Morningstar | Millicom Agrees to Acquire Telefonica’s Operations in Panama, Costa Rica, and Nicaragua
Millicom announced on Feb. 20 that it agreed to acquire Telefonica’s operations in Panama, Costa Rica, and Nicaragua for $1.65 billion, or 6.8 times 2018 EBITDA. Strategically, we believe this is a great acquisition at a fair price. These are the three countries where Millicom was a fixed-line telecom operator only, and Telefonica’s assets are all wireless, making Millicom a converged operator in all of its Latin American operations. Telefonica is the largest operator in Panama and Nicaragua, and the second largest in Costa Rica.The deal is being funded by debt and will push Millicom’s debt/EBITDA to about 3 times, which is quite high. However, debt reduction will now be the company’s focus. There is still the possibility of acquiring another wireless operator in Panama, but we think consolidation is more likely to happen amongst the other operators. We think Millicom will now look harder to exit Africa to use the cash to pay down debt. We believe the firm will maintain its existing dividend, but we no longer expect an increase in the next five years.
We would anticipate that the free cash flow the firm is generating and asset divestitures are sufficient to bring net debt back down to 2 times within five years. This deal provides additional opportunities for revenue growth and margin enhancement. However, for now, we don’t expect to change our $86 ADR fair value estimate due to the risk of the additional debt. Our narrow moat rating for both companies is unchanged, and we continue to believe the shares for both are undervalued.
We believe the deal highlights how undervalued Telefonica is, as developed markets historically carry higher multiples, yet Telefonica is trading for about 5.3 times EBITDA. Our EUR 13 per local share fair value estimate implies a multiple of 6.9 times, in line with this transaction, which is expected to close in the second half of the year.
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