2023-04-11 11:46:43 ET
Summary
- In January, telecommunications services provider Millicom confirmed it was in takeover talks with a buyer consortium comprised of Apollo Global Management and ex-Softbank executive Marcelo Claure.
- Subsequently, a prominent telecom investor Xavier Niel significantly increased his stake in the company from 7% in November ’22 to 21% currently.
- A bidding war might potentially be brewing here.
This is an interesting potential buyout situation with a chance of turning into a full-blown bidding war. The situation was highlighted to Special Situation Investing subscribers in late February.
Millicom International Cellular (TIGO) is a $3bn market cap mobile and broadband telecommunications services provider with operations in Central and Latin America. In January, the Financial Times reported that the company was in talks with a buyer consortium comprised of Apollo Global Management and ex-Softbank executive Marcelo Claure. The rumored acquisition price was in the "high teens" or $10bn EV. Both Apollo and Claure are highly credible and experienced players in the telecommunications space (see section below). Millicom's management promptly confirmed that discussions were ongoing.
The news was followed by several interesting developments related to the company's shareholder French billionaire Xavier Niel. Niel is the founder of French ISP/mobile operator Iliad and has extensive experience in the telecom industry. Niel's investment vehicle Atlas Investissement currently owns a number of telecom companies in nine European countries. After the news of sale talks at TIGO, Niel increased his stake in the company from 7% (reported in November '22) to 19% as of February '23. Later on in March, Niel raised his stake again to 21%. Given the dates when Atlas' recent stake purchases were disclosed, it is likely that the Niel acquired TIGO's shares close to current share price levels. Atlas' latest filing indicates that the shareholder intends to put his members on the board. Niel's involvement suggests that he considers TIGO to be significantly undervalued. The timing of rapid share purchases might also suggest that Niel 1) intends to make an acquisition bid for the company, 2) expects a higher bid from Apollo and Claure or 3) intends to join the buyer consortium. Xavier Niel previously participated in a number of telecom buyouts, including Monaco Telecom , Tigo Senegal and Eir .
Current takeover interest comes at a quite opportunistic time as TIGO's stock hovers way below pre-COVID levels. Meanwhile, the underlying business seems to be on the brink of a cash flow generation inflection after the recent business transformation with the exit from African operations ( completed in 2022) and expansion in Central/Latin America with the buyouts of minority stakes in Guatemalan (in 2021) and Panamanian (2022) joint ventures. The company used to operate around cash breakeven levels in 2018-2021, with FCF ranging from -$40m to $14m. Driven by the transformation, the company's cash flow generation has materially picked up in 2022, with $171m in 2022 FCFE vs $12m in 2021. The management has guided for cumulative FCFE of $800m-$1bn in 2022-2024, implying annual FCFE of $320m-$420m in each of the next two years. The main drivers behind the FCFE growth are expected to be service price increases and cost cuts. Cost savings are expected to reach $100m by the end of 2024 compared to $1.9bn operating expenses recorded in 2022. Strategic shift and improved cash generation have also allowed the company to lower its debt burden, with leverage ratio (net debt/EBITDA) dropping from 3.34x in Q4'21 to 3.04x in Q4'22 (vs 2025 target of 2.5x).
Valuing TIGO is not straightforward given the nature and geographical location of the assets, however, there might be substantial headroom for an offer above current share price levels. According to the author of this VIC write-up , TIGO's core business might be worth close to $30/share. On top of that, the company owns about 10,000 wireless towers, 13 data centers and a fintech business- TIGO Money - all of these combined might be worth an incremental $10+/share. Worth noting that the company has already announced plans to carve out its tower assets as well as TIGO Money. Both separations are expected to be completed in 2023-2024.
Apollo and Mauricio Claure
The potential suitors, Apollo and Claure, have extensive backgrounds in the telecommunications space. Several of Apollo's noteworthy acquisitions/investments are listed below:
- Last year, Apollo acquired Lumen Technologies' local exchange carrier business for $7.5bn.
- In 2020, the PE giant bought Lendlease's US telecommunications platform which included a portfolio of operating cell towers.
- The firm also made a strategic $200m investment into US fiber-based carrier FirstDigital Telecom in July '21.
Meanwhile, Mauricio Claure was the founder of the mobile phone distributor Brightstar. The company was eventually sold to Softbank in 2014 for $1.5bn. Claure subsequently assumed the CEO role at the US telecom giant Sprint before the company's merger with T-Mobile in 2020. Claure was Softbank's COO from 2018 until early 2022. Mauricio Claure currently runs his newly established family office Claure Group.
Millicom International Cellular
Millicom is listed in both the US and Sweden. The company is a fixed and mobile telecommunications service provider operating under the TIGO brand in nine Central and Latin American countries. TIGO's offerings include wireless, data, legacy voice and fiber-based services. The company segments its revenues into mobile (52% of total sales), cable and other fixed services (38%) and telephone and equipment (10%). The company's fintech segment TIGO Money provides money transfer and mobile banking services. TIGO holds market-leading positions in broadband and wireless services in most of the geographies it operates in (see below). The company has boasted high penetration rates in both mobile and fixed broadband services markets in all of the geographies, ranging from 38% (Nicaragua) to 66% (Bolivia) for mobile broadband and from 20% (Nicaragua) to 62% (Costa Rica) for fixed broadband.
Millicom International Cellular's 2022 10-K Millicom International Cellular's 2022 10-K
As part of its transformation, the company has committed to investing a further $3bn in Central and Latin American businesses over the next few years. TIGO has already announced plans to invest to build out its 4G/5G networks in Colombia , Panama and Paraguay . The company holds JV ownership interests in assets located in Colombia (50%) and Honduras (67%).
Risks
- TIGO is a large and highly-levered enterprise, implying that arranging financing for a potential takeover in the current macroeconomic environment might be difficult. The FT's report has mentioned that Apollo and Claure are/were trying to structure the potential buyout "in a way that would avoid them repaying or refinancing" TIGO's existing debt. Worth noting that Apollo's takeover of Lumen Technologies (completed last year) has faced financing issues and the underwriters were eventually forced to provide a loan after failing to find other creditors. A large portion of TIGO's debt matures in 2027.
Millicom International Cellular's Q4'22 Earnings Release
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TIGO's management holds a tiny (<1%) ownership stake in the company. Meanwhile, the company's executives are compensated very generously. For reference, the CEO received a total compensation of $11m in 2022 and $20m in 2021.
Conclusion
Millicom currently presents an interesting situation with a potential near-term catalyst. Buyout interest from Apollo and Claure as well as involvement of prominent telecom investor Xavier Niel both suggest either a takeover or a bidding war might be brewing here. Given the value of TIGO's core business and its other assets, the upside here in case of a company sale might be substantial.
For further details see:
Millicom: Potential Buyout