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Apollo and Marcelo Claure Eye $10bn Millicom Takeover, Unlocking Growth Potential in Emerging Market



Overview:

Early in 2023, private equity and investment management firm Apollo Global Management alongside former SoftBank executive Marcelo Claure, announced the intention to buy out the Luxembourg based telecommunications company, Millicom International. The target was valued at approximately $10bn, inclusive of debt. The company is one of the leading mobile and cable service providers in Latin America.


Industry Analysis:

2023 presents a somewhat challenging environment for TMT deal flow, with high interest rates, inflation, repressed demand, supply chain disruptions and geopolitical tensions. Accordingly, regulations have been made more stringent, which puts a damper on the valuation of deals since larger deals may attract greater scrutiny. However, strategic deals involving high-quality and financially sustainable targets will still go through. This is further backed by the recent upsurge in private credit financing by virtue of it becoming easier to acquire. This comes as a relief to the market as syndicate financing was dealt a blow by the events of 2022, as evidenced by the case of the take-private deal of Citrix. Companies and investors flush with cash are likely to take advantage of lower asset prices in the coming months, and it would not be surprising to see a slight hike in take-private moves. Even as the delayering of traditional telecom models continues, we can expect to see deals in fibre, Internet of Things and TowerCo.


Strategic Rationale:

Although Millicom is not considered a premium telecom company, it has a set of quality assets and a dominant position in its operating markets, primarily Latin America. In 8 markets of Latin America, the company is ranked #1 or #2. Millicom is a business that was strategically established in the early days of the telecom industry, Vodafone itself is an evolution of the Racal-Millicom JV in the UK. The company has a stable pipeline of projects in underpenetrated and underdeveloped markets, which presents an opportunity to lead the charts even in geopolitically challenging environments. There is still a large segment of the population in these regions that lack access to modern communication, and Apollo is keen on capitalising on this deficiency.


According to the AAII scale in the US, Millicom has a strong quality grade rating and has relatively stable financial fundamentals. In 2022, the company performed well, and it is expected to reach the scope of 822,000 new homes while also accelerating engagement in the B2B space. This acquisition would give Apollo access to a company that serves approximately 50mn customers under its Tigo brand. Millicom recently announced the development of a new fibre network at the Bioceanic Corridor that connects the Pacific and Atlantic Oceans, which could be a significant selling point in the progress of this takeover. Fitch Ratings has evaluated Millicom to have a stable outlook, reflecting geographic diversification, strong brand value and network quality, resulting in solid operating cash flow generation, as well as a dominant position in key markets.


Financial Analysis:

At the close of the market on February 17th, Millicom International has stable financials with a market cap of $3.36bn and an enterprise value (EV) of about $10.08bn. The EV/EBITDA multiple of 4.32 suggests that the company is not significantly overvalued. The Q4 2022 earnings release shows that revenue was up by 10% and operating profit grew by 17.2%, reflecting the benefits of them gaining full control of their JV in Guatemala. An equity FCF of $171mn was achieved, despite a challenging macroeconomic environment, which partially offset the revenue growth. EBITDA rose YoY from Q4 2021 to Q4 2022 as the net tax expense fell due to changes in deferred taxation policy in Colombia and the effect of the consolidation in the Guatemala deal. The IFRS consolidated measure of leverage fell from 3.12x to 3.04x, and net financial obligations decreased YoY.


By acquiring Millicom, Apollo would gain access to a company with a dominant position in Latin America, serving approximately 50 million customers under the Tigo brand, with a stable outlook and strong financial fundamentals. The addition of Millicom to Apollo's portfolio would provide a unique opportunity to expand into new, higher-value markets. TIGO stock (NASDAQ) has a beta of 1.06, which indicates a less volatile stock than the TMT average.


Valuation Analysis:

The proposed deal is valued at around $10bn, which includes its debt and the company’s current market valuation stood at around $3.36bn, with $6.9bn in gross debt. The price offering per share of the stock would be in the high teens, according to an earlier report by the Financial Times, dated 25 January. However, with the recent increase in French telecom investor Xavier Niel’s stakeholding in the company, from 7% in November 2022 to 19.6%, it is likely that the control premium on the deal will increase.


The only concerns Apollo has, regarding this takeover, is the high debt level of Millicom, which they are looking to bypass by structuring their bid in a way to avoid having to refinance or repay the existing debt, given the recent rise in interest payments. It’s worth noting that Millicom’s financials are relatively stable, and its EV/EBITDA multiple suggests that the company is not significantly overvalued. Since the news of the potential deal was first reported by the FT, Millicom’s shares trading on NASDAQ have jumped about 23%.


Integration:

While the deal is not set in stone yet and Apollo has not submitted a formal bid, the company’s prior experiences in the telecom industry and Millicom’s attractive position in underpenetrated Latin American markets make the intention of the takeover seem sincere. There is one complication that has been delaying this deal. A takeover battle seems to be brewing, as Xavier Niel seems to be attempting to block out the acquisition by a rapid increase in his shareholding over the past few days. Although Niel has filed as a passive shareholder in Millicom and has remained cryptic about his plans, his increased stake in the company could potentially impact the negotiations of the deal and lead to a prolonged takeover battle. Therefore, the successful integration of Millicom into Apollo’s portfolio will depend on how the company navigates this potential obstacle and whether they are able to secure a controlling stake in Millicom.


Regulatory Approval:

Since the stock is listed on NASDAQ and SWE, regulatory approval will be required from the US Securities and Exchange Commission as well as the Swedish Securities Council. The approval process may experience delayed in case a hostile bid of sorts is submitted by Xavier Niel or any other complications arise. However, given Millicom’s leadership position in 8 out of 9 Latin American markets, this sudden inflow of cash into a cash flow system rendered robust at the end of 2022, would likely enhance the company’s financial position and enable it to compete more effectively against other major players in the industry, such as AT&T, America Movil, and Vodafone.


Summary:

The deal looks to be one founded on strong company fundamentals as well as financial performance in 2022. The deal is expected to bring greater synergies for both companies, diversify Apollo’s asset management portfolio and provide Millicom with opportunities to expand into new markets and strengthen their position in existing ones. While there are some challenges related to the macroeconomic environment and debt, these can be overcome by the key tenets and catalysts of this deal.

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