Millicom is Consolidating its Balance Sheet

Millicom International Cellular S.A. (MICC), a Luxemburg-based leading global wireless service provider in various emerging markets, is exploring all options to improve its highly leveraged balance sheet.

The company had approximately $2.2 billion of total debt and $729 million of cash & cash equivalent at the end of the first quarter 2009. Management has taken several decisions, the first of which is to reduce its capital expenditure.

Historically, Millicom has benefited from the huge capital expenditure it had undertaken to expand and upgrade networks, which resulted in significant subscriber growth and record revenue. Since a major part of fiscal 2008 capital spending was earmarked to improve network coverage, it is expected that the company will now benefit from service expansion.

Management has stated that capital spending will decrease to $850 million in 2009, compared to $1.43 billion in the previous year, improving the company’s ability to generate sizable positive free cash.

Secondly, Millicom’s strategy of offering prepaid cards through mass-market distribution and non-traditional channels, such as street vendors and freelance distributors, has proven to be effective. This method enables the company to keep costs low and margins high.

EBITDA margin reached 45% during the first quarter of 2009, which was the long-run target announced by management. The company guided EBITDA margin to remain near 45% in fiscal 2009, a respectable level for telecommunications carriers.

Thirdly, Millicom has decided to disinvest its Asian operations consisting of Cambodia, Sri Lanka and Laos. The major concerns in these markets for Millicom are increased competition and an extremely tight credit market. The Asian region contributed just 8% of the company’s total revenue and its EBITDA contribution is even lower at 6% of the total.

Overall ARPU in Asia was just $6.2 in the first quarter of 2009, compared to $6.6 in the previous quarter and a massive $8.7 in the year-ago quarter. Disinvestment of Asian operation is expected to provide $500 million – $600 million of cash.

Millicom’s other operations in Central America, Latin America and African regions are performing in line with its expectations despite stiff competition from several global telecom operators like America Movil (AMX), Telekom Argentina (TEO), Telefonica S.A. (TEF), and Telefonos de Mexico (TMX). We maintain Hold recommendation for Millicom.

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