Millicom to Redeem Bonds - Analyst Blog

Millicom International Cellular SA (MICC) intends to redeem in full the 2013 10% high yield bond in December 2010. The redemption will play an important role in Millicoms’s financial strategy by reducing the cost of financing, extending average maturity to more than three and a half years, strengthening risk management and improving tax efficiency.

During second quarter 2010, Millicom’s total revenue grew 14% year over year to $928.6 million and surpassed the Zacks Consensus Estimate of $921 million, mainly due to a higher contribution from African and Latin American regions and the strengthening of the dollar against a number of local currencies.

Earnings per share came in at $1.20, compared with $1.05 in the prior-year quarter. However, the result was well below the Zacks Consensus Estimate of $1.36, primarily due to a weak economic environment and the impact of new taxes and interconnect cuts introduced in the previous quarters.

The redemption is conditional and will raise finance of up to $400 million. The par value of the bonds is approximately $455 million. However, the early redemption will incur a penalty of 1.65%, all of which will be paid out of cash balances within the company. The redemption will result in a more than 5% increase in earnings per share in 2011.

Historically, Millicom has benefited from the huge capital expenditure it had undertaken to expand and upgrade networks, which resulted in a significant subscriber growth and record revenue growth. Since a major part of 2009 capital spending was earmarked to improve network coverage, the company will now benefit from service expansion. Management has stated that capital spending will decrease to $700 million in 2010 compared with $737 million in the previous year, improving the company’s ability to generate sizable positive free cash.

Increased competition in the telecom sector may result in volatile revenue trends. Though competitive scenario in Africa is intensifying, Millicom has kept its focus on its African operations to ensure increased growth in the future. Global telecom giants Vodafone Group plc. (VOD), South African MTN, Bharti Airtel, and France Telecom are existing players in this market. The company’s Central/Latin American operations are also facing stiff competition from several large telecom operators such as America Movil S.A.B. de C.V. (AMX), Telekom Argentina, Telefonica S.A. (TEF), and Telefonos de Mexico.

We believe massive growth of fixed/mobile broadband services, coupled with the mobile VAS business in Central/South America and Africa, will serve as fundamental business catalysts. Millicom has already deployed high-speed 3G wireless services in South America. Improved EBITDA margin and reduction in capital spending are likely to strengthen the company’s balance sheet. At the same time, we remain concerned regarding increased competition in the African markets, where Millicom is giving maximum emphasis for future growth. Economic headwinds in Central/South America and Africa together with volatile currency exchange rate may also hinder Millicom’s current growth.

We currently maintain our long-term Neutral recommendation on Millicom with a short- term Zacks Rank #3 (Hold).

 
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