Spotlight: Why a Liberty LatAm takeover of Millicom would be a perfect fit

Monday's news that Liberty Latin America is in talks with competitor Millicom about a potential takeover bid could become one of the biggest stories of the year in the sector and, if it goes ahead, would create a serious third competitor in the regional telecoms market.

The news was leaked to Reuters, forcing both companies to issue separate press releases confirming that talks were indeed underway.

WHY?

A merger of the two companies has probably been on the cards for some time and would also make sense because the two companies have little crossover in the countries where they are present, meaning a JV would be highly complementary.

Millicom has a strong presence in the major Central American countries, as well as Colombia, Paraguay and Bolivia with its Tigo brand.

Liberty Latin America owns Chile's leading pay-TV company VTR, a cable operator in Puerto Rico and the operations of Cable & Wireless Communications (CWC), which covers most of the Caribbean, as well as Panama. This gives the company a broad spectrum of services from pay-TV to mobile and fixed line telecommunications.

CWC also owns a highly valuable and extensive submarine cable network, which would give a major boost to Millicom's operations in Central America and Colombia, giving it independence from third-party cable owners such as Telefónica and bringing down wholesale broadband costs.

A combined, larger company would also generate economies of scale, giving the entity more bargaining power when purchasing handsets, thus helping drive down costs in underpenetrated markets like the Caribbean and Central America.

CWC also has a mature corporate ICT business and a merger with Millicom would open up business to multiple new markets.

Millicom, on the other hand, is strong in the area of mobile broadband, having focused heavily in recent years on upgrading its customers to 4G services and postpaid plans, and that will complement Liberty's operations in the Caribbean, where CWC competes with Digicel.

Millicom is also investing heavily in fiber deployments, anticipating the major demand for backhaul that will come with 5G.

In addition, Millicom brings to the table experience in value-added services with Tigo sports, Tigo OneTV, which provides linear and non-linear TV, Tigo Money mobile financial services, Tigo streaming music, as well as corporate ICT services Tigo Business. Liberty's international landing points will only help better position the offering of such services.

A merger of the two companies would give them undisputed dominance in Central America and the Caribbean. In the Caribbean, debt-strapped Digicel would be no match for the financial might of a new super competitor.

COLOMBIA

While CWC will give Liberty access to 24 new markets across Latin America and the Caribbean, Liberty's eyes are most likely on Colombia.

According to José Otero, Latin America and Caribbean president with 5G Americas, Colombia is the third largest telecommunications market in the region after Brazil and Mexico and has a lot of untapped demand for growth, especially in the area of expanding fiber networks. Though there is currently a fiber backbone, it is disjointed, not connecting all areas.

After having struggled for several years in Colombia, Millicom CEO Mauricio Ramos said that in the third quarter of 2018 results showed the company's strategy of investing in fiber was paying off. The company pointed to a 13.7% year-on-year increase in Ebitda and a 3.2% rise in revenue.

GONE SHOPPING

Liberty Latin America is a new company, spun off from parent company Liberty Global in January 2018 with the express purpose of freeing the company to explore inorganic growth.

Liberty Latin America was launched as a publicly-traded company and is reported to have access to ample credit lines.

Guillermo Ponce, CEO of VTR, was appointed to oversee initial acquisitions, the first of which came with the purchase of 80% of Costa Rican cable operator Cabletica in October for approximately US$250mn.

In December, it was reported that Liberty was in advanced talks with the government of Curaçao to acquire fixed and mobile telecom provider UTS.

If the takeover is successful, Liberty would likely look next to Peru, which after Colombia is the next largest market and is attractive, with four established network operators and several MVNOs. Ecuador is a small market with few market players and so is less alluring. Argentina would be difficult to enter due to a strong and established duopoly, while in Uruguay state telco Antel has a stranglehold on TV and fixed line broadband.

Millicom has also been shopping. In October, the company acquired 80% of Panama's largest cable operator Cable Onda for US$1bn, thus completing its Central American footprint and connecting it to Colombia. Panama is the only country where Millicom and Liberty compete.

Millicom also has operations in Chad and Tanzania in Africa, but has been progressively selling off its assets on that continent to concentrate on Latin America, which now makes up 90% of revenue. The news of the takeover bid came only a week after the company started trading its shares on the US-based Nasdaq stock exchange in a move to increase the liquidity of the stock.

IN NUMBERS

At the end of Q3, Millicom had 31mn mobile customers compared to Liberty's 7.8mn mobile subscribers.

Millicom also has 9.9mn homes passed in Latin America compared to Liberty's 6.6mn.

Millicom has a market value of US$6.6bn, more than twice that of Liberty Latin America (US$2.9bn).

By comparison, América Móvil ended 3Q18 with 279mn mobile subscribers and 83mn fixed line users. The company that uses the Claro brand ended 2017 with revenues of 1.02tn pesos (US$53bn).

Telefónica posted revenues of 52bn euros (US$59bn). The company had 343mn customers in Europe and Latin America, of which 272mn were mobile, 11mn fiber and 8mn pay-TV.