Why is Millicom walking out on its Telefónica Costa Rica deal?

Luxembourg-based group Millicom has formally terminated its agreement to purchase Telefónica’s Costa Rican operations after a series of bitter exchanges in recent days.

Millicom argued that the conditions to move forward with the US$570mn deal were not met and that the share purchase agreement with Telefónica provided for the termination of the acquisition under such circumstances by May 1, 2020.

Millicom hinted that the coronavirus crisis had played a role in its decision.

"At this point in time, it's a lot more prudent, given that we have the absolute legal right not to go forward, not to extend in terms of that contract or not to go forward. It's really a very sound and prudent business decision. The largest synergies by far were in Panama and are being attained in Panama rather than in Costa Rica… Our existing business in Costa Rica is relatively small," Millicom CEO Mauricio Borrero said in the company's 1Q20 earnings call.

Meanwhile, Telefónica is claiming there has been a breach of contract.

The company had already declared that all conditions for the deal were in place. Now, as soon as the New York legal circuit reopens after the currently coronavirus restrictions are lifted, the Spanish carrier is likely to take the case to the courts to try and force Millicom to honor the deal. 

Millicom fired back saying it will “vigorously defend any action brought by Telefonica in this matter.” 

Costa Rican telecoms watchdog Subtel, which is also an antitrust authority in telecommunications, had given its blessing to the deal at the end of last year. In fact, most regulatory approvals for the acquisition have already been granted, but Millicom was claiming some necessary ones were still pending.

OTHERS TO COME

This Costa Rican deal is similar to what happened recently between the US and Brazilian aerospace groups Boeing and Embraer and is another example of what might be expected for the months ahead.

The US plane maker claimed that Embraer had failed to meet contractual conditions and for that reason it was giving up on the purchase of Embraer’s commercial business. 

Embraer replied that the allegations were mere excuses to justify pulling out of the deal and stated that it would go to court to enforce the completion of the deal, as millions of reais had been spent on the integration of systems and processes.

The fact is that, as the economic recession triggered by the pandemic sinks in, other big announcements made in recent or regarding deals in the pipeline are very likely to have similar outcomes to the Millicom-Telefónica agreement, regardless of the alleged causes.

The failed Costa Rica deal is also ringing alarm bells in the ICT industry.

Telefónica has been on a major divestment push in the past two years, putting up for sale towers and datacenters, as well as entire operations. 

Last year, the group took a step further and announced that its plan would be to focus on four key markets: Brazil, Spain, the UK and Germany. But then came COVID-19, which risks throwing a major spanner in the works.

Up until the pandemic, Millicom was also happy with its Latin American perspectives, calling 2019 a ‘transformational year’ partly because of its series of acquisitions.

From an operational standpoint, Telefonica's Costa Rica acquisition was complementary to Millicom. 

“In reality, the sale of [Movistar’s assets to Tigo] does not represent a consolidation because Tigo is, in the end, a cable and internet provider, not mobile. So now it has the possibility of complementing a social offer towards a more residential mobile market,” Fabián Monge, Costa Rica country manager for Swedish manufacturer Ericsson, told BNamericas last month.

Synergies aside, Millicom remains upbeat on its cable business, more so now than ever.

"We're happy to have cable stand-alone because cable stand-alone is very resilient. You're seeing it through the crisis. It does not immediately need a mobile solution, and it does hold the stronger long-term strategic part because those mobile, those networks are very, very resilient and capturing the bulk of the topic. So we think with cable stand-alone, we're in a good position and a good strategic position to evaluate other options," Borrero said in the company's Q1 release.

Overall, Millicom said it invested more than US$3bn inorganically in Central America in 18 months. 

In a long company report on what now looks a very different 2019, the company was optimistic about its growth perspectives in Latin America.

"Our strategy to further consolidate Tigo operations in LatAm holds some degree of planned risk, but we see significant potential growth ahead for this region," it stated.