We came across a bullish thesis on Millicom International Cellular S.A. (TIGO) on No Deep Dives’s Substack by jefke. In this article, we will summarize the bulls’ thesis on TIGO. Millicom International Cellular S.A. (TIGO)'s share was trading at $25.61 as of Nov 26th. TIGO’s trailing and forward P/E were 27.89 and 8.48 respectively according to Yahoo Finance.
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Millicom (TIGO) recently completed its long-anticipated tower sale-leaseback (SLB), a move that has been speculated on by investors for years. However, despite the announcement, the stock barely reacted, raising the question of whether the catalyst had already been priced in or if the market's expectations were too high. While the immediate stock response might be disappointing, the real focus should be on the long-term outlook for Millicom, which remains positive, with the tower deal serving as a key step in unlocking future value.
The sale of over 7,000 towers for approximately $975 million brings immediate cash flow to Millicom, but the company will now have to pay lease costs, which will slightly affect its free cash flow (FCF). The deal removes the operational expenses and capital expenditures associated with maintaining and expanding the tower portfolio, allowing Millicom to focus on its core business while receiving upfront cash to bolster its balance sheet. By selling these towers to infrastructure investors like SBA Communications (SBAC), Millicom benefits from the higher valuation multiples that these buyers are willing to pay for telecom infrastructure, which is typically higher than what the broader market would assign to a telecom operator. This creates a situation of multiple arbitrage—Millicom gets to sell the towers at a premium and then potentially repurchase its own shares at a lower multiple, boosting shareholder value. For instance, after the sale, if Millicom uses $800 million of the proceeds to buy back around 30 million shares, it would permanently increase its FCF per share by about 13%, from $3.79 to $4.31, despite a $40 million annual reduction in FCF.
However, this transaction is not without risks. The sale exposes Millicom to the possibility of more competition, as SBAC will open the towers to other operators, potentially affecting Millicom’s market position. Additionally, the company will face ongoing lease obligations, which could limit flexibility during economic downturns compared to owning the assets outright. Despite these potential drawbacks, the immediate financial benefits from the upfront cash and the reduction in capital expenditures are likely to outweigh the longer-term risks.
One of the reasons why the stock didn't react as expected could be lower-than-anticipated valuation. Many had hoped for a price closer to $1 billion to $1.5 billion, but the final deal was more in line with previous expectations, which had been adjusted due to rising interest rates. Moreover, Millicom has not yet disclosed how it plans to allocate the proceeds from the tower sale. Investors were hoping for a clear commitment to return capital to shareholders through buybacks or dividends, but the uncertainty regarding how Millicom will deploy the funds has led to skepticism in the market. Furthermore, the transaction’s benefits have already been partially priced into the stock, as the market had anticipated the tower sale for some time.
Looking ahead, Millicom’s majority shareholder, Xavier Niel, through Iliad, is likely to play a pivotal role in the company’s future. Niel, who owns around 40% of Millicom, has shown patience in building value over the long term, and he may prefer a more gradual realization of value rather than immediate shareholder returns. While Millicom will soon reach its debt target of 2.5x EBITDA and is expected to generate around $650 million in FCF in 2024, the company’s management has indicated that shareholder returns won’t be a priority until this target is met.
In its most recent earnings report, Millicom confirmed that it would not be distributing dividends or engaging in share buybacks until its leverage target is reached. The company’s focus will be on organic capital expenditures and a potential merger or acquisition in Colombia. Millicom's ability to generate strong cash flow and its plans to invest in growth opportunities, coupled with the SLB transaction, position the company well for future value creation. However, investors will need to remain patient as the company works through its capital allocation plans and as Niel's long-term strategy continues to unfold.
Millicom International Cellular S.A. (TIGO) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 10 hedge fund portfolios held TIGO at the end of the third quarter which was 8 in the previous quarter. While we acknowledge the risk and potential of TIGO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TIGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
