Tigo Q1 preview
First of all, if you would like to read a short and to the point overview of the current investment case for TIGO 0.00%↑, check out No Deep Dives.
The period after the Q4 release has been quite active. But let me begin with some comments on Iliad’s and NJJ’s entry into Tele2. Tele2 has been unofficially for sale for a long time and there was some speculation about a bid for the entire company. As it happens, I accurately predicted that would not happen, while also pointing towards Xavier Niel as one of few plausible buyers.
The structure of the deal is worth considering. Freya (Iliad+NJJ, Xavier Niel’s holdco) tasked Kinnevik with converting enough A-shares into B so that they would slip under the 30% mandatory bid threshold in terms of voting power.
We can consider an alternative deal structure: Freya buying all the A-shares intact but forgoing some B-shares, letting Kinnevik dispose of those separately. Presumably Kinnevik didn’t want that inconvenience, so that was off the table immediately. But what about the opposite? Kinnevik converting all the A-shares into B and then selling to Freya and allowing Freya to buy more cheap shares over the market, thus increasing their ultimate economic interest? I’m positive that this was never even considered. Freya paid a control premium and is interested in maximum voting power for minimum leverage increase at Iliad. They get cash flow, cheap off-balance sheet debt and the ability to influence Tele2 operations. In due time they will be looking to make use of Tele2’s pristine balance sheet to converge their current markets and — eventually — international roll-ups.
The value of this deal structure is shown by Iliad — as I’m writing this — tapping the bond market for a second (!) time after the Tele2 investment, this time in the holdco. Rating and funding costs are unchanged. As it happens, Tele2 stock already trades above their price paid, which is a nice bonus.
If we return to TIGO 0.00%↑, I wrote a Twitter thread about why I think the analyst estimates are too low for Q1 and this year overall. For those who only want to read on this site, I will copy-paste the thread below:
AMX 0.00%↑ Q1 continuing to post great customer intake in Colombia driven by campaigning, which may have prompted the bankruptcy filing by WOM. Easing of competitive pressure should be relatively close, but the pressure may be kept on as creditors evaluate their chances of recovery.
I think Colombia is moving towards the end phase of the market share scramble and the incumbents are leaning on the weakest opponent to force a rationalization of the sector while rates are high and lending is tight. It's a sound strategy but requires some more patience.
A HUGE exclamation point was net churn figures for Central America prepaid (-584k) due to a ransomware attack in late January. TIGO 0.00%↑ should be the chief beneficiary as they are a major competitor in 4 out of the 5 countries affected (all except Costa Rica).
It's unclear exactly which geographies were heaviest hit, but Guatemala represents ~40% of the population in the five countries and TIGO 0.00%↑ is the only competitor in that market...
To get some sense of the potential impact: if Guatemala was affected proportionally to population size, that would mean higher customer intake for TIGO 0.00%↑ Guatemala in Q1 than in the entire preceding 3 years.
No questions were asked on the subject by analysts. After all, Central America is of minor economic importance to the giant AMX 0.00%↑ . However, this may mean that the market has not yet fully appreciated the effect on TIGO 0.00%↑ .
The estimates that I am referring to are about a month old. If there are more up-to-date analyst estimates around now than those available on the website, I’m not aware of them. A final addition: there was no noticeable price reaction in TIGO 0.00%↑ stock either when the hack against AMX 0.00%↑ happened (late January, officially admitted to early February) or after the subscriber impact was reported by America Movil, which seems rather strange to someone like me with experience of the usually heavily speculative Stockholm exchange, keen to move stocks at every whiff of a change in outlook.
After repurchasing some bonds below par late last year and early this year, TIGO 0.00%↑ entered the bond market with a 7-year $450 million senior note at 7.375%, further pushing out the maturity schedule. I applaud this strategy and expect more in this general vein going forward. Managing the maturity profile and liquidity is a paramount task, and something which has been well attended to under Ramos’ tenure. I except even more laser focus on this from the revamped team.
Speaking of Mauricio Ramos’ tenure as CEO, it is now coming to an end. But he won’t be leaving us entirely. His successor Marcelo Benitez, a Millicom lifer, seems to be taking on the role as aa morepure operations guy, while some of Ramos’ current CEO responsibilities will follow him into the chairman role. This looks in line with the more hands-on approach that the BOD has taken since the French team came onboard.
Lest we forget it, Tigo also announced a CFO change a few weeks ago, promoting Bart Vanhaeren from treasury.
Other moves as of late include the CEO of Bolivia quitting after 13 years and the CEO of Colombia, Marcelo Cataldo, leaving for the CEO role at Digicel. He also brings his former lieutenant and VP of finance at Tigo, Leopoldo Gutierrez, as new CFO. These are only the very last moves in upper management since Lombardini started cuts at HQ. Some necessary turbulence, but in light of that it makes sense to focus on internal promotions for the highest positions to keep maximum continuity under the circumstances. A dusty value investor such as me always likes internal promotions, but I do favor them even more when I think it’s unclear if the company will exist in its current form as a listed, Latam-only company in a few years. Going on an expensive and time-consuming search for a “star” recruit doesn’t make sense under those circumstances. Also, I would never assume that such a hire would automatically do better at the job, and judging by what I have read on Xavier Niel’s hiring history he would agree.
On the subject of Digicel, this Caribbean operator just emerged out of restructuring with its founder retaining a 10% interest. It’s quite possible that this is another telco searching for a new owner. Who knows, maybe the French and possibly all of us will live to see a reunification with the old Colombia team? The former Digicel bondholders are probably not looking to own a telco indefinitely.
I recently watched a fantastic interview with Digicel’s founder, Denis O’Brien. Highly recommended for anyone interested in telcos generally and EM telcos specifically. O’Brien’s observations are sharp and profanity-laced.
AMX 0.00%↑ is turning the screws in Colombia, presumably to get someone to fold, and operators like WOM and ETB are absolutely squealing right now. No wonder! WOM was forced to enter restructuring. The city of Bogota seems to be considering selling ETB (again!), this time likely for a comparable pittance. With the central bank rate at 12.25% — but falling — and profitability of the telco sector very low, consolidation is a top priority for all operators and regulators will have to accede. At least if they want to avoiding handling bankruptcies and market exits. The time to move is now.
To get a sense of how acute the situation is for the minor players, TIGO 0.00%↑ tapped the local bond market for about $40 million at an interest of 17%, right after both selling towers and raising new equity. TIGO 0.00%↑ is one of the few local issuers who could even raise debt at all under current conditions.
No matter, we shouldn’t focus on the now but on the future potential. Colombia has a large population in need of connectivity and with consolidation and lower rates, telcos could suddenly be worth a lot more dead than alive, and start to generate sufficient returns for their owners. This would allow future investments in the country’s infrastructure. A rational outcome which would be positive for everyone involved. I’m bullish Colombia and I think it has serious potential to be the most valuable market for TIGO 0.00%↑ long-term, but there is still some real work needed for that to happen. I would also suspect that EPM, under the new administration in Medellin, is finally completely ready to sell their 50% of Tigo Une. Under current dire circumstances, however, they will have to temper their price expectations to get a deal done.
Another market with some issues is Bolivia. Bolivia has a long-standing peg against the USD, that isn’t entirely in mesh with reality and has resulted in large fx fees for operators since banks in lieu of a “real” exchange value are forced to charge exorbitant fees. Speculation has emerged that the Bolivian government is at the end of their rope with foreign exchange reserves at historical lows. A devaluation might be on the table soon. Bolivia is of course not unimportant to TIGO 0.00%↑ but in terms of EBITDA it comes in only as the number 5 country with a 9% share in Q4. Note that a devaluation would eliminate the giant fx costs of 10% even though it would of course decrease operating earnings in USD terms.
Lastly, we are all waiting for news on Lati and I’m as curious as everybody else. But I would like to nuance the picture a bit, because at this point — if the turnaround continues as I expect — Lati is suddenly of not quite as huge importance as it was 6 or 12 months ago. There is still good value potential there, don’t get me wrong. You only have to look at the development of Sitios’ Central America division since the spin from AMX 0.00%↑ to see that. In the fresh Q1 report they sport a 92.3% EBITDAaL margin in the segment, after increasing tenancy ratio as an independent entity. There is absolutely no reason Lati can’t do the same.
We should at a minimum get a fat multiple arbitrage deal out of Lati that can be used efficiently by good allocators. Still, when the cash-flows from the TIGO 0.00%↑ operations can be trusted and we even get some real growth going, that will be the by far greater value driver for the stock in the end.
Tx for the shout out and in depth Q1 preview!
Thanks for the update. Have you done a study at all on how much the stock of TIGO like businesses move when they do a transaction involving their towers? I am wondering what sort of movement in the stock price this particular catalyst will cause.