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Morningstar | Liberty Ends Discussions to Acquire Millicom Over Price; Millicom's Stock Undervalued

Millicom's stock is trading down about 8% in Stockholm as we write on Jan. 23, as the firm has confirmed that Liberty Latin America has exited talks to acquire it. We are not surprised that the two firms couldn’t agree on a price, and we are maintaining our $86 fair value estimate for Millicom’s ADR. We previously wrote about our skepticism regarding a deal. Liberty is significantly smaller than Millicom and already carries a large debt load. Its stock has performed poorly since being spun out of former parent Liberty Global and thus the company was limited in its ability to use its own stock or raise additional debt. We believed the only possible way it could work is if John Malone, Liberty’s controlling shareholder and chairman, could convince investment firm Kinnevik, Millicom’s controlling shareholder, to take shares in the combined company.

Millicom is just starting to see revenue benefits from significant spending on acquisitions, primarily in cable TV, and expanding its 4G wireless network. We believe its stock price doesn’t recognize the value in the company, and neither did Liberty’s offer. While the end of talks has hurt Millicom’s stock price in the short term, we think it provides a better entry point for long-term shareholders. Bloomberg reported the deal was around $7.6 billion, which would value the company at about $75 per share, or about 5.3 times enterprise value/EBITDA, which is below our fair value estimate. This is far below the 10.7 times Liberty paid for Cable & Wireless Communications in 2015, where admittedly we thought Liberty overpaid. It is also below the 7.9 times Millicom just paid for Cable Onda in Panama. Thus, we think Millicom was correct to not be willing to sell at this price.