Good morning and good afternoon, everyone, and thanks for joining us to discuss the Guatemala transaction that we announced last night. I'm Michel Morin, VP Investor Relations at Millicom, and this event is being recorded. Our speakers today will be our CEO, Mauricio Ramos, and our CFO, Tim Pennington. Following their remarks, we will have a Q&A session. By now, you should have received a copy of our press release, which is available on our website, along with the slides that we will be referencing during today's presentation. Now, if you'll please turn to slide two, you can see our Safe Harbor Disclosure. We will be making forward-looking statements which involve risks and uncertainties and could have a material impact on our performance.
We will also be referring to many non-IFRS metrics throughout the presentation, and we define these metrics on slide three, and you can find reconciliation tables on our website. Now, let me turn the call over to our CEO, Mauricio Ramos.
Thank you, Michel. Good morning and good afternoon, everyone. Thank you for joining us today on short notice to discuss the very exciting news we put out today. Today, we announced that we are taking full control of our Guatemala business. The deal was signed today, and we expect that it will close shortly. The highlights are on slide four. First, we paid $2.2 billion, as you will see in a moment. This transaction immediately unlocks a tremendous amount of shareholder value, and owning 100% of the Guatemala business transforms Millicom's financial profile. Second, this transaction is immediately attributed to equity-free cash flow and to net income. The investment adds about $200 million to Millicom's equity-free cash flow, which implies a free cash flow yield of around 9% in year one, well above our cost to fund this transaction. As I said, it's immediately and greatly attributed.
Third, we plan to take out the acquisition bridge loan with a combination of long-term debt and an equity rights offering for existing shareholders, which for clarity is also known as a preferential rights offering in Sweden. We're targeting two-thirds debt and one-third equity, implying $1.5 billion in new debt and about $750 million in new equity issuance. Fourth, leverage is expected to be 3.1x pro forma for the transaction and the equity issuance I just mentioned. We expect to complete the rights offering in Q1 2022, and we expect to get leverage back below 3.0x by the end of that year and then continue on towards our deleveraging target of 2.0x . Finally, the valuation is compelling, as you will see in a few minutes. Now, please turn to slide five for details.
I will go into each of these points in more detail on the following slides, but the simple and key message is that this transaction will significantly enhance our cash flow and simplify our structure. As I said earlier, the deal is immediately accretive. We're buying more of a great business, which we already know and operate, with a strong track record of performance and solid cash regeneration, and which operates in a healthy two-player market. In addition, the transaction will allow us to simplify our structure and give us more exposure to an extremely, and I mean extremely, stable currency and a growing economy. Let's go over each point one by one, beginning on slide six. You're all familiar with our strategy, which we have communicated several times. This transaction is perfectly aligned with that. We want to allocate capital to our Latin American markets.
Our first priority is to invest in the business to drive organic growth. Acquiring minorities, as we have said often, is something that we want to allocate capital to when we can do these transactions in an accretive way. It's like buying more of the same opportunity we like and of the business we already know and operate. Call it safe M&A, or if you will, our proprietary opportunity. This investment is consistent with that, and as you will see, we have structured the financing in a way that is shareholder-friendly, will allow us to maintain a healthy balance sheet and continue on our deleveraging path. Let's move to slide seven, which shows how accretive this deal is on day one. Let's start with the underlying cash flow. Our Guatemala operation is highly cash-generative.
In 2021, we expected for Guatemala to generate equity-free cash flow of around $450 million and net income of around $350 million, and we will now own 100% of this. Effectively, we have bought just a little over $200 million of incremental free cash flow, and that's the key number on this transaction, a little over $200 million of incremental free cash flow. We will, of course, have to pay interest on the additional debt incurred to fund the transaction, and you can make your own estimates on that. The point is that in which way you cut it, this is a highly and immediately accretive deal to our shareholders. On the next slide, slide eight is Tigo Guatemala's impressive track record of growth in dollars. Our mobile business is number one in Guatemala, and we have sustained solid customer growth since 2016.
In the home part of the business, we have almost doubled the number of customers over the past five years, and earlier this year, we became the largest provider of broadband in the country. You can see on the top right chart that these strong customer gains have driven healthy revenue growth every year since 2016, and you can see a similar pattern with our EBITDA on the bottom left of the page, with margins expanding every year to more than 50% now. Here's the punchline. We're constantly taking that EBITDA growth and converting it into operating cash flow and net income. These numbers on this page are all shown in dollars, by the way. Slide nine is a slide from our Q3 presentation where you can see that we sustained strong growth in Guatemala throughout the pandemic.
In fact, our growth in Q3 was well above the five-year cadres that I just showed you on the previous slide. Growth in Guatemala has accelerated this year, even when Guatemala had a very solid year in 2020. On slide 10, I simply want to make the point that this transaction will transform the financial profile of Millicom. Recall, please, that under IFRS rules, we equity account for Guatemala in our statutory financials. This will change beginning in Q4 when we'll start to fully consolidate the results of Guatemala in the group results. This slide simply shows you the pro forma impact of that on our historic 2020 results. This transaction will greatly simplify the understanding of operational and financial numbers for everyone. On slide 11, you can see our strong leadership position in the Guatemala telecom market.
We're number one in mobile, number one in fixed broadband, and number two in pay TV, and we continue to gain steady share in the fixed side of the business. Additionally, on the bottom of the page, you see the low broadband penetration rates in the country, which gives us a significant growth runway going forward in what is today a very healthy market. Now, please turn to slide 12 to get a better sense of why we are so confident about doubling down in Guatemala. Simply said, we know this market extremely well, and we like it. We thought we would share some historical macro data to underpin our point. On the left, you can see that real GDP declined only 1.5% in 2020, the year of the pandemic. It's one of the best performances of any country globally.
In 2021, we're seeing a very strong recovery back to continued GDP growth in Guatemala. On the right, you can see that remittances from the U.S. continue to grow strongly and consistently, and this underpins both GDP growth and the stability of the currency, the quetzal, which is what you see on the bottom of this page. This is an amazing chart, perhaps even surprising to many. Please take a look at it carefully and look at the dark blue line that is not the X-axis. That is the quetzal versus the U.S. dollar over the past 20 years.
Not only has the quetzal appreciated 4%, what is more impressive is how incredibly stable the quetzal has been throughout good times and bad times, including events like the U.S. financial crisis of 2008 and 2009, or COVID in 2020, or the currency shocks in Mexico, Brazil, or Argentina over the past two decades. It is this track record of sustained business performance over the years, which we've talked about already, and the solid cash regeneration of the business with a stable and healthy industry structure, which is now in place in Guatemala, with a remarkably stable macroeconomic backdrop over the decades in the country, all of which drive us to be very solidly behind this investment decision. Said simply, increasing our ownership in Tigo Guatemala will significantly increase not only the amount of our cash flow, but also its predictability.
I'll now hand the call over to Tim to discuss the next few points.
Thank you, Mauricio. Now, let's look at the valuation on slide 13. Tigo Guatemala has a very high cash conversion rate and a low effective tax rate. We believe that the best way to look at valuation is on a cash flow basis. Using EBITDA less CAPEX, or our definition of OCF, this transaction is on an EV to OCF multiple of 8.2x , and that is based on forecast 2021 numbers. We think that is very compelling. If we look at it on a yield basis, based on our expected equity-free cash flow, we are getting a yield over 9%, again, compelling in any circumstance. We see this as accretive to both earnings and cash flow from day one. Now, turning to financing on slide 14, we plan to refinance the bridge with a mixture of long-term debt and equity.
We expect to raise approximately $1.5 billion in debt and up to $750 million in equity via a rights offering with preferential rights to our existing shareholders, probably in Q1 2022. We have designed this capital structure to ensure we broadly replicate the group capital structure and to give our existing shareholders the opportunity to benefit from this transaction whilst being able to bring leverage back down quickly and to remain on track to meet our leverage targets. With this mix of debt and equity, pro forma leverage will be around 3.1x , and with the cash generation and track record of growing EBITDA, I expect we will be back below 3x by the end of next year and will remain on track to continue to reduce our leverage.
Finally, and although no decision has been made yet, I also draw your attention to the rich portfolio of infrastructure that Tigo Guatemala brings with it: 4,400 towers, three data centers, 21,000 kilometers of fiber. This is something we will consider further in the context of the comments Michel made on infrastructure in the Q3 call. Wrapping up on slide 15, I want to make sure our thought process for this transaction is clear. On the left, you can see why we're so pleased to be making this investment. We're taking full control of a growing and cash-generative business in a two-player market with a stable macro and FX backdrop. As with our other minorities, this was proprietary EBITDA opportunity available only to us, which is why we were able to execute the transaction at a compelling valuation.
This deal is immediately and significantly accretive to our earnings and our equity-free cash flow, and we think it makes for a very compelling investment case. With that, back to Mauricio.
Thank you, Tim. Before we finish, please allow me a minute to thank and recognize your team of more than 3,000 employees in Guatemala who have been doing a tremendous job and have given us the confidence to double down our investment in Guatemala. Indeed, with this investment, we renew our confidence in our team, in Tigo Guatemala itself, and in the country of Guatemala as well. With that, we are now ready for your questions.
Thank you, Mauricio and Tim. We will now begin the Q&A session. As a reminder, please email us at investors@millicom.com if you would like to ask a question. Our first question will come from the line of Andres Coello at Scotiabank. Andrés? We need a minute to move him into the queue. Okay.
Sorry, can you hear me?
Yes. Yes, Andres, hola.
Sorry, I was on mute. Excuse me. Mauricio, Tim, thank you for taking my question. Obviously, Guatemala being one of the world's most profitable operations, this is a very interesting transaction. I was wondering regarding the infrastructure assets you just mentioned, Tim, 4,400 towers and also the data centers. If you could eventually explore monetizing these infrastructure assets in the future, I understand you already monetize towers in Central America, just wondering if the fact that you had a minority in Guatemala was stopping you from monetizing these assets. I understand that Mario López built through his own company some infrastructure assets in Guatemala. I was wondering if after this transaction, Mario López will continue to own any of the assets of Tigo in Guatemala, or if all of the assets used for operations in Guatemala will now be owned by Millicom. I have another question, if I may.
Sure. As I said on our call in Q3, and I think Tim also referenced it earlier today, we are doing all the legwork around creating a separate infrastructure vehicle. What I said on Q3 was that we're doing the work to carve out our infrastructure assets. We went through those, which, as you recall, are about 170,000 km of fiber, north of 10,000 towers, and 13 data centers, all Tier 3 across the region. What this transaction does for that is it simply makes it easier and facilitates it. I do not think there was any blockade or any significant hurdle that we would need to overcome, but it just simply makes it easier when you want 100% of the assets and a sizable chunk of those infrastructure assets indeed sitting in Guatemala.
The local business, Tigo Guatemala, owns straight out all the assets that we mentioned, the towers, the data centers, and the facilities that Tim alluded to in his presentations. Our local partner owns some of the land under which some of those towers sit. He is a landlord, if you will, to some of the tower infrastructure. As you can imagine, we have secured long-term deals on those. Straightforward. I have a feeling I missed a little bit of your questions. Tim, if I need any bailout on your question, Andres, let me know. Did I miss a little bit of it?
Actually, thank you for just saying. I did just say, boy, we've got a little bit of instability here. I have nothing much to add on that. I mean, we're sort of agnostic to owning infrastructure. If we can do a good NPV-positive deal, we certainly will do it. We just know that we're now a lot freer to consider options. I think quickly, and I don't know if you wanted to cover this or not, Michel, but on the related party transactions that you had, Andres, Missing and Mario López will continue to own the assets that they own. We're buying everything inside Comcel, the Tigo Guatemala business. There will continue to be relations with the family enterprises. For instance, they own FOCTIVUS, one of our towers around. They're one of the major distributors. Those relationships will continue into the future.
They've always been on an arms-length basis and will continue to be on an arms-length basis.
Understood. One final question, if I may. Obviously, this transaction in Guatemala brings to the table a minority shareholder in Colombia and Honduras. Just wondering, in terms of timing, if any Honduras, yeah, any of that more time?
Sure. There is a good old saying in Colombia called amanecerá y veremos. For those on the rest of the call, tomorrow it will be a new day, basically. These positions that we called and we have alluded to them for a long, long time, this is EBITDA that we run, we operate, we know, but we do not yet own. By definition, like on this transaction, these are transactions that if we were to do them, they would be accretive. I would draw some distinctions, and I do not want to talk too much about transactions that are hypothetical. Honduras is hypothetical. Colombia is also hypothetical.
Of course, I want to draw some differences to particularly Colombia, where we control and operate the asset, whereas in Guatemala, we shared control. Now we are taking full control. That is a meaningful difference, I think, between Colombia and Guatemala. In Colombia, we fully control and we fully consolidate the asset. It is also a meaningful difference, Andrés, in terms of cash flows. Guatemala is a very cash-generative business. Colombia, on the other hand, is a business that we are investing in for the long term. The risk profile is very different. I think the last thing I would simply mention is that the Colombia transaction, as much as it is in the press, has not yet received approval from the Consejo de Energía to go forward.
It is a process that has been announced by our local partner, but has not yet received a go-forward from the Consejo de Energía for the sale to begin. We will deal with that, as I said earlier, when the dawn arrives tomorrow in Colombia.
Thank you.
Thanks, Andres. Next up, we have Stefan Gauffin from DNB. Stefan?
Yes. A couple of questions, just to understand a little bit more on why this is happening right now. I know you have been working on buying out minorities for a very long time, and I know it's a really good deal. Why are you successful right now? Secondly, the local partner, how has having a local partner in Guatemala impacted the business? I mean, has that been beneficial for you in any way, and are there any risks not having a local partner?
I'm sure. On the timing, there's a timing for everything, and sometimes the moment is just right. Of course, there's a lot of things about considerations around our partners that we don't have insights into. I do think that the timing for them has a lot to do with their estate planning. It's come to a point where they needed to mature and monetize and crystallize their investment for estate planning purposes, and we were sensitive to that. We were friendly to that. We engaged proactively with them to find a solution that worked for both. As you very well said, for us, which I can speak more freely about, it's really a great deal. It's a great economy that we know very well, stable, with a tremendous broadband opportunity and a very, very stable currency.
It's a great business, one of the better businesses around the world. It's a very cash-accretive transaction. Very few times do you come across a transaction that you know you can do the math right on with a lot of safety and know that it's accretive. Day one and anyone around the call can do the math. The last thing I'll say on this, Stefan, to address your question, is the relationship has been great. It has helped create a good business in Guatemala. Our business is managed by one of the greatest operating teams in the world. They're the ones that are carrying the water every day and getting things done in Guatemala and have done so for many, many, many years.
It is on them and our global expertise that we rely to manage this business and have done so for the last few years. It is really them that will carry the ball going forward with our support at all levels. I do not think there is going to be a blip missed going forward in Guatemala. We got everything we need as we have for the last few years to continue to execute in Guatemala. Our team in Guatemala is hyped and excited, and we confirmed that they are going to continue to go forward. No changes. We will not miss a heartbeat there.
Perfect. Thanks.
Thanks, Stefan. We have a question in the chat here that I think is for you, Mauricio. It's from Johan Sundén at Carnegie. The question is, how will this transaction impact day-to-day operations in Guatemala, referring specifically to how involved our partner was and will be in the company? I think part of that you've answered already, but maybe in terms of the day-to-day operations.
There's going to be no change in the day-to-day operations, in the way we run the business, and in the way we set the strategy for the business. We've been running the business for the last few years. We've been extremely involved. We've set the strategy. We oversee the execution. We have the regulatory conversations with the government. There won't be a change in the way the business is run. We'll continue to run it the successful way in which we have been running it during the Guatemala team over the last few years.
Thanks, Mauricio. Next up, we have Froylan Mendez from JPMorgan. Froylan, if you want to unmute and turn on your camera, if you can, that would be great.
Hello, guys. Thank you very much for taking my question and congrats on the transaction. Maybe another way to ask the same question, Mauricio, is, what was the contribution from the partner to the Guatemala operations that we will not longer be having? Secondly, could you speak a little bit more about the potential for increased broadband penetration in Guatemala? Thank you so much, guys.
Yeah, you bet. Listen, I think I've answered a little bit about how we run the business. I can simply continue to say that we've run the business. Our teams have been working together. The Guatemala team is reporting in a matrix form to my team in Miami, and we've been running the business. None of that will change. I mean, I think there will be these are not core changes, but you can imagine that we'll likely put a little bit more debt on the local balance sheet. We've already implicitly said that. I think the second change that will facilitate things a little bit will be we will not be negotiating around the infrastructure, right? It will facilitate the infrastructure. The same with Tigo Money.
We will be able going forward to push Tigo Money quite a lot more without having to negotiate the economics with our partner, right? Guatemala is a big market. Guatemala is a market of $80 billion GDP, 20 million in population. It is a market where Tigo Money has a lot of potential. This will facilitate that because we do not have to negotiate those things. That is the extent of the changes, really. It is around Tigo Money, infrastructure, and the local balance sheet. The rest, it will be the same strategy. Broadband penetration, it has got a lot of runway to go in Guatemala. Mobile broadband penetration as measured for 4G is only 40%. There is a lot of runway compared against some of the other countries that we operate in. You still see that there is a lot of runway there.
Significantly so in fixed broadband, where you've seen our business just grow high double digits in the last couple of years. We expect that we will continue to do that. As you heard me say, we believe Guatemala has strong macro behind it. With strong macro behind it and stable currencies come broadband penetrations because the population in Guatemala is one of the youngest in the world, which is adopting digitally the fastest in the world. That is all the reason for us to do this. We think the timing was right for us to do it.
Thank you.
Thanks, Froylan. We have another question that just came in by email from Peter Kurt at ABG. Mauricio, Peter is, first of all, saying congrats on the transaction. We've highlighted the attractive cash flow yield exceeding the cost of capital. I guess this is for you, Tim. What is Millicom's cost of equity capital in Guatemala, please?
The good thing, Tim, is everyone's doing the math. That's a good thing.
Yeah, yeah, yeah, yeah. The cost of equity capital in Guatemala is, I don't know, the last numbers we had were somewhere between 11% and 12%. Now, that is the cost of equity. If you were to look at it on the 9% that I talked about, you need to do an equity-free cash flow calculation to compare that 11%-12%. Whatever assumptions you make, Peter, on that, you will find that this is hugely accretive still.
Okay. It looks like we have a call. This is a dial-in from Simon Duff at M&G. Simon, I think you just need to unmute your line, and the floor is yours. You're still on mute. Betty, I don't know if you're able to unmute Simon. Otherwise, we'll go to.
We'll come back to Simon.
Yeah. Maybe we'll try to come back to Simon in a second. We also have a question on the chat from Nick Ivanov. Nick is asking about the leverage at Comcel, which is only about half a turn, and what would be the optimal net leverage target for Comcel. Also, is it going to be local currency or U.S. dollar debt? I guess that's for you, Tim.
Yeah. Thanks, Nick. I mean, look, I think we've spent a lot of time talking about the cash generation of this business. We've talked about the stability, the FX, the market positioning, etc. In short, the balance sheet is very leverageable. Now, having said that, it will be a fully consolidated subsidiary going forward. Tax is based off revenues rather than pre-tax profits. Actually, from a tax point of view, we're relatively neutral between where debt sits, whether it sits at the group level or on Guatemala level. As a target, I would be targeting to get all of our sort of subsidiaries and operations to roughly the same leverage level as the group leverage level. That would be somewhere between 2-3. I do think on a standalone basis, Comcel is very, very adaptable to take debt on the balance sheet.
We aim to put local currency debt on, but we're talking $1.5 billion here. The only capital pool that can sustain that would be the 144A dollar market. That will be our primary funding source for the acquisition financing here.
Okay. Thanks, Tim. I don't know, Simon, maybe we want to try and see if you're able to unmute your line because I see you're still here with us as a panelist. Simon? Otherwise, we'll send you some instructions on how to do that. In the meantime, we've got another question that just came in via email. I guess the first one is, this is from Daniel Oda at Banco Chile. Daniel is asking if we expect significant changes in our investment plan and our CAPEX in Guatemala and any kind of guidance that we can give on capital intensity. I think the other question was probably just answered, but if we can expand further on the debt to be raised, will it be opco or holdco, and also the currency mix, banks versus bonds, etc.? That's probably for you, Tim, the second one.
On the first part, and I'll hand over to you, Tim, on the second part. Daniel, if it ain't broken, don't fix it. This business just runs very well. We're not going to tweak things that we've been putting in place ourselves. As I said earlier, we've been managing and running this business with the local team on an operating basis. We're not going to change anything. We're not going to tweak anything. The investment plan doesn't change as a result of this transaction. Over to you, Tim.
Yeah. I'm fully on board with that. Look, to give you guys a bit of a sense of this, I mean, we've spent round about 11%-12% of revenues in CAPEX for the last few years, and I could probably go back further at that level. Our CAPEX is devoted to ensuring network superiority on the mobile side and building out cable on the home side. We have a really great building cable business in Guatemala. As Mauricio said, why change a winning formula? We'll continue to do it at the same level. In terms of the debt, I think I more or less covered it before. We've got fairly clear goals in terms of our treasury, our capital markets guidelines in terms of local debt to opco debt.
In this circumstance, we will look to see the best option and probably will be putting debt at both the holdco and the operating business. It will just depend a little bit in terms of maturities and pricing and availability.
Great. Okay. Thank you, Tim. Thanks, Mauricio. Simon ended up sending us his questions via email. This is from Simon Duff at M&G. Number one, have you discussed the risk around increased structural subordination of the group's holdco bonds with the rating agencies? Do you have any concerns about notching downgrades as a result of the $1.5 billion incremental opco debt? What is the timeline for achieving that? Question number two. What is the timeline for getting to 2x leverage?
Simon, as you're aware, we have constant and sort of detailed discussions with rating agencies. I don't know if they've come out yet, but I'm not expecting any impact on our ratings as a consequence of this transaction. I think that plays into the fact that, broadly speaking, we've aimed to have a sort of capital structure neutral approach to the financing of this, i.e., the capital structure mirrors the capital structure for the group as a whole. I'm not anticipating any impact there. Kind of in terms of the target, look, kind of I think the important target to talk about today is the fact that we expect this business, because it is so cash accretive and because the earnings growth has been so strong, we will take our leverage up a little bit.
We'll notch it up about 20 basis points to 3.1x pro forma for the equity. This is a big but, we expect to be back below 3x by the end of the year and therefore back on track to the deleveraging targets that we previously had.
Okay. Thanks, Tim. I do not see any additional questions either in the queue or via email or via chat. I guess we can give people a couple of seconds here if they want to signal by raising their hands. I think we have probably addressed all of the questions then. Mauricio, back to you.
Thank you, Michel. No questions seems to indicate that we've done a good job at explaining things. Listen, thanks everybody for joining today. We're very happy with this transaction. We are buying into what we believe and have evidence is a strong and very stable economy with very stable FX. We're buying more of a high-performing asset that we know and operate very, very well with tons of cash flow. We're doing a transaction that, because of that cash flow, is highly accretive. Because of that transaction that's highly accretive, we're putting in place a financing structure, long-term financing structure that has a very shareholder-friendly approach, sharing that accretion with our existing shareholders. We're overall extremely, extremely happy with the transaction today, and we hope you all are as well.
I want to thank the execution team for putting this deal together and carrying it through today. I also want to thank our board for the support and guidance and challenge that they've given us in executing this transaction. Thank you for everybody for joining us.