Millicom looks to buy Telefonica's Colombia ops for $400 million

The Latin America-focused telco group revealed on Wednesday that it aims to purchase Telefonica's stake in fixed and mobile operator Coltel, as well as making a move for the government's holding and those of other minorities at the same per-share price. Further, it noted that it seeks to take full control of its own Colombian operation Tigo UNE, something it has been working on for a while.

All in all, Millicom is looking at an outlay of $1 billion in cash and assumed debt to bulk up its business in Colombia.

Of course, all the various discussions could yet come to nought, as Millicom points out in its announcement. There are several parties involved and lots of variables.

Arguably the most interesting aspect of the plan is the acquisition of Telefonica's holding in Coltel.

The Spanish incumbent has a 67.5% stake in former incumbent Coltel. The company has had a rough time in recent years, the mobile market having proved particularly competitive and the cost of spectrum licences and network upgrades taking their toll on its financial position. Debt and cash flow also remain an issue.

On the plus side, the telco has a decent market position, as Fitch pointed out, when it downgraded the operator in April. It is the second-largest mobile player in Colombia with a 25% share, but market leader Claro, owned by America Movil, is around twice the size. It is also the third-biggest fixed broadband player with a market share that has grown to 16%, the ratings agency said.

All of that being the case, a merger with rival TigoUne makes a lot of sense from a scale perspective, presuming the companies succeed in brokering a deal and obtaining the relevant regulatory approvals, of course.

And for Telefonica, which has been on a debt-reduction drive for some years, the sale of the asset could provide a useful cash injection.

The Spanish incumbent has already spun off its fibre network business in Colombia, selling a 60% stake to KKR, as part of that push, a model it has replicated in other Latin American markets.

Telefonica didn't have much to say about this proposed deal though. In a short regulatory statement it confirmed a non-binding agreement with Millicom and admitted that it may sell its Colombian assets. But it made no other comment on what such a deal might mean.

Millicom was more expansive, waxing lyrical about the potential benefits of the tie-up in a statement that reads a lot like it is laying the ground work for a regulatory battle.

"The proposed combined entity would rejuvenate Colombia's telecom sector by forming a robust telecom entity with the necessary scale and financial capacity to support the significant network and spectrum investments required to achieve Colombia's ambitious digital inclusion objectives," Millicom said. "Colombia will gain a second large scale and financially viable operator at a crucial moment," it added, going on to talk up the potential for the rollout of digital services as well as fibre and 5G infrastructure.

Millicom – which remains the subject of a takeover bid by Xavier Niel's Atlas Investissement, although its board has deemed a $24-per-share offer to be too low – is clearly keen to bulk up in Colombia, but there is an extra element to its plan: to buy out state utility Empresas Públicas de Medellin's (EPM's) 50% interest in TigoUne.

It plans to purchase the shares for cash at a comparable valuation multiple as the one implied by the Coltel acquisition, it said. Last September the two owners amended their shareholder agreement to include a put option that would allow EPM to sell its 50% stake to Millicom entire 50% for 300 billion Colombia pesos (US$73.5 million at current exchange rates), plus 10%. That being the case, the whole process should be simple enough.

So, now it's just about hammering out the T&Cs with Telefonica...and jumping through the various regulatory hoops.