Potential Bidding War – Upside TBD
An interesting setup is brewing at Latin America’s major telecommunications company Millicom International (listed in US). I know next to nothing about telecoms businesses, especially the ones operating in developing countries such as Guatemala, Colombia, Paraguay, etc. However, several details suggest this setup might be worth looking at.
TIGO has just become a takeover target and negotiations are ongoing. On Jan 25, Financial Times reported that TIGO is in talks with Apollo and Claure Group. The rumored buyout price in ‘high-teens’. Claure Group is run by Marcelo Claure, ex-Softbank COO and ex-Sprint’s CEO. On the same day, TIGO confirmed the rumors.
Shortly after the news, French billionaire and telecommunications tycoon Xavier Niel (founder/owner of Iliad) increased his stake in TIGO from 7% to 19.6%, becoming the company’s largest shareholder. The amended 13G was filed on Feb 14, so I assume the shares were purchased closed to current trading levels (somewhere around $17-$18/share). Niel is not an arbitrage investor, so I don’t think he threw nearly half a billion dollars at TIGO just to sell the stake to the Apollo consortium at a small profit. Instead, he is either expecting a far higher offer, wants to make a bid himself or wants to join the buyer consortium. There is a chance this situation turns into an outright bidding war.
The buyout interest for TIGO comes at the cusp of substantial FCF inflection for the company. For multiple years prior to 2022, the company operated around cash breakeven levels, ranging from -$40m to $14m in 2018-2021. The recent business reorganization, exit from African operations, and the buyout of the remaining interest in Guetemala’s JV (TIGO’s star asset) in late 2021 have materially boosted cash flow generation. FCFE for 2022 stood at $171m, while forward guidance is even higher. Management forecasted cumulative FCFE for the 2022-2024 period at $800m-$1bn, leading to an average annual forward FCFE of around $320-$420m. At current prices, this would result in cash flow yield of 10%-13%. In the recent Q4 conf call. the guidance has been reiterated. Management noted that the inflection will be catalyzed mostly by service price increases and new cost-cutting program that is estimated to result in $100m annual savings by the end of 2024 (vs $1.9bn OPEX last year).
Judging by this VIC pitch, there appears to be plenty of headroom for an offer at a material premium to the current trading levels. Ignore the per-share figures in the VIC write-up as these are outdated due to the dilutive rights offering last year. However, in a recent comment the author valued TIGO’s core business at $30+/share. On top of the core business, a substantial incremental value might be hidden in TIGO’s 10,000 wireless towers and 13 data centers in Central/Latin America. In early 2022, management unveiled a plan to carve out tower assets. Based on recent transactions TIGO’s tower assets might be worth around $6/share and the data centers another $5/share.
A few risks worth noting:
- TIGO is quite levered and financing this buyout may pose difficulties. FT.com specifically stressed that Apollo and Claure are ‘attempting to structure their bid in a way that would avoid repayment or refinancing of about $6.9bn of Milicom’s existing debts. There’s a risk that the buyers’ won’t find an appropriate way to finance this acquisition and will withdraw from the bid. The potential downside to pre-announcement prices is around 22%, although it could be lower due to the strong Q4 results and reaffirmed FCFE guidance, which came after the potential sale announcement.
- It’s worth noting that the two major TIGO shareholders have sold their stakes in recent weeks – SG Americas Securities (from 8% stake to 0%) and Societe Generale (from 6.3% to 0%). However, taking into account the size and the timing of Xavier Niel’s share purchases as well as the relatively calm trading volumes in February, it seems that most of these shares were probably just privatelly sold to Niel.
- Another thing worth noting is that TIGO previously was targeted by another bidder, its peer LILAK, back in 2019. The sale talks were quickly terminated as TIGO’s management did not like the highly levered balance sheet of LILAK and the soft buyout premium offered (the exact offer was not disclosed).
Apollo talks are over, Niel crossed 25%, mandatory bid at 30% if he goes up that far. Major upside seems gone, but bid from Niel alone still possible.
What are your estimates for free cash flow/year over the next 5 years or so?
I find it hard to model given spectrum acquisitions.
Going by management and analyst estimates it seems $400-600m isn’t unreasonable a few years out, which would make the stock very cheap without an acquisition. And increase pressure to make a bid before that materializes.
We are in the same boat here. Seems too difficult to come up with any kind of estimates here besides what has already been guided by the management.
At the moment, for me, it’s very hard to model. Previous estimates from management were good enough to be an investment case on their own. However, since the last quarterly results, it didn’t seem really great. I personally think they’ll have to revise. Do note that since then, a lot has happened. TIGO anounced that they will further consolidate Colombia (which basically is their weakest segment), which could be very good. A lot of sellside analysts value Colombia at very low multiples -which now could change-. There’s plenty of value, now the real question is how/if shareholders will see some of it.