Keep your eyes on the ball

Millicom is worth at the very least $40 per share

Welcome to all new readers and subscribers! My last post seems to have struck a chord with a lot of people. An especially warm additional welcome to all the new readers in Miami.

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In this post I will try to pre-empt arguments and anchoring tactics in the event that Apollo and Claure formalize a bid. If you are short on time, here’s a quick summary: Millicom is worth $40. Don’t sell your Millicom stock below $40. Tactics will be employed to try and make you believe that you should not get anywhere close to $40. Don’t fall for them.

Already, we have had the release of the “high-teens” number in the FT article. Most market participants have realized that this bid level wouldn’t have much success. However, in spite of that, the stock is stuck around those levels and is exhibiting significantly less volatility than a share trading under normal circumstances.

This is all natural and by design of the numbers leak. “High-teens” was never meant honestly, it was meant as a mental anchor which will later make possible a bid that surprises to the upside, while still being low enough to be a complete bargain for the bidders. This is a standard way of ensuring that as many shares as possible trade and find their way away from regular shareholders and into risk arbitrageur hands, so that the acceptance rate will be as high as possible, no matter what the fundamental merits of the bid are. Takeover psychology 101.

The Fitch rating upgrade which came out shortly before the Q4 report is significant, not so much for what it said but for what it didn’t say. There was no warning that a new majority owner would induce the rating agency to consider a downgrading. This is a greenlight for a takeover attempt, as that would allow the company to keep its now relatively cheap bond financing intact. Here we have a likely explanation for the stock’s seemingly mysterious rise from $17 to just shy of $19 on Wednesday. Note however, that the FT leak still does its intended job; the price is still moored to the “high-teens” number.

This explanation also jives with contemporary falls in bond prices, indicating the debt markets further pricing in the possibility of a PE takeover. The company will be run with higher financial risk in its future non-public incarnation.

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The Q4 numbers came and went broadly in-line, in spite of tough macro. Millicom performed to the expectations set by management and the seemingly aggressive financial targets from last year’s capital markets day were not revised. This is significant, because it implies that Mauricio Ramos believes that the value of the company is the same as a year ago.

So how to go about establishing a value for Millicom? A PE firm will usually look at EBITDA and OCF. Those figures establish interest coverage, debt bearing-capacity and ROI. OCF for Tigo is highly variable with the amount of capex that is spent and management claims to be just past a significant bump in capex. I will therefore focus on EBITDA as the most stable and reliable number.

The acquisition of the Guatemalan minority in late 2021 serves as a good reference point. Guatemala is rightfully seen as the crown jewel of Millicom and represents major parts of the value of the whole enterprise. Mauricio Ramos and the board paid 6.2x EBITDA to achieve full control. And in actuality, the real multiple paid was actually even higher, seeing as stock had to be issued at a significantly lower multiple to pay for it. Management chose to buy 50% of Guatemala instead of doing long-promised share repurchases at share price levels way below where Ramos had repeatedly claimed the stock to be significantly undervalued. Consequently, 6.2x as the private market value for the whole of Millicom is fair and conservative.

Where would that get us in terms of stock price? 12-month rolling EBITDA is 2.228 billion. That times 6.2 is an EV of 13.81 billion. Net debt including leases is 6.78B USD. Subtracting the debt from the EV gets us a market cap of 7.03B. Divide it by just above 172 million shares and we get a price to $40.85 per share. Let’s knock off 85 cents as a gesture of good will for a smooth $40.

Now, the next argument may be that the macro outlook has worsened in the last year and that USD has strengthened, making earnings in Latam currencies worth less in dollar terms. This is true. However, shortly after the Guatemala acquisition was announced, Ramos and the team at Tigo issued new financial targets which — despite ample opportunity — have not been revised since. Thus, Ramos’ position is by logical extension that the value of the company is the same today as a year ago.

To remove any notion whatsoever that this multiple is on the high side: this is not far off from where closest peer Liberty Latin America trades without a takeover premium and with significantly higher financial leverage and thus more risk.

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The icing on the cake here is the cellphone towers, due to be separated later this year. Why? Easy — Ramos himself explained that in his appearance at Morgan Stanley’s conference in November 2022. Separating the towers will be EBITDA neutral to Millicom, but the towers separately fetch a much higher multiple than the base telco operator business. Thus, in a bit of financial engineering magic, you conjure up value out of thin air without impairing the company’s earnings and debt servicing capacity. This is catnip for private equity.

In order to be conservative, let’s use someone else’s numbers from before the takeover story started. Keith Smith at Bonhoeffer Capital estimated the worth of the towers at $1.4 billion or $8 dollars per share. A straight sale and leaseback of the towers could pretty much on day 1 of a PE takeover bring in this amount without — per Mauricio Ramos himself — hurting the company’s EBITDA. At a “high-teens” price of $19, this represents 42% of the purchase price, which really puts into perspective how utterly preposterous this attempt at anchor point is. At a more reasonable $40, you still get back as much as 20% of the cash purchase price straight away.

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Let me now try to predict how Apollo will argue for the value of its upcoming bid.

Banking on weak and disinterested institutions and a massive legacy retail shareholder base from Kinnevik — all of whom are generally tired from years of underperformance — they will point towards “undisturbed” share price levels. A drop back to levels from before the takeover leak may sound scary, but that leak was placed strategically before Q4 numbers were released. Had Millicom been trading freely right now, that Q4 would have resulted in a massive boon to the share price. Market skepticism from a wobbly Q3 and an — at that point — seemingly never-ending dollar strength should be totally dissipated after a credibility enhancing Q4.

Additionally, the company has a new largest shareholder, French billionaire Xavier Niel, who has been steadily increasing his ownership and may still be doing so at this very moment. Note how he is staying silent, not commenting on the proposed takeover. Usually, in the merger business, this means that you are busy doing and don’t want to bring needless attention to yourself. Odds are that he is still buying over the market or looking at making a takeover proposal himself. Or both. Either is good news for the other shareholders.

And in the unfortunate event that Niel joins hands with Apollo, the minority shareholders still have a decent hand to play. Luxembourg has a high 90% squeeze-out level for takeovers and we know our worth: $40.

With all this in mind, it is easy to see that the downside from current levels is not high at all, it is low. But just watch Apollo trying to tell you otherwise.

Having made these arguments, I have yet to touch upon how large the possible upside is over a longer time frame. Owing to the leveraged equity, just a little growth in earnings will have great value creating properties for shareholders. Management’s financial targets are for EBITDA growth at higher than mid single digits, meaning close to 10% per year. The math at those levels quickly gets us to several multiples of the current share price.

In spite of that, a mere $40 (or 420 SEK) will do for me to part with my stock and allow Apollo to get all that additional upside for free.

Keep your eyes on the ball. Millicom is worth $40 today — as a floor.