Is Tigo a future cannibal?
As of this writing, the auction process for buying parts or all of Tigo’s new towerco Lati is ongoing. My working assumption is that the outcome — provided no capital markets hiccups in the interim — will be known at the latest when the Q4 results releases at the end of February.
Atlas Luxco, Xavier Niel’s Luxembourgian vehicle for holding his Tigo stake, seems to be done buying shares in Tigo. We can speculate as to the reasons why he didn’t quite reach 30%. Perhaps the mandate to buy shares ended at a certain date or maybe the LTV became too high to allow more purchases after most of the shares in the mandate were bought and the share price had (unexpectedly?) fallen in the process. It’s also possible that Niel was either unwilling or unable — due to insider trading rules — to top up the equity in the holdco in order to facilitate more share purchases.
Unwillingness could stem from his being in the market for other private deals. Leaks of Niel’s interest in buying out Altice Portugal from Drahi’s unraveling empire came out about a week ago. Irish Eir’s holdco also bought a stake in Belgian operator Proximus recently. Lastly, just before the new year, Niel’s top holdco NJJ bought Ukrainian operator Lifecell from Turkcell for an undetermined sum. This looks like it might be a forced sale. Lifecell had a sanctioned minority owner whose shares were seized by the Ukrainian government in October. In spite of the war and accompanying rampant inflation in Ukraine, Lifecell looks like an asset that is doing well and mirroring the Iliad strategy in Ukraine of low cost operations enabling grabbing of market share. Niel is one of very few telco business with both extensive know-how and cash to spare currently. Taking advantage of that when conditions are there to make good deals is logical.
Even with all those private deals, the news that Iliad was making another move to consolidate the Italian market is the most important news as it pertains to Tigo. The news of Iliad’s second bid for Vodafone Italia was leaked on Friday December 15, mere hours after Tigo’s raised profit guidance and launch of a repurchase program. After Tigo’s stock initially reacted positively to the news, it declined in afternoon trading and traded flat for the rest of the year, while the rest of the market continued to rise. This despite the initiation of repurchases the following Monday, the same day that Iliad officially released its offer to Vodafone.
If I understand this quite complicated deal structure correctly, Iliad will have an initial outlay of €4 billion for the JV merger with Vodafone Italia. Even if that is entirely feasible and Iliad's finances and capital market reputation are both in great shape, it would likely preclude Iliad from pursuing any other significant deals in the immediate future. A synergistic merger is almost always preferable to any other kind of M&A, so it makes perfect sense to proceed with this before considering any other possible deals. Of course, Vodafone has not yet responded.
On the Q3 call, Tigo’s new COO Maxime Lombardini seemed to strike a cautious tone, emphasizing the company’s need to de-lever and improve its FCF generation. The backwards-looking leverage has crept up from the poor business performance and currency movements in the last year. You could interpret that communication as an essentially defensive pose taken up to mollify the bond market. But Tigo doesn’t have any significant maturations in the next few years. News of the repurchase program does seem to entirely void the fear that debt covenants could be creeping too close for comfort. Additionally, proceeds from Lati and the earnings increases from the major cost-cutting initiatives coupled with the built in revenue momentum from a weakening dollar and a turning Colombian business should already be more than enough. But the repurchases before we have seen any of these developments in the actual numbers do really seal the deal: the debt is no worry for those closest involved. My tentative conclusion is that Lombardini’s comments were more of a “we got this” moment than a “please trust us” plead. And Niel’s team should have enough confidence from the bond market that such a stance can have an actual value.
The profit guidance revision was minimally positive. In actuality “above $500 million” for 2022-2024, which was the earlier goal, is really very similar to “around $600 million”. Especially when you consider that there has been a lot of additional severance costs which will affect short term EFCF since. The delta between the two guidances is maximally in the tens of millions, which is peanuts for the size of the operations. Still, striking a balance between enough soft sandbagging of the true earnings potential and giving rating agencies enough to stay neutral could be imperative.
Granted, even on a purely operational basis, we might not see immediate great progress towards the EFCF target in Q4 as Guatemala, the most important market, has tough comps for Q4. On the positive side, Colombia is going to look better and better operationally and have a continued tailwind from the strengthening currency. From Q1 and on Colombia will also see significant cost benefits from the network JV. Not only are costs now shared 50/50, but the total outlay for spectrum for the entire sector will also be lower going forward as evidenced by the 5g auction.
In Guatemala, competition — at least on the consumer side — has likely kept normalizing. Additionally, the political turmoil related to the upset win in the presidential election seems to have subsided after immense international pressure. Among the minor markets, Panama will likely see a bit of weakness due to highly disruptive protests around a mining permit and droughts causing bottlenecking in the Panama canal.
The stock price has moved a bit after the turn of the year, but for a levered entity just about to turn the corner really not all that much. Especially considering giant underperformance against other rate sensitive stocks towards the end of 2023. Telcos overall have been doing well in January and Tigos doesn’t stick out in that comparison either. On the Stockholm exchange, notoriously stale Telia has it beat for the year. With an imminent and large change to the capital structure upcoming, there really doesn’t seem to be a lot of speculation going on, a raised recommendation from Morgan Stanley notwithstanding.
As listed towercos have seen good recent performance with long-term rates easing, Tigo has received no such credit from the market yet. Private deals in towers are generally done at markedly higher multiples than public comps. It doesn’t strike me as unreasonable to assign, say, a 25% higher value to Lati today than at the trough in 2023.
I was starting to suspect that Atlas had finished buying shares when the repurchase announcement hit the screens a few weeks back. That did surprise me and was a prompt to reevaluate the situation a bit. The likelihood of an imminent buyout appears to have slightly decreased, although I would raise the possibility that it happens before this year’s Q4 is lapped, that is before February of 2025. Why? Because Tigo’s seasonality coupled with a successful turnaround would have then bled fully into the accounts. Pre-empting that is just good M&A strategy. Such astute maneuvering would be in line with what Xavier Niel and his hired hand at Skadden have demonstrated thus far.
In the meantime, we could look to Iliad’s last few years as a listed company.
Monetizations from Lati and beyond coupled with earnings improvements offers can provide huge space for repurchases. This strategy makes sense from all kinds of perspectives. First of all, the hurdle for capex versus share buybacks under current circumstances as opposed to in the ZIRP environment is way skewed in favor of buybacks.
Secondly, for Xavier Niel it makes sense to continue to shrink the public float anyway if he wants to own more of Tigo. While triggering a mandatory bid is an option, utilizing Tigo’s own funds is a simpler approach, potentially resulting in lower average price paid per share. Moreover, with all the recent deals in mind, it’s unclear if he wants to commit more capital to Tigo at the moment. Allowing legacy retail shareholders and weaker institutional holders to gradually sell without drawing further attention might have more juice to squeeze left.
Even so, Tigo still trades at an almost uniquely low EV/EBITDA multiple but now has a world-class management team, while the value of Lati is just about to be highlighted. If a buyout is still on the table, there is a chance to get taken out at a premium. On the other hand, the further out an eventual takover is (I still think this is the only logical endgame), the more aligned minority shareholders are with the controlling shareholder. If earnings are improved and other monetizations happen, that means continually more room for repurchases of a stock that has only seen multiple compression for the last decade. Therefore, large repurchases are now starting to seem almost like the path of least resistance. History also tells us that monetizations plus buybacks was the modus operandi at Iliad. To me personally it would make perfect sense to retire 20% of the shares outstanding in 2024, half before the AGM and half after. If yet more monetizations happen, or Lati gets fully monetized right away, there is probably even more room should the stock — counterintuitively — stay flat through those events.
Perhaps we are now veering from analysis into wishful thinking, but I will say it anyway: we might finally be at the beginning of Tigo’s cannibal story arc.
10 reasons why Millicom is losing positions at Colombian Telecommunications ranking
By Unitratel Labour Union.
Unitratel is a Colombian employee Union inside the TigoUNE and Edatel companies. Preoccupied on seeing how the Millicom administration is making mistakes after mistakes resulting in a deep and fast deterioration of the company health. Each day the company is loosing participation in the Colombian Telco market at the point is falling to fourth position when it was struggling for the first one when the 3 companies joined since more than ten years ago. This union made an analysis to illustrate how and where those mistakes were made and continues to be made more and more until the point, we forecast the company will enter in a no return way.
1. Lack of vision for the middle and long term. By the time UNE joined with TIGO, it had a Gpon project to be the first in Colombia to offer high speed connectivity for home using Optical Fiber in Colombia. However, the CEO of new company(TigoUNE) stopped the project and many experts in this technology were forced to leave the company by several non saint maneuvers , so most of those engineers were recruited by Claro, the competition. The money of this project, perhaps, was sent to headquarters whether in Sweden, Luxemburg, other countries in Central or South America. As a result, Millicom is unable to offer high speed internet service at home by optical fiber, now a days. Meanwhile the competitors are receiving thousands of clients looking for better connectivity Tigo couldn{t offer. This lack of vision makes the company loose clients until the point Millicom had to joint the competitor Movistar which has telecommunications services by optical fiber, to share the infrastructure as last option due to Claro is far away as undoubtable leader., number one.
2. Bad Decisions have made competitors, like Claro and WOM, take advantage. The problem here is that TigoUNE in steady falling below the fourth position of all Telco companies. This has created a weir atmosphere for clients who have made the decision to leave the company, seeking for better services. It is unbelievable that a competition like WOM just settled in Colombia few years ago, have gotten 4 million clients, most of them come fom Tigo.
3. Firing expert Engineers has given competitors to recruit them with better salaries. This is the case of WOM who have recruited the most amount of engineers that were foced to leave the company in strategic areas. Wom, for instance, is installing dozens and dozens of new antennas connecting more people while Tigo is selling them and renting them again paying a huge amount of money each month. Claro does not sell any antenna as Tigo does, they are investing more and more in infrastructure every day with the help of experienced engineers that TigoUNE fired or called to leave the company. WOM is growing up in a scandalous way, meanwhile TigoUNE is loosing clients in all scenarios. However, the 200 million pesos CEO of TIGO (the salary per month in Colombian pesos), as it is called on the street, Marcelo Cataldo, asks frequently to MinTic(Telecommunications ministry) to declare Claro as “dominant operator” to get more subsidies and benefits from the Government and the competitors like Claro. In other words, he wants to be prized by his mistakes, bad administration. His idea is to get on the desk what he has lost on the street because of his bad decisions. That would be horrible for customers and free competitive market. He only wants to earn money without any effort deceiving the Minister by arguing the market is hard but hiding the bad practices inside the company int both areas, processes and human resources .
4. Selling strategic infrastructure such as Antennas: Neither of the competitors, Nor Clark nor WOM are selling their antennas and then rent them. Most of competitors employees like Claro are laughing at TigoUNE practices, selling antennas to take them rented back is a practice that make the new owner richer and make TigoUNE company loose competitiveness. On the street people say that the seller and buyer are the same and they are doing that a maneuver to pass the most valuable assets to other of his branches, If so, it is a bad message for New York stock market.
5. Poor Analysis to open shops. The useful life of a shops is very short. Shops that are open with a huge investment is close in short terms due to low revenues showing a lack of experience in knowing the local market, poor analyzes in where to open a new shop.
6. Unstable and unreliable internet service. In the past, users used to recognize UNE services as synonym of high quality such as TV and internet. Now a days, those reference points have disappeared and instead of that, the internet at home is very unreliable, for instance, once an individual connect his/her mobile to home wifi appears the message “Connect without internet” that is perhaps because the network was expanded preserving a weak signal, in other words there are many users connected to the same infrastructure. They do not expand the network because the incomes are not enough, the continue using HFC thick cable which is impossible to place in ½” pipe in our houses. This thick cables only allow to connect 2 rooms, so the signal and speed is very weak and low, respectively.
7. Poor leadership of the CEO. It is a big mistake that the head of the company, CEO Marcelo Cataldo, goes to the media to announce that the company made a great decision to sell the antennas making the competitors laugh at him because it is like to say that we have to sell our houses to pay rent, instead. But the greatest mistake is to go to announce on the media using a misfortune example that a The pastry chef does not need to own an oven for his pastry so he/she should rent it, instead. That example gives an idea of poor knowledge and short vision of the 200million Pesos CEO,= of Tigo.
8. Unplugging Town connection: Edatel is a brand inside the holding that connects people in the remote towns by a combination of microwaves and cable. It has enough infrastructure installed during decades of operation. Millicom wrongly made the decision to close those locations so Claro is making a huge business selling a lot to those people who are being unplugged by Edatel. Any one could think that by closing Edatel locations, people would move to Mobile in the same joined company, Tigo. But Tigo does not have signal in those remote towns so Claro is taking advantage of that mistake and they are increasing the gap between them. Claro, looking that mistake, increased the costs of services in those towns so people must take it because there is no option, representing a problem to the government who has to guarantee connectivity to those remotes areas. So with all in all, Marcelo Cataldo is kneeing to Mintic to declare Claro as dominant operator to receive more subsidies. That is unbelievable.
9. Selling key Buildings and real estates. they are selling the most important buildings that belong to UNE and Edatel, others are making business they rent to third parties receiving considerable amount of money but sacrificing the connectivity in the towns.
10. Bad use of human Resources. Marcelo Cataldo started a witch hunt against employees. The last persecution was planned strategically. He denied to negotiate with unions in order to freeze salaries in two years in a row without any increment in order to make a very poor offer to employees and Directives to leave the company. So this guy the 200millions CEO created a weir and persecuted atmosphere to employees had to abandon the company. He called private financial founds to persuade employees to put their tiny amount of money he offered in their accounts to be free of tax, but they must leave the money for 10 years, resulting a worse solution . In other words, He gave a place inside the company to catch that money
He really believe that with professionals bad paid could compete with strong companies like Claro and WOM who are breathing at Tigo’s neck
The company has a good income but the money is being sent out the country to headquarters. By the time EPM wants to recover the company back the surprise would the major assets are placed to another company, so EPM wil recover only the UNE’s Logo.
a great update, thanks for staying on top at such a specific level.
1 question, 2 comments :
- can you point to some reference\discussion on why you believe the new TIGO C-suite to be 'world-class'? the prior CEO stuck my as quite sophisticated although he may have suffered from some overconfidence. his guatemalan aggregation was well done in a stressful time.
- your key point is dead-on; with seemingly greater global telecom bargains each quarter, niels can get distracted by the latest shiny opportunity. no sign this environment flipping soon.
- the irony of tough economic times anywhere is that telecom use (also alcohol too!) goes up, but unlike beer, the business model is not really structured for greater profit per client usage.