EUR 850.00 For Business Accounts Only

Morningstar | Millicom to Enter Panama With Cable Onda Acquisition; Maintaining FVE, Shares Undervalued

On Oct. 7, Millicom announced an agreement to acquire 80% of Cable Onda, the largest cable television operator in Panama, at a price that values the entire enterprise at $1.46 billion, or 7.9 times the firm’s estimated 2019 EBITDA. We believe this is a fair price, and we are maintaining our $86 per ADR fair value estimate and narrow moat rating. We continue to believe the shares are significantly undervalued.

Cable Onda has increased its revenue in the low-double-digit range for the past two years. While we don’t expect it can maintain this growth rate, we do project it can grow around 6% annually for several years. Panama has one of the fastest GDP growth rates in Latin America and is a dollarized economy, so it should have lower currency risk than the other countries Millicom operates in. Onda has passed over 700,000 homes with its pay TV network and has 51% market penetration, which is significantly higher than Millicom has in its other markets. Onda is the largest pay TV, broadband, and fixed-telephony operator in the country. It also generates an EBITDA margin in the low 40s, much higher than Millicom’s average. Currently there is minimal convergence interest in Panama as no operator owns both fixed-line and wireless networks. We expect Millicom will eventually offer a wireless service as a mobile virtual network operator in order to offer a converged service. However, its initial focus will be consolidating Onda and reducing debt. We expect Millicom will use the additional free cash flow to bring debt back down to 2 times EBITDA and will maintain its dividend at $2.64 per share through at least 2020 before taking it higher.

We expect the deal to close by the end of 2018, so we are modeling Onda starting at the beginning of 2019. We expect some synergies kicking in during 2020, particularly in the business segment as Millicom will now have continuous operations from Guatemala to Colombia, with Panama being a key regional business market.