Tigo post-bid

What is next?

So, the bid is finally over. Atlas increased their stake from just below 30% to just above 40% of the shares. I would have guessed a higher acceptance beforehand. The traded volume in the last few weeks was surprisingly thin, which made me lower my estimated acceptance level to about 50% in the final days. That was still way too high.

As I have tried to peruse the eminently readable financing document, I have come to the conclusion that this bid was likely never meant to cross the 50% threshold. Instead the intent was to come as close to 50% as feasible while absolutely not crossing it. The consent solicitation seemed made too cheap on purpose. The upshot is that the company now likely has a decent idea of what the bond owners would demand in compensation when the day actually arrives.

The financing terms for triggering the change of control and covering all of the outstanding bonds would put both Niel’s pledged Iliad shares in play and the banks on the hook for many billions extra. Even if the CoC clause would only be triggered if TIGO 0.00%↑ was also hit by a downgrade, this would never be an acceptable real exposure for the people involved. The fact that this arrangement was a mere formality and not one of actual intent also likely holds the key to why Niel didn’t just buy himself over the mandatory threshold of 33% and trigger a mandatory bid; if you launch a voluntary bid you always have the option of backing away if things take an unexpected turn while a mandatory bid is a giant open-ended liability, which may be too complicated to extricate yourself from should the need arise.

The Swedish real estate mogul Erik Selin may have had something of a scare during his foray into Entra in which a mandatory bid by his Balder triggered an adverse response from S&P. Selin would argue that his de facto exposure was extremely low as most shares not yet held by Balder were held by Castellum, who would never sell. However, for someone — perhaps with their neck tie too tightly knotted — looking at maximum downside potential, this commonsensical approach was interpreted as rather cavalier about risk.

The outlook was changed back from negative to stable when only just above 2% of the shares sold to Balder, but it still might have given a taste of the issues that can be brought on by open-ended exposures to huge balance sheets. At the very least this move realistically closed off the bond market for Balder for two months at the end of 2021, which may have had some rather serious knock-on effects, considering what happened in February 2022. Balder had a lot more rating worries since and has pretty much done nothing at all for 2.5 years due to their need to save up equity for huge upcoming maturities. Others have been worse off and forced to sell assets, but still — with hindsight — Balder went too aggressive for their bond market exposure, and the Entra episode was emblematic of that.

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Anyhow, my guess is that Atlas would ideally have liked to come closer to 50%. The question is: what comes next? Essentially, as far as I understand it, there is nothing stopping them from launching another bid. Do I think this will happen imminently? No, I don’t. I think Atlas on its own can scarcely afford it. Iliad — while they are deleveraging at an enormous rate — has other immediate priorities, such as their Eir call option, and perhaps some deal-making in Italy and/or the UK.

So the path of least resistance should be that Atlas is now looking to buy shares over the market up to 49.9%. As far as I understand, they are free to do this at any price they please, as a finished voluntary offer does not include the need to compensate sellers into that bid if you buy shares higher afterwards.

As it happens, the financing document does give details about Atlas’ source of funds for over the market purchases. The debts are split up in two parts, B1 and B2. B1 covers the debt that is provided for their holding going into the takeover offer plus shares acquired in the offer up to 50%. B2 includes debt for covering bond debt, all the shares bought between 50-100% plus any shares bought over the market post-settlement. The last bit applies to the current situation, since we are below 50% and the bid is done with. B2 comes with some more strings attached than B1.

So what are those strings? Except for LTV ratio for Atlas and some other less relevant things, the important part that applies to TIGO 0.00%↑ and enters the picture with B2 is that if the leverage is above 2.5x after Q4, then Atlas is on the hook for mandatory prepayments as follows:

The same goes for if an asset disposition (read: Lati or other infrastructure) fails to take the leverage below 2.5x. Then the cash goes towards prepayments. I could go into a bunch of minutiae on this stuff, but it would bore you to tears. Suffice to say, Atlas is very incentivized to meet the target of 2.5x at the end of 2024. In light of this, all of the company’s actions make a huge amount of sense; from the lack of share buybacks at low prices since the small program early in the year, to the big bond repurchases at discounts (leaning on the cheaper debt in order to create more equity), to their short-term prioritization of cash flow in Guatemala. It all falls into place.

Maxime Lombardini, the turnaround king, who will leave the company at year-end

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I also need to say something about the proposed Colombia deal. Look, I think it is so good that I had finally come to rule it out as a possibility after last year’s JV structure announcement. It is monumental. A country of 52 million will be turned into a 2 player market. I don’t want to put figures on it before it happens, but together with the proposed partner buyout it is probably the most important indvidual deal that the company has ever done. The person who may deserve the most credit for this, but might not get much in public, is the chairman Mauricio Ramos.

Granted, money is dear in Colombia right now with a central bank rate above 10%. But if you can gaze 2 years out, think about the structural profitability possible in a 50+ million 2 player market and visualize what that might be worth when interest rates are slightly lower, I think you might come to fully appreciate the potential. Obviously, this deal in itself means that buybacks or dividends — which I wouldn’t deem likely in the near tearm anyway — will not be a priority any time soon. Those are things that a lot of shareholders are holding out hope for and their time preference might not match up with that of a strategic owner such as Xavier Niel. All I can say to you is that you are lucky, because there is a dedicated buyer out there who very likely would take your shares if you lose your patience. At least for another 10%.

So, finally, where does Lati figure into all of this? I’m tempted to quote a famous stateswoman here: “What difference, at this point, does it make?”

Well, I don’t quite mean that. I haven’t got a clue what is actually going on with Lati. But rates are down, towercos are up and the main operations have been turned around. Logically, we should be in an absolutely fantastic negotiation situation.

But the future of TIGO 0.00%↑ looks bright anyway.

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PS. I have speculated a lot about things on this blog and seeing as there have been many huge changes at TIGO 0.00%↑ in the last year or so, I realize that some of what I have written may possibly have contributed to uncertainty inside the company. That was not my intent. I will try to be more mindful of such things in the future.