Case Studies

Considering the Impact of COVID

Liberty Latin America (“Liberty LatAm”) connects and entertains people through broadband internet access, premium TV, mobile services, and undersea fiber.  Liberty LatAm provides these services in Chile, Panama, Puerto Rico, Costa Rica, and across the Caribbean.  Demand for its offerings has never been higher as customers are working from home, seeking ways to connect to friends and family digitally, and consuming more digital entertainment than ever.  Liberty LatAm’s fixed broadband network has seen a 40% increase in demand, for example.  Broadband access sales have risen with this increased demand.  Across its markets, first quarter revenues and operating cash flow were up 2% and 4%, respectively.

About 12% of Liberty LatAm’s business is selling access to its mobile network to customers via prepaid cards (i.e., prepaid mobile).  This part of the business is the most economically sensitive as wealthier customers typically pay for mobile access by the month under traditional plans (i.e., postpaid mobile).  Additionally, since many customers are at home, they are consuming data more through their broadband connections rather than over mobile towers, which further depresses prepaid mobile demand.  Liberty LatAm’s mobile business is primarily in the Caribbean where lost tourism will impact the consumer more than other Liberty LatAm regions where fixed connections are the primary offering.  Even though the biggest COVID-19 pinch for mobile is happening during the seasonally low summer period for Caribbean tourism (high season runs from mid-December to mid-April), we expect prepaid mobile revenues to decline substantially in 2020.

Liberty LatAm’s biggest competitor is financially troubled.  Digicel recently reorganized its debt again, as it converted some of its existing bonds to convertible notes to give the company breathing room on its interest payments.  Even with this restructuring, Digicel remains on life support and falling prepaid mobile revenues will add to its business challenges.  The company cannot afford to be aggressive in its pricing, nor can it fund capital expenditures to enhance its network.  We view Digicel’s distressed financial position as an advantage for Liberty LatAm.

Reflecting Liberty LatAm’s utility-like fixed network offering, we expect revenues and profitability to be only modestly affected by COVID-19.  Management has reacted prudently to the environment by reducing fixed operating costs and capital expenditures by $150 million this year to help ensure financial health and flexibility, and the company expects to generate free cash flow in 2020.  Appreciating the opportunity offered by the current stock price, Liberty LatAm’s board of directors initiated the company’s first share buyback program in late March.   With the stock price cut in half despite only a modest impact to the underlying business, the directors believed that allocating capital to buybacks at prevailing stock prices promised strong long-term returns for shareholders.  Demonstrating personal confidence in this corporate decision, insiders have purchased shares in the open market throughout the COVID-19 market selloff, with CEO Balan Nair buying shares as recently as May 13th.  Additionally, pending regulatory approval, Liberty LatAm will complete its purchase of AT&T’s Puerto Rico wireless business later this year, which will combine its dominant broadband offering on the island with AT&T’s dominant wireless business.  Liberty LatAm will be able to cross-sell a complete bundled solution to customers, reduce costs, and shrink customer churn in a deal that will be immediately cash flow accretive to Liberty LatAm’s shareholders.  This strategic combination is an important step in management’s plan to build a scale telecom provider in the region.  Given the strength of Liberty LatAm’s core business and the organic and M&A/consolidation growth opportunities potentially on the horizon, we believe the business is undervalued at seven times its owner earnings.  We bought additional shares in mid-March at even lower prices.