Evaluating Liberty LatAm’s Key Markets and Runway for Growth
We spent significant time on the ground in Liberty Latin America (“Liberty LatAm”) markets in 2019 and met with several local management teams, including in Chile (Liberty LatAm’s #1 market) and Panama (#2 market). We have a visit to Puerto Rico (#3 market) planned for March, when we will have an opportunity to evaluate the company’s recently announced acquisition of the largest and most advanced mobile network on the island. Because AT&T was pressured to sell this network by an activist shareholder, Liberty LatAm was able to purchase the business at an attractive valuation that should be accretive to free cash flow. During the year, we also spoke with a series of competitors, suppliers, and global peers. These calls allow us both to verify what we learned on the ground from Liberty LatAm’s managers and to better understand the competitive ambitions of these other players.
We assess potential competitive threats across Liberty LatAm’s markets in several important ways. First, we look closely for any changes in network overbuild and overlap from one or multiple competitors. Second, we independently track the quality of Liberty LatAm’s and competitors’ networks in each market through speed test aggregation. We want to know if Liberty LatAm is improving the quality of its offerings on an absolute and relative basis from the consumer’s perspective. Third, we independently record the offerings and packages in Liberty LatAm’s larger markets for both Liberty LatAm and its competitors. This effort helps us follow price and service changes in real-time to consider who has the best value proposition and where margin pressures may be lessening or increasing. In parallel, we try to look forward to competitive considerations that are developing elsewhere. To that end, we follow Liberty LatAm’s developed market peers to assess business trends before they potentially migrate into Liberty LatAm’s markets. And we follow the changes in technology that could be either threats or boosts to the industry. All of these factors are important to reliably projecting Liberty LatAm’s long-term cash flows.
We spoke with management on multiple occasions during the year on timely corporate finance topics, and we had an extended meeting with Liberty LatAm’s CEO Balan Nair and CFO Chris Noyes at their Denver offices about strategic and operational considerations. They are optimistic about their ability to achieve scale across the company’s markets, and we believe they have many places to deploy cash at high internal rates of return for years to come. Liberty LatAm is focused on long-term cash generation at the expense of near-term GAAP earnings, which we support. In fact, this near-term softness in reported earnings provided the opportunity to build the position at compelling prices.
Through the first nine months of 2019, Liberty LatAm grew organic revenues by 2% and operating cash flow by 6%. Liberty LatAm’s fixed network (broadband) remains the company’s most compelling business due to its size and natural monopoly characteristics. Revenues and margins are defendable, and Liberty LatAm has a long runway to build out its fixed network in Chile, Central America, and the Caribbean at incremental returns in excess of 20%. The mobile business is less attractive generally, although it still produces sufficient returns in markets where the competitive profile is reasonable. That is not currently the case in Panama, a four-player mobile market that has been a meaningful drag on Liberty LatAm’s overall results in recent years. Given the significant financial distress of the fourth player (Digicel) and the government’s recent lift of its ban on consolidation, we expect there will be at least one — if not two — fewer players in this market soon. This move would materially improve profitability in Liberty LatAm’s #2 market. Elsewhere in Central America and the Caribbean, Liberty LatAm is instituting best practices, leveraging the scale of the Liberty complex to improve its products (set-top boxes, modems/Wi-Fi routers, cheaper procurement), and rationalizing costs. This work should reveal itself in the financial results over the next several years.