Operator Series: What will change with Liberty Latin America's split-off?

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Friday, January 26, 2018

In early January UK-based Liberty Global completed the split-off of its Latin America operations known as LiLAC into a new independent company called Liberty Latin America, consisting of Chilean cable operator VTR, Puerto Rico cable operator Liberty Cablevisión and Cable & Wireless Communications (C&W), which provides residential and corporate communications across the Caribbean and Central America.

The split had been nearly three years in the making, and the company is now publicly trading independently on the Nasdaq, a move that Liberty Global CEO Mike Fries has said "will ensure that this new company will have access to the capital and resources necessary to achieve superior financial and strategic growth."

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While all three Liberty Latin America units offer residential triple- and, in some cases, quadruple-play services, C&W has a solid corporate ICT business, offering datacenter and managed services as well as a subsea and terrestrial fiber optic network connecting over 40 markets in the region.

One could raise the question of whether the split-off is part of plans to create another regional telecoms group worthy of competing with the likes of América MóvilTelefónica and Millicom. Or could the growth strategy involve M&A? Could the split-off create greater financial risk for the company?

FINANCIALS

No such plans are foreseen in the near term. In the meantime, ratings agencies don't see the split-off as creating any major changes to the group's financials.

Liberty Latin America has combined annual revenue of some US$3.7bn, 3.7mn mobile subscribers and covers 6.4mn homes.

In an investor's note, Moody's said that, as Liberty Global will continue to provide operational support and technical oversight, it does not see any immediate impact on ratings, and any changes will be gradual. Capital structures will remain the same, and no tax changes are expected, although there will be some incremental costs associated with becoming a separate public company.

Executives from Liberty will be leading the new group, which will support consistency in the operating strategy and financial policies, according to Moody's.

Balan Nair, who was chief technology and innovation officer at Liberty, has been appointed president and CEO of Liberty Latin America, while Liberty Global CEO Mike Fries will serve as executive chairman of the new group.

In December, C&W announced the appointment of Inge Smidts as CEO, replacing John Reid. Smidts brings marketing and brand management experience from Liberty's Belgian unit Telenet Group, as well as from Procter & Gamble.

"The combined liquidity of the LiLAC Group is solid," Moody's said. "Although each subsidiary operates independently and there is no contractual obligation among the group to provide financial support to subsidiaries, we believe that the Latam Group will be both willing and able to ensure adequate liquidity within each operation."

"They are a solid operator financially and I don't see anything materially different to the split-off," Alvin Lim, director of corporate ratings for Fitch Latin America, told BNamericas. "The main goal of the split-off is to increase transparency and they wanted their shares to be more efficiently valued on the performance of the Latin American operations separate from Europe." 

PUERTO RICO

Liberty Cablevisión of Puerto Rico is the largest cable company on the island, providing fixed broadband, VoIP and TV services. It was created in 2012 following the merger of two Puerto Rican broadband companies. It is 60% owned by Liberty and 40% by Searchlight Capital Partners. During the 12 months to September 2017, the company generated revenues of US$409mn.

Liberty Cablevisión operates in a challenging environment that includes a bankrupt local economy, a declining population and long-term challenges following the September passage of Hurricane María, which destroyed the US territory's telecoms infrastructure. 

The hurricane wiped out 95% of mobile cell sites and cable infrastructure and devastated power supply. Some 90% of mobile sites are now back online, but cable and wireline services are still largely unavailable due to a lack of electric power. Liberty has estimated it will require over US$100mn to fully restore damaged networks in Puerto Rico.

The company estimated that hurricane damage would impact Liberty Puerto Rico's revenue by US$80mn-100mn during Q4, in addition to US$19mn absorbed at the end of Q3.

Before the hurricane, the company was generating steady cash flow and Ebitda margins. However, Moody's expects the company to see a drop in revenues, driving higher leverage and weaker cash flow.

Prior to the hurricane, Liberty Puerto Rico was experiencing unfavorable trends in its video business, which was offset by growth in broadband. The company offers the fastest broadband (up to 300Mbps). Adapting to customer loss and the economic scenario, the firm is launching a basic streaming service and is offering free Wi-Fi hotspots.

As Liberty Puerto Rico will not have the internal liquidity to fund immediate post-hurricane needs, Moody's expects the company to raise additional funds and benefit from cash and revolving credit facilities of Liberty Latin America. The group had an integrated insurance policy in place, covering property and business interruption with a limit of US$75mn per occurrence, according to its 3Q17 investor call presentation. But the expected insurance payment will only cover a portion of incurred losses, it added. 

VTR

VTR is Chile's largest triple-play provider with a leading market share in cable TV, broadband and fixed-line voice services. As of September 2017, VTR's network passed 3.4mn homes with 2.9mn revenue generating units. It posted revenue of some US$930mn in the 12 months ended September 2017.

In September VTR had a 38% market share of fixed broadband, ahead of Telefónica's 34% and a 33% market share of pay TV versus Telefónica's 21%, according to telecoms regulator Subtel.

VTR also operates as a mobile virtual network operator (MVNO) but has a small client base (206,000) with a market share of under 1%, though the company has been seeing monthly gains.

Broadband is growing faster than voice and video and represents 34% of total revenue, adding subscribers at a rate of 8% despite competition from large competitors Telefónica (Movistar) and América Móvil (Claro).

The company has been constantly investing in upgrading its network to hybrid coaxial cable (HFC) that produces speeds of up to 300Mbps. 

On the upside for VTR is Chile's stable economy, which the IMF expects will grow 3% this year. The fact that VTR only operates in one country, however, means it has limited growth options, reduced access to capital, higher programming costs and limited synergies.

VTR is facing increasing competition in residential telecoms services from Claro ChileEntel and Telefónica, though the company is innovating in TV and broadband to stay ahead of the curve. In broadband, the company has introduced Mercury, a next generation enterprise-grade router for the residential market. It was developed with Liberty Global and aims to reduce interference from neighboring networks, using beam forming.

C&W

The fallout from Hurricane María will negatively impact C&W revenue to the tune of US$15mn-25mn in Q4. The company expects to need over US$50mn to finance repairs across the Caribbean.

C&W is the most diverse Liberty Latin America unit, both in terms of geographical coverage and services. It was acquired in May 2016 by Liberty Global for US$7.4bn, and offers mobile, broadband, video, fixed-line, business and IT services in 16 Caribbean nations. Additionally, it has a minority stake in TSTT Trinidad & Tobago and a 49% share in C&W Panama.

In 2015, C&W acquired Columbus International, adding both infrastructure and the competitive video and broadband brand Flow. Today, the company operates the Flow brand in all its Caribbean operations, except in the Bahamas (BTC).

The company also operates a subsea fiber optic network spanning over 50,000km, providing wholesale and carrier backhaul capacity. The business division provides datacenter hosting, managed network services, and cloud and IT solutions for governments and corporates.

In June 2017, Cable & Wireless Panama said it would invest US$220mn in the country over the next two years to improve service quality. The investment will be used to upgrade mobile infrastructure, replacing copper wire with fiber optic, and strengthen business services.

C&W's main rival in the Caribbean is Irish-owned Digicel, which is facing a challenging debt burden. A year ago, it launched Digicel 2030, a restructuring process targeting a 25% reduction of its global workforce.

In December, just as C&W announced its new CEO, Digicel also shuffled its corporate structure with the appointment of Alexander Matuschka Greiffenclau in place of long-standing chief executive Colm Delves. In that sense, both companies this year will face the same digital transformation challenge all telcos are seeing – how to be more nimble in adapting to increasingly digital savvy customer demands and to compete against, or work with, over-the-top players – but under new leadership.

SYNERGIES

The benefits of Liberty Latin America's split-off remain to be seen. Financial independence from Liberty Global may help the new leadership take the company in new directions. The three units operate relatively independently of each other, although there could be potential business and marketing synergies.

According to Lim of Fitch, LiLAC had been benefitting from synergies by sharing management expertise with the European operations and developing products together. VTR CEO Guillermo Ponce told BNamericas last year: "We see a lot of synergies. We can leverage scale and size to negotiate lower pricing with programmers. We also plan to centralize regionally certain functions that are currently being done locally."

Ponce added: "Then there's the transfer of best practices. C&W Panama, for example, is strong in mobile but has little fixed line, while we are the opposite. So we can exchange experiences in both. C&W is also very strong in B2B, which we don't have in Chile – so it's an area to explore."

Pictured: A worker checks a cellphone communications tower in Dorado, Puerto Rico, last September following the passage of Hurricane María, which destroyed the US territory's telecommunications and electricity infrastructure.