de Medellín). This is a real shame since Millicom could really do with cleaning up their corporate structure in order to get a better stock market valuation.

 

On the other hand, this public part-ownership may possibly be what has allowed Tigo to play hardball with Avantel, something the two others didn't choose to do. The ownership situation can have possible drawbacks with for example employee costs but seems pretty likely to be a net benefit from a competitive standpoint.

[dwy000]

Love your research and insight AlwaysInvert. Keep it up!!

[alwaysinvert]

https://www.nytimes.com/reuters/2019/12/21/technology/21reuters-colombia-telecoms.html

 

https://millicom.gcs-web.com/news-releases/news-release-details/millicom-announces-spectrum-purchases

 

 

No spectrum for Movistar! Does this together with Telefonica’s strategic shift indicate a merger in the works?

[alwaysinvert]

A logical merger from the spectrum auction results would seem to be Novator (WOM) taking over Movistar in Chile and Colombia, providing a partial exit for Telefonicá and allowing Novator the luxury of not starting from scratch in Colombia. But if it is not prohibited by antitrust concerns, Tigo should also be in the run for the Colombia business. Claro is most likely too big.

 

https://www.larepublica.co/empresas/el-multimillonario-islandes-que-peleara-con-claro-tigo-y-movistar-2940500

 

However, it might be that Movistar is too big to swallow for Novator and that their angle - as I indicated above - is to grab the corpse of Avantel on the cheap and develop it with their new spectrum access. If so, there is only one possible taker left for Movistar: Tigo. Either way, some kind of merger seems imminent.

[alwaysinvert]

I'll stop spamming for a while after this but some more relevant links

 

Former CEO of UNE, who was behind the sale of half of EPM to Tigo in 2014, argues that they should sell the other half to Tigo now in order to finance pressing infrastructure investments:

 

https://www.larepublica.co/analisis/marc-eichmann-505757/el-dilema-de-epm-2945079

 

Some further comments from different actors on the market structure in Colombia here:

 

https://www.elespectador.com/economia/colombia-tendra-un-nuevo-operador-movil-partners-articulo-896923

[WayWardCloud]

AlwaysInvert, Please feel free to keep "spamming" us. This is all extremely interresting!

[Gregmal]

Kind of tangential, but do you have any familiarity with Tecnoglass? South American companies are tough...

[compounding]

Some recent information on the market structure in Guatemala:

 

https://elperiodico.com.gt/inversion/2019/10/03/operadoras-reportan-20-8-millones-de-lineas-moviles/

 

There are some similarities with Colombia from a Millicom perspective: they have a large minority owner, it's an important market from an earnings perspective, and Telefonica exited earlier this year by selling to Claro, which makes Guatemala a duopoly between Tigo and Claro as I understand it. According to the article, 92.5% of mobile users in Guatemala are on prepaid. 4G penetration is at 16% and fixed broadband penetration at 14%, so the organic growth story will be there for many years to come.

 

Potential value drivers for the Guatemala business therefore include: acquiring the minority stake, moving people to postpaid mobile subscriptions/increasing 4G penetration, and growing the broadband business organically.

 

33% of their customer base is on 4G in Guatemala as of Q3 2019 (up from 24% in Q3 2018), and they grew broadband subscriptions by 6.9%. My efforts in searching through the prominent newspapers in Guatemala didn't yield much in terms of the dynamics of the ownership situation, so if anyone has anything to add on that point it would be much appreciated.

[alwaysinvert]

The new mayor of Medellín now seems to signal an exit of EPM's 50% ownership in Tigo-UNE. "Either they buy us out or we buy them out": https://360radio.com.co/o-nos-compran-o-los-compramos-daniel-quintero-sobre-tigo-une/ 

[rogermunibond]

Between Telefonica exiting and TIGO and LILA circling each other, LatAm telecom/cable is getting interesting.

 

I would guess no one or no states want AMX to get bigger.

[alwaysinvert]

Between Telefonica exiting and TIGO and LILA circling each other, LatAm telecom/cable is getting interesting.

 

I would guess no one or no states want AMX to get bigger.

 

Agreed, although I suspect that we are further from LILA-Tigo at this point because of the transactions both of them have undertaken recently and the fact that both struggle with similarly low multiples. Short to mid-term there are also some more compelling M&A moves available to Tigo. Consolidation within their markets is after all more immediately value-creating than a combination with a player with almost no overlap.

[compounding]

Another article on the possible exit of EPM:

 

https://www.elcolombiano.com/negocios/que-tan-rentable-es-tigo-para-medellin-AF12242332

 

Google translate isn't perfect (although admittedly better than my Spanish). My interpretation is that emphasis is being placed on the company making net losses in the last few years, and that the author thinks Medellín should realize the value of their stake rather than keep investing for the possibility of larger dividends in the future. It also seems like the conflict of interest inherent in public/private partnerships is bothering the people quoted.

 

The implications for Millicom, if net losses at the company are a source of public pressure to divest the stake, are quite interesting. They would currently be incentivized to make losses for negotiating purposes, in particular by increasing capex. If they are able to add scale via the Telefonica assets and buy out EMP, the steady state FCF from Millicom's Colombian business should be significantly higher.

 

Some more in this link, including a quote regarding the unions in Medellín being uncomfortable with the current setup:

 

https://www.bluradio.com/nacion/alcalde-de-medellin-no-quiere-que-une-siga-siendo-el-socio-bobo-de-tigo-antq-237303-ie435

 

 

 

[compounding]

Tigo Paraguay issued a new bond at lower rates than the pre-existing ones, with maturity in 2027. They now have the same Moody's rating as Paraguay as a country (!). The bond has traded up after issuance by quite a significant margin, so there seems to be plenty of appetite for Tigo credit, even at the lower rate. Lowering financing costs across the company is probably another avenue for increasing equity FCF the coming years, and presumably their credit will improve further (at holdco level at least) with more consolidation and geographical diversification.

 

https://www.ultimahora.com/tigo-sube-apuesta-y-coloca-mas-bonos-usd-250-millones-n2866288.html

[alwaysinvert]

Things are really starting to move for Telefónica. Wants to sell before the summer.

 

https://www.elconfidencial.com/empresas/2020-01-31/telefonica-encarga-citi-acelerar-venta-latam-millicom-liberty_2433491/

[alwaysinvert]

Colombia the only country with possible competitive obstacles (in reference to Tigo of course). Too bad if that is the case but not entirely unsurprising.

 

Seems like partial exits is the probable outcome for the time being. Neither of the main bidders are likely to have the capital required to buy a lot of the countries outright. Telefónica won't prefer to be paid in stock as that doesn't help them immediately free up capital. I also doubt either Millicom or LILA is all that keen on issuing lots of equity at the moment, at least not on multiples acceptable to the seller. All circumstances for me points to Telefónica's negotiating position being quite compromised.

 

Perhaps there could be a JV between Tigo, Millicom and Telefónica for all/most of the countries where the acquirers take 25% each and assume operational control with the option of grabbing it all at a later date. Such a structure would be very logical if the goal of ultimately combining Millicom and LILA is still on the table. It would not maximize price but it will raise lots of capital quickly for the seller and it probably makes financing within reach for the acquirers.

 

As a pure fantasy, you could imagine that they make the mega merger concurrently with doing a JV deal with Telefónica. That would be something.