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Morningstar | Millicom Receives Preliminary Offer From Liberty; Skeptical of Deal, but Millicom Undervalued

Millicom confirmed it received a highly conditional preliminary offer from Liberty Latin America, or Lilac. We are skeptical of such a deal actually transpiring. Thus, we are maintaining our Millicom $86 per ADR fair value estimate and narrow moat rating. We agree that Millicom’s shares are undervalued. Lilac was spun out of Liberty Global in 2017 and is controlled by John Malone. However, neither company's shares have performed well since the spin-off, and Lilac now has a market capitalization of just $3 billion versus Millicom’s $6.7 billion. In addition, like most Malone-run companies, Lilac is heavily leveraged at 4.4 times debt/trailing 12-month EBITDA, as we calculate it, subtracting stock-based compensation from EBITDA. This means it would be difficult for Lilac to fund the acquisition from new equity or debt. Finally, Millicom is 37.2% owned by investment firm Kinnevik, and Millicom is just starting to turn the corner after several years of investment in 4G and cable TV. The cable business is particularly starting to show significant growth, so we wonder why Kinnevik would sell now.

Kinnevik has controlled Millicom, for over a quarter of a century, and the wireless operator is one of its largest investments. Selling for cash would create a huge tax burden and create the issue of where to reinvest the proceeds. The one possibility we see is if Malone can convince Kinnevik to take shares in the combined company and that the enlarged company would be much stronger. However, for this to happen we think Lilac would need to offer a big premium to where Millicom is trading. In 2015, Liberty Global paid 10.7 times EBITDA for Cable & Wireless Communications, the largest asset in Lilac. Even with the recent runup in Millicom’s stock, it is only trading at 4.8 times our 2018 estimated EBITDA. While a multiple as high as the C&W deal may not be required, we would anticipate that one much higher than the current level would be required to entice Kinnevik to sell.