The Long and Short
Millicom and EPM strengthen their Tigo-UNE venture
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Millicom and EPM have unveiled an agreement to inject capital into their joint venture, Tigo-UNE, operating in Colombia. Each entity will infuse COP300 billion, or approximately $71 million, into the venture, primary to meet imminent amortizations. This looks like a positive for Millicom debt, including the structurally senior Comcel 2032s and the Conda 2030s.
Under this agreement, Millicom and EPM will maintain their current shareholdings in Tigo-UNE. The two companies have also consented to amend the 2013 shareholders’ agreement, incorporating a put option. This option, if exercised, grants EPM the ability to sell its entire 50% stake in UNE to Millicom for COP300 billion, along with a 10% premium.
Furthermore, the existing drag-along clause will undergo an extension, now reaching until December 31, 2026. This clause allows Millicom to retain its existing rights, ensuring it receives first refusal on EPM’s stake and an opportunity to participate as a bidder in any sale process initiated by EPM.
The overarching objective of this agreement is to alleviate Tigo-UNE’s current liquidity challenges. This includes addressing near-term debt maturities and funding requirements related to spectrum renewal and general maintenance. Notably, Tigo-UNE faces approximately $40 million in debt maturities this month, with an additional sum of around $85 million due in the second quarter of 2024. Moreover, the venture must make an initial payment for the renewal of its spectrum holdings in the 1900MHz band by the end of this year. These financial obligations could result in an increase in net leverage in the upcoming year unless additional liquidity is provided.
Currently, the Tigo/UNE business in Colombia lags behind Claro in terms of market share. Although their operational strategies have been successful in safeguarding and expanding their mobile share, which has seen a 3-point increase since 2020, challenges persist. The competitive landscape was further intensified by the entry of WOM into the market, estimated to hold a 7% market share by the end of 2022. This heightened competition, coupled with rising costs, has led to margin compression. Capex requirements for spectrum renewal have also contributed to sustained cash burn at the subsidiary level in recent periods.
While Millicom is actively pursuing an infrastructure joint venture with Telefonica to streamline deployment costs and spectrum capacity usage, margins are likely to remain under pressure due to customer acquisition costs (SAC) and ongoing inflation. One potential positive development on the horizon is the possibility of selling and leasing back towers at the UNE level, a move that could be facilitated by the new recapitalization agreement.
The agreement should have a positive impact on Millicom’s valuations across its debt structure, including the structurally senior Comcel 2032s and the Conda 2030s. These bonds have experienced pricing pressures in recent sessions, exacerbated by a recent Negative Watch placed by Moody’s on its parent-level ‘Ba1’ rating. Although the bond price movements have not been accompanied by high trading volumes, opportunities to add broad Millicom risk look attractive here. The HoldCo Tigo 2029 and 2032 bonds, both trads four to five points below their levels before the UNE-related headlines, are poised for incremental price improvements to reflect fair value within the structure.
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