Millicom Should Benefit from International Bidding War

| About: Millicom International (MIICF)

Millicom International Cellular (MICC) could shortly be on the end of a nice windfall as three major emerging market telcos line up in a bidding war for MICCs Tigo network in Sri Lanka. Millicom has been making concerted efforts to divest its Asian operations as it realigns its strategy to concentrate on key markets in Latin America and Africa.

In August Millicom offloaded its Cambodian operations to local partner The Royal Group in a cash deal that saw Millicom receiving $346m in return for its 58.4% holdings in CamGSM, a premium that valued the operator at 7 x times 2009 EBITDA. The deal is expected to close before the end of 2009. This followed the company's statement in July that it wanted to exit the Asian market.

With CamGSM gone, Millicom continues to hold interest in Sri Lanka & Laos. Tigo Sri Lanka, a 100% owned entity, is now on the auction block, with India's Bharti Airtel and state controlled BSNL having expressed interest, as both operators are looking to expand into new markets and Sri Lankan operations could create some nice synergies with Indian activities. Now that UAE based Etisalat has thrown its hat into the ring, we could see a bidding ward erupt, as three majors go after the prize.

Cash rich Etisalat has had a terrible 2009, as it desperately seeks to expand out of its domestic market, recently failing to secure the purchase of Morroco's number two operator MediTel, as Telefonica and Portugal Telecom offloaded the unit to local private investors. Etisalat has been on the hunt for the last 18 months or so and has made bids to operate networks in Iran, Morroco, India and Libya. Currently the country is also on the prowl in Nigeria, where it is looking to add to its existing operations. The company bought a 40% stake in Emerging Markets Telecommunication Services (EMTS) for $400 million last year, and it is now looking at acquiring incumbent operator Nitel.

Analysts said the move fit in with Etisalat’s strategic push to operate mobile networks in complementary markets that share commercial or social ties. It already offers some integrated services between networks in the UAE, Saudi Arabia and Egypt, and has said that building on such synergies across its 18-country global network is a priority.

Etisalat announced the Millicom bid in a stock market statement, but did not disclose the price it is offering to pay for Tigo Sri Lanka, which has more than 2.2 million customers. A report in The Wall Street Journal recently said Bharti Airtel [BOM:532454] would be willing to pay up to US$120 million (Dh440.7m) for the company as it seeks to combine Tigo's 2.2 million subscribers with its existing local operator.

“We are looking at various opportunities to expand our operations in foreign markets,” said Kuldeep Goyal, chairman and managing director of BSNL. “This is one of them.” BSNL has undersea cable connectivity in Sri Lanka.

The telecom rumor mill also has Russia's Vimpelcom (NYSE:VIP) involved in the bid, however nothing is yet firm on this. It would seem more likely for Vimpelcom to look at Millicom's Laos operator, as the Russian carrier has launched services in Vietnam and Cambodia this year.

For me the most likely candidate is EtiSalat, as Bharti is tied down in lengthy negotiations with MTN over its $25Bn merger and this would seem to be a side show. BSNL is also rumored to be looking at acquiring a stake in Kuwaiti telco giant Zain at present, whilst Etsisalat has the appetite, the money and the credit rating to make the deal. MICC's management are shrewd operators and will squeeze every last dollar out of this, so if Etisalat want into the Sri Lanka market, it is my opinion that they will pay a premium.

Disclosure: Author holds no position in any company mentioned.

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