Millicom International Cellular SA (USA) (MICC)

At today's stock price, MICC's 31 mm subscribers are valued at $300/sub. Is that cheap, fair or expensive? Let's take a look.

Their ARPU (avg revenue per user) is $10/month and monthly churn rate is 5%, implying that the average customer lasts 20 months i.e. providing a cumulative gross revenue of $200 before the customer goes away. Even if they had zero operating costs, zero corporate overhead and zero customer acquisition costs, just the gross revenue number makes them look overvalued today. But of course these costs are nowhere near zero. My estimate is that their average sub should be worth less than $100.

So the next question is: could they significantly grow their subscriber base or improve the value of their existing subscribers to justify the $300/sub tag? Let's look at some factors that impact growth.

1. Increasing the ARPU (say from $10 to $20 per month) by providing 3G, value add services etc. This could work if they were providing services in the developed world or India/China. But the bulk of their upgrade opportunity lies in African and Central American countries where per capita income is on the average $125 per month. I don't think the masses will spend 16% of their income on their cellular bill. Verdict: Very difficult for them to double their ARPU across the board.

2. Reduce churn rate (say from 5% to 2.5%) effectively doubling the life of each customer. Most of their subscribers are prepaid subs (which is the norm in most less developed countries). Such subscribers shop for the best deal and have zero loyalty. Their are mutiple service providers in each of their markets - in some they are one of six providers. It is possible they could improve their churn rate but I don't see it halving given the customer behavior. Verdict: Customer churn will remain an issue.

3. Grow the subscriber base by increasing penetration and/or gaining market share. Their relatively wealthier central and south american markets already have a 60-80% penetration and stiff competition which is primarily based on pricing. Limited growth opportunity there. Penetration is lower in African markets. But you are looking at an unpenetrated market where the ARPU is going to be $5 per month or less. Where is the growth?

My belief is that the business will be worth $6 billion in a couple of years in a best case scenario (with 40 million subs) which translates to about $150/sub - expensive but plausible. This would be consistent with a 10x 600 mm fcf valuation, which is my estimate of their stabilized free cash flow net of capex.

Why pay $9.5 billion for this today?

Don't take my word for it. Their website has a 3Q 2009 investor presentation which provides very detailed information by market (full credit to them for this) and do the math yourself.

The real irony of this business is that while a majority of their markets are among the poorest nations in the world, the company itself is HQed in Luxembourg, which has one of the highest per capita income :)