Fitch Affirms Millicom at 'BB+'; Outlook Stable
CHICAGO -- January 13, 2014
Fitch Ratings has affirmed the long-term foreign-currency and local currency
Issuer Default Ratings (IDRs) of Millicom International Cellular, S.A. (MIC)
at 'BB+' with a Stable Outlook. Fitch has also affirmed MIC's senior unsecured
debt at 'BB+.'
KEY RATINGS DRIVERS:
MIC's ratings reflect the company's geographically diversified portfolio,
leading market positions in most of its markets, good liquidity and solid
pre-dividend free cash flow (FCF) generation. The ratings are tempered by the
company's increasing leverage due to recent M&A activities, historically-high
shareholder returns, exposure to markets with low sovereign ratings and low
GPD per capita, pricing pressures, and debt allocation between subsidiaries
and holding company.
Temporary Hike In Leverage
Negative pressure on MIC's ratings is increasing as its financial leverage
will significantly increase when the company completes the merger between its
subsidiary, Colombia Movil, and UNE EPM Telecomunicaciones S.A. (UNE) in the
first half of 2014 (1H'14). The merger will increase MIC's net debt by USD1.3
billion which will result in its financial net leverage, measured by total
adjusted net debt to operating EBITDAR, rising above 2.0x in 2014 from 1.5x at
However, Fitch believes the expected increase in leverage to be temporary in
2014, as the company is likely to reduce its aggressive shareholder return
policy. The company paid only USD264 million dividend in 2013. This was a
sharp reduction from USD731 million including share repurchase in 2012. Fitch
believes total shareholder returns in 2014 and 2015 will remain in line with
the 2013 level, which will lead to positive FCF and leverage of less than 2.0x
over the medium term.
A slower-than-expected deleveraging due to a lack of the company's commitment
to restraining dividends, acquisitions, or a further deterioration in its
operating performance will immediately place negative pressure on the ratings.
MIC's EBITDA margin is likely to continue to deteriorate in 2014 and 2015 due
to intense competition. Mobile ARPU is trending downwards in all of its
operational geographies amid increasing market saturation in Latin America. In
addition, the increasing revenue proportion of less-profitable fixed-line
business and online services will place pressure on margins. Some of the
increase in fixed line revenue is attributable to the merger with UNE. In 2012
and 2013, the company recorded a negative EBITDA growth despite a stable
subscriber number growth, suppressing the margin down to 37.3% and 39.8% in
the first nine months of 2013 and 2012, respectively, from about 44% in
Improving Competitive Position In Colombia
The planned merger with UNE will strengthen MIC's market position in Colombia,
as UNE's fixed-line network and products complement MIC's operation in terms
of both geography and products offerings. The merger will also enhance product
diversification, as well as operational cost savings. This synergy is
important for MIC as Colombia has been the fastest growing market in terms of
revenue contribution among MIC's markets. Although any dividend upstream is
not likely for the foreseeable future given the high leverage of the newly
formed entity, the addition of UNE will help MIC turn around its EBITDA growth
MTN Investment Into AIH Is Positive
The MTN Group's (MTN) investment to acquire a third of the stake in MIC's
online business joint venture, African Internet Holding (AIH), is positive
from both financial and operational perspectives. MTN's local expertise, as
Africa's largest mobile operator, can be of great value to AIH's business
strategy. In addition, as this investment will provide much needed cash for
EBITDA-loss-making operation of AIH, MIC will not inject additional capital
into this venture beyond the already-committed amount of EUR35 million in
Concentration In Low-Rated Sovereigns
Despite the diversification benefit, MIC's ratings are constrained by its
operational footprint in only Latin America and Africa with low sovereign
ratings and GDP per capita. The operational environment in these regions, in
terms of political and regulatory stability and economic conditions, tend to
be more volatile than developed market which could potentially affect MIC's
operations negatively. This also adds currency mismatch risk as 36% of MIC's
total debt at end-September 2013 was based on USD while most of its cash flows
are generated in local currencies in each country.
Leading Market Positions
MIC has retained its market leader positions in most of its key cash
generating operating companies in Latin America backed by its effective
marketing strategy, strong brand recognition, and extensive network and
distribution channels. The company's subscriber growth remains solid, adding
1.5 million new mobile subscribers in the third quarter of 2013 (3Q'13), and
its increasing investment into fixed-line and media will help provide
increasing cross-selling opportunities to acquire more revenue generating
units. Fitch believes MIC's market position in key markets will remain intact
in the short to medium term.
Diversifying Revenue Mix
MIC's future revenue growth will be more centered on non-voice/SMS services as
it tries to alleviate pressures on the traditional voice/SMS revenues. As a
result of its strategy, 56% of the total revenue growth in the first nine
months of 2013 was generated from the non-mobile segment such as online,
mobile finance, and media. Therefore, mobile revenue portion is likely to
decline below 70% in 2015 from about 83% in 2013.
As of Sept. 30, 2013, the consolidated group cash was USD1.0 billion and total
on-balance sheet debt was USD3.4 billion, with 24% allocated to the holding
company. Debt maturities are well spread with an average life of five years.
Fitch does not foresee any liquidity problem for both the operating companies
and the holding company given operating companies' stable cash generation and
their consistent cash upstream to the holding company.
Dividend streams mitigate structural subordination
The creditors of the holding company may be subject to structural
subordination to the creditors of the operating subsidiaries given all cash
flows are generated by subsidiaries, which held 76% of the total group debt at
end-Q313. However, it is our view that a very stable and high level of cash
upstream, mostly through dividend, by subsidiaries is likely to remain intact
over the long term. Therefore, Fitch does not foresee any material risk from
this structural weakness.
Negative rating action can be considered in case of an increase in net debt to
EBITDAR above 2.0x-2.5x without a clear path to deleveraging due to any one or
combination of the following: M&A activity, including additional funding the
online business, aggressive shareholder distributions, competitive or
regulatory pressures on its operations.
Positive rating action can be considered if its financial leverage improves
towards 1x on a sustained basis due to improvement in its operational
competitiveness and resultant stronger cash generation, less aggressive
shareholder returns, or a higher level of diversification in cash flow
generations across its geographies.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Evaluating Corporate Governance' (Dec. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Parent and Subsidiary Rating Linkage Fitch￢ﾀﾙs Approach to Rating Entities
within a Corporate Group Structure
Evaluating Corporate Governance
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Alvin Lim, CFA, +1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Owen Fenton, CFA, +44 (0) 20 3530 1423
Daniel Kastholm, CFA, +1-312-368-2070
Brian Bertsch, +1-212-908-0549 (New York)
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