Millicom International Cellular SA Online Services Investment Conference Call
Aug 20, 2012 AM EDT
MIICF - Millicom International Cellular SA
Millicom International Cellular SA Online Services Investment Conference Call
Aug 20, 2012 / 12:00PM GMT
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Corporate Participants
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* Mikael Grahne
Millicom International Cellular S.A. - President & CEO
* Francois-Xavier Roger
Millicom International Cellular S.A. - CFO
* Justine Dimovic
Millicom International Cellular S.A. - Head of IR
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Conference Call Participants
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* Laurie Fitzjohn
Citi - Analyst
* Erik Pers Berglund
Danske Bank - Analyst
* Stefan Gauffin
Nordea Bank - Analyst
* Thomas Heath
Handelsbanken - Analyst
* Lena Osterberg
Carnegie - Analyst
* Andreas Joelsson
SEB Enskilda - Analyst
* George Dent
Walter Scott - Analyst
* Bill Miller
J.M. Hartwell - Analyst
* Mark Walker
Goldman Sachs - Analyst
* Sven Skold
Swedbank - Analyst
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Presentation
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Justine Dimovic, Millicom International Cellular S.A. - Head of IR [1]
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Good day, everyone; my name is Justine Dimovic and it is my pleasure to welcome everyone to today's conference call. The conference call is to discuss the agreement we have reached with Rocket Internet to develop online franchises in Latin America and Africa. This call is scheduled to last no more than an hour and we would like to give everyone as much opportunity as possible to ask questions. Before we go into Q&A I would like first to hand over to our CEO, Mr. Mikael Grahne, for brief comments.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [2]
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Thank you, Justine. I would like to start by recapping the key points of the agreement we announced in our press release last week. Millicom has signed an agreement with Rocket Internet to develop franchises in the online sector in Latin America and Africa and to create a sixth category online. We believe there is a fantastic growth opportunity in the online sector in Latin America and Africa which can create a lot of value for our shareholders.
Online and e-Commerce has been one of the fastest growing sectors in developed markets over the past 10 years, enabled by the fact that people gain access to the Internet. This sector is now only emerging in Latin America and Africa, but Internet penetration is growing rapidly. By being early there is a great opportunity to secure leading positions in this category.
In the same vein we brought affordable mobile telephone services to merging market customers, we will bring e-Commerce and online services to markets where the fast-growing middle class is increasingly demanding access to goods and services over the Internet.
Upon closing of the deal we will acquire a 20% stake in each of the two Rocket Internet subsidies, Latin America Internet Holding and Africa Internet Holding, for a cost combined cost of EUR85 million. This investment is in the form of direct capital increases of [new shirts] by the two holdings, LIH and AIH will use the cash proceeds from the capital increases to develop the eight already operating businesses and the many ventures still to be launched.
Over a four-year period we have the option to acquire gradually controlling stakes in LIH and AIH through capital increases in the businesses. The total consideration to be paid, if we decide to exercise the options to acquire the first 50% stakes, will be EUR340 million including the initial investment of EUR85 million.
A final option to acquire the remaining 50% of the businesses with full management rights is exercisable no later than September 2016 at fair market value. As we have a clear path to control we will fully consolidate the businesses.
Our commitment to shareholder returns is not affected by this transaction and today we have resumed our share buyback program. We are very excited about this growth opportunity and would now be happy to take questions -- any questions you might have. Operator, may we have the first question, please?
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Questions and Answers
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Operator [1]
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(Operator Instructions). Mark Walker, Goldman Sachs.
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Mark Walker, Goldman Sachs - Analyst [2]
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I have two or three please. I just wanted to get an idea firstly of the visibility that you have over the new ventures to be launched in the next three years, particularly in the African holding company.
Secondly, regarding your expectation to essentially breakeven in 2015, is it actually possible that you just continue to invest in these types of assets should the growth profile be attractive and enough, and also under what circumstances would you not exercise your options to invest further?
And then finally, can I just ask a bit about the business models that you've actually acquired? I mean, they seem largely e-Commerce ventures the likes of Kanui and Airu and [Trikai]. Do they actually hold stock or are they online marketplaces to take a commission from suppliers? And also can you tell us a bit more about YepDoc and (inaudible) service work and -- (technical difficulty) -- particularly how you monetize that service? Thank you.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [3]
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Okay, let me maybe start at the last questions you had there. If Kanui is holding stock or not. I mean these are all new, very new businesses. In the early part when you start an e-Commerce business you basically don't hold stock; you have low cost suppliers who hold it.
Once you learn where the demand is and you have more predictability you gradually move the stock into your own capacity so that you can manage the consumer interface and the accuracy and security of the delivery. So I think over time all these businesses will hold their own stock.
In terms of sort of visibility, we will be part of a Board that will meet at regular intervals. And we are -- Rocket Internet, one of the strengths of Rocket Internet is they are very detail focused, great operational experience and control. So they have a multitude of KPI's that we naturally have access to. So that really will allow us to have great control and understanding how this business is performing.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [4]
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On the exercise of the options, obviously we value these businesses according to different (inaudible); one of them is a DCF. So we have a long-term plan on these businesses and using it as a benchmark to review if we exercise our options or not. So we will use that base to check after one year and two years and as well as in 2016, in September 2016.
This plan is a reference to check how we are delivering and performing against the benchmark. So we have the opportunity, we take this initial 20% stake, we have the opportunity to move up to 35% in September 2013 and then to 50% without a controlling stake in September 2014 and then to take the (inaudible) in September 2016. So we have some milestones obviously in one year and in two years and in four years to review how we perform against the initial plan.
Just in terms for your information, these businesses have as well I would say a fairly clear way to measure the way they perform. Obviously we will look at revenue growth; we will look at cash flow generation as well. The objective on average is to break even in terms of cash on average after 18 months. So we have a good way to measure if these businesses on an individual basis are performing well or not on the top of benchmarking their development against our acquisition plan.
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Mark Walker, Goldman Sachs - Analyst [5]
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Thank you, that's clear. Can I just follow up on the services type business such as YepDoc, how they work and how you monetize that? Thank you.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [6]
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Yes, I mean, subscription business basically you allow people to access doctors and you pay a subscription for this one. This is pretty much a similar service we already offering in some of the Central American markets. So when we really looked at this Rocket Internet we found that we were already basically active in two of the five categories that Rocket is playing into that subscription and payments with Mobile Financial Services.
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Mark Walker, Goldman Sachs - Analyst [7]
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Thanks very much, guys.
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Operator [8]
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Laurie Fitzjohn, Citi.
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Laurie Fitzjohn, Citi - Analyst [9]
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A few questions. Firstly, just on the pre (inaudible) valuation of the deal at EUR340 million which is 10 times your expected 2012 revenue. I was just wondering if you can give any more detail about sort of what was behind this valuation (inaudible) metrics be very useful?
Secondly, on the timings, if you are to tell us when discussions on this deal started and just how it will work in terms of the upcoming change in CEO in relation to strategy would be very useful.
And then just lastly, in regard to your comment just now on no change to shareholder returns, does this mean we can assume we should still expect a special dividend this autumn? Thanks very much.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [10]
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Okay, on the valuation, as I said earlier, we used several methodologies. We took -- and that we did along with an advisor that is really -- that has developed a strong expertise in online and e-Commerce, [LNM Co.].
So we did the valuation according to four methodologies -- expected returns, which means basic exiting I/O; DCS, and in the DCS we took obviously a discounting rate that reflects that fact that most of these businesses that are at an early stage of their development.
So it was, for your information, the work was obviously significantly higher than the work of Millicom. The sub methodology that we use is prior rounds for (inaudible) evaluation of former funding rounds.
And then finally, the fourth methodology that we used was private valuation, which is what venture capital businesses use with a run rate for revenue (inaudible) and so forth.
So we did these four valuations mainly using this year because this is probably the one that has the most value and this is where we arrive at this (inaudible) evaluation.
Regarding the timing and the process, we entered actually in competitive process, which means that (inaudible) entered in the competitive process with us and other parties to take a stake in their business and then we started a few months ago and participated in and that process.
In terms of shareholder return, we have said for this deal as well as Cablevision Paraguay that it will not impact our shareholder return for 2012. The acquisition of Cablevision Paraguay, if it closes this year, which is likely to happen, will mean $150 million of cash outflow which we expect to finance through additional debt. And the same will apply for the first tranche of this Rocket deal, which is EUR85 million or close to $100 million.
We always said that we were more comfortable in having a net debt to EBITDA ratio of close to 1 and if we had opportunities to get to that point we will seize them. So these two opportunities will not even bring us to the one as a net debt to EBITDA ratio but it is a good opportunity to leverage a little bit more the Company, which I understand many investors were quite happy with.
Talking more specifically about the share buyback, we have resumed the share buyback this morning and we -- I can confirm that we intend to commit to -- to stick to our commitment to carry out a $300 million share buyback for 2012 and we have ample room to do it.
As far as a special dividend is concerned, no change to what we said which means that if we have excess cash at the end of the year we will not hesitate to return it to shareholders, which is what we did in the last two years. No change to what we disclosed since the beginning of the year or even last year.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [11]
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In terms of the question on timing, this (inaudible) the outgoing CEO, as I am the outgoing CEO, I just want to put the record in place. This deal began long after I had already informed our Board of my intention to stand down. There is no correlation in that. I am extremely enthusiastic behind the deal to believe very active in the management team making it happen. And beyond October 31 I am still going to continue to be a shareholder in this great Company.
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Laurie Fitzjohn, Citi - Analyst [12]
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Great, thank you very much.
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Operator [13]
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Erik Pers Berglund, Danske Bank.
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Erik Pers Berglund, Danske Bank - Analyst [14]
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I have just two areas which, if possible, I would like to understand a little bit more about. First one is the current assets in the businesses you are investing in, which are sort of the main two or three websites in there? What market positions do they have in their respective market niches? And out of this EUR35 million predicted turnover this year, how much is like delivered by the number one and two sides? And if you could also share with us a little bit about how long a history do they have in the markets and how many employees, et cetera?
The second area which I would like to understand more about is just the EUR340 million of pre-money valuation? It seems a bit steep in relation to the early stage of the businesses. You have touched upon this somewhat, but just one thing I would like to understand is that have you benchmarked against Kinnevik's entry into Rocket Internet and how does that compare, for example? Thank you.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [15]
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Let me start maybe or some comments -- most of these businesses have been started second half 2011, so they are in very early stage. I think it is fair to say that there is very limited competition in Africa, I think in most cases we are actually first mover. There are a bit more competition in Latin America primarily in Brazil.
But it is too early to really talk about market shares. I think we entered into this business under the premise that we firmly believe that we can go in there and establish leading positions in all of the categories and the markets we would compete in. That is our objective.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [16]
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Regarding the [premium] evaluation, as I said earlier, one of the four valuation -- four methodologies that we use was the prior rounds, which means that we took into consideration premium evaluation of former funding rounds including Kinnevik, but not only with Kinnevik, because there are the minority partners.
We took into consideration the fact that the other parties having shares in those businesses are not at the same level as we are, because most of them are at operating level, which is different from what we took as a stake at the holding level.
And on the top of it, I mean we are taking controlling stake which is very different from what the other shareholders did because we have a [pass] to control so with an intention to control the and manage these businesses over time, which is fundamentally different from what the other guys did, which is to take a minority stake because they are financial investors. We are not financial investors; we are operators in that investment.
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Erik Pers Berglund, Danske Bank - Analyst [17]
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Okay. Could you just have one follow up on the early mover advantage. Which of this different -- I think you have five different categories in your slide, showing what types of business models you are investing on, which one of these sort of has the grade as far as (inaudible) advantage in your view?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [18]
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Yes, I think it is too early to comment on that one. I would expect that when we get to -- basically all of them have a chance and I think when we really got to know Rocket Internet and visited their operations both in Germany as well as in Brazil we were really deeply impressed with the detailed operating know-how they have and the ability to track the businesses, the ability to continuously add new features and deepen understandings. So we think a basically all these businesses have a chance to go in and become number one.
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Erik Pers Berglund, Danske Bank - Analyst [19]
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Okay, I guess the reason I was asking was just that it seems to me that a retailer -- an electronic retailer has a lesser first mover advantage than say marketplace like eBay, which a consumer cannot (inaudible) a switch between one marketplace and another.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [20]
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Well, maybe, on the contrary, you are not taking over anything from the eBay side. If you look at e-Commerce in emerging markets, so it is not only the fact that you have the convenience of ordering this from your home on the Internet, you also have a huge delta in that an online retailer can offer a much bigger assortment of products than a physical retailer.
So it is also the whole assortment that they can bring into that that is going to make a difference. So I think, on the contrary, maybe the e-Commerce has a great opportunity to get rapid revenue growth very soon.
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Erik Pers Berglund, Danske Bank - Analyst [21]
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Thanks.
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Operator [22]
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Stefan Gauffin, Nordea Bank.
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Stefan Gauffin, Nordea Bank - Analyst [23]
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I have three questions. First of all, you have a midterm target of delivering 8% to 11% growth. Would you say that this type of investment is necessary to reach this target as compared to continue with the current core operations?
The second question relates to the EUR340 million for two years; is that your total commitment for this type of investment or could we expect further investments in this field if the opportunity arises?
Then thirdly, you have given us the EUR35 million in revenue for full year 2012 and then EUR250 million for EBITDA losses over the coming three years. Could you provide some more information on the financial development, both top-line and EBITDA? Should we expect the majority of the EBITDA losses coming in 2013?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [24]
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Okay. The midterm target of 8% to 11% which we provided for 2012 and 2013 is something that had been provided before that acquisition of Rocket, so it is totally -- we did not need it at all. And by the way, earlier in the year we confirmed in the first two quarters the fact that we confirmed this -- it is not a target, by the way, it is in internal ambition of growing from between 8% and 11%, which we, by the way, matched totally in Q1 and Q2.
So we will have to review that target in light of this acquisition. Obviously this acquisition will increase our revenue growth and dilute of the EBITDA margin and the net profit to a lesser extent at least initially because we already have a 20% stake. But anyway this target, this ambition of 8% to 11% is totally independent from that acquisition and we don't need it to get there.
The EUR340 million, it's a total commitment. In fact, it's not a commitment by the way, we have committed only to EUR85 million for the time being and then we have an option to increase our stake over the next two years.
This is what we discussed, we are not involved in any other discussion at this stage, we keep on monitoring, as you know, anyway our growth opportunities in the market because this is about growth. But there is no discussion whatsoever on e-Commerce or online so those that what we have discussed neither with Rocket or with any other party at this stage.
Regarding the indication of revenue that we provided for this year on the losses in the EBITDA level for the next three years, this is what we provided for the time being. And we said that we will come back to the market early next year at the occasion of full-year results when we provide the guidance for 2013. Will come back with additional information on that business -- on the total business of (inaudible) including some specific information on that new category.
I take the opportunity to say that this new category will be reported independently so that you still get the exact same visibility that you have on the existing business, so there is no -- you will have a full visibility on each side of the business.
Another thing which is important as well to mention, this investment is not going to distract ourselves from the other categories that we manage today or from our traditional business. We are not in the driving seat of that business for the time being. So our teams are still -- our existing teams are still fully dedicated to developing the business the way that we presented to you in Q1 and Q2 and that we will continue reporting in the future.
So it is not a distraction; we have a pass-through control which means that we will gradually take over the management of this company but we will not do it at the beginning. Precisely we are partnering with [Ortet] with the idea of partnering with a company that does proven and demonstrated results with specific skills in that area that we don't have and we don't have the resources to do it today.
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Stefan Gauffin, Nordea Bank - Analyst [25]
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Okay. Can I just follow up? You said that this will be reported independently. Will it be one line online or what you report Africa and Latin America separately?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [26]
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We still need to review, but probably I would say the two separately. We are still reviewing the level of segmentation that we will do. That is absolutely certain that we will report this e-Commerce and online business separately. After that we will report it on a geographic point of view -- we will see.
We will not do it for Central America, South America, Africa, but maybe LatAm and Africa -- remains to be seen, we have not decided yet. But you know that we always try to strike the right balance between providing appropriate information to investors and analysts without giving too much commercial information as well. But we will do our best to accommodate your -- as much visibility as you need.
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Stefan Gauffin, Nordea Bank - Analyst [27]
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Okay, thank you.
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Operator [28]
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Thomas Heath, Handelsbanken.
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Thomas Heath, Handelsbanken - Analyst [29]
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Firstly, looking back you have very often stressed that you rarely pursue M&A within telecoms because you only see in-market synergies and few cross-market synergies. Against this backdrop what synergies do you realistically see between online and your existing business? And if there are no synergies why should you rather than say Kinnevik [own] these assets? And is there any limit on how non-core assets you may acquire to achieve growth in the future? So that is on a strategic basis and then a few follow-up questions perhaps if I may.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [30]
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We have always flagged the opportunity for us to do external acquisition for growth as well including in (inaudible) that are let's a somewhat at the periphery of our core business. We flagged for two years about the -- that we were looking at external growth opportunities in the area of e-Commerce, e-Financing and e-Health, our medical -- in the medical field.
So this is totally in line with what we had indicated to the market. It doesn't mean that we can't make any M&A activity either in our traditional core business, which is just something that we can do.
Comparing it with Kinnevik, it is a totally different approach, as I said earlier. Kinnevik is a financial investor in these businesses with a minority stake, with no pass-through control, with no management rights -- neither to then or in the future. We are not a financial investor, we are -- we have -- it will absolutely critical for us to acquire that growth opportunity with the idea to gain control.
But given this is a good way to acceleration our knowledge and expertise of the business partnering with a company that has demonstrated this capacity to roll out very quickly very different business model in the online and e-Commerce industry, which we don't have the capacity today, so it is a good way to do it quicker and more efficiently than we could have done at a reasonable price and limiting the risk because we are doing a phased investment.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [31]
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There are a number of touch points between these businesses that I want to basically highlight. If you look at, for example, Mobile Financial Services, that is a clear and able to drive this business forward and that is also vice versa launching these businesses in our market will also enable us to probably drive the Mobile Financial Services at an accelerated pace.
We can also do cross promotion between with our customers, offer them incentives on either mobile side or on the online side. And so we think there is over time lots of opportunity. We didn't particularly highlight it at this stage because that is something we need to learn. But our intent is to launch in two Millicom markets and try to really explore and understand how we can drive these touch points and maybe more synergies going forward.
It's about really also utilizing our country and area experience and our consumer understanding that has led as to -- you know, with excitement and raise this category.
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Thomas Heath, Handelsbanken - Analyst [32]
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Okay, thank you. That is clear. A few other questions if I may. On this financing, is this all the financing that is needed in the business plan for these operational companies in the coming years?
And also on the slides that you have, you have the minority other investors. Will they be diluted as this money flows into the operating companies or are the percentages on your slide the ownership shares as they are when the money has flowed down from the hold -- two holding companies into the operating companies? Thank you.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [33]
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Okay, we are confident with all of the discussions we had with Rocket that the amount of money that we are contributing is sufficient to develop the existing businesses plus the launch plan, which is fairly aggressive over the next three years. So we are confident that this is sufficient and that we should not be diluted.
The percentage that I indicated there are post money and post a capital increase. So this is the economic interest that we will have after the capital injection of the first trenches which means after the 50%.
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Thomas Heath, Handelsbanken - Analyst [34]
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Okay, thank you. That's very clear. And a last question, given that Rocket has some other ventures in the regions including (inaudible), what sort of guarantees do you have that you will not be competing with Rocket in the businesses they already have or in similar businesses? Thanks.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [35]
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Indeed I mean we did not take a stake in some companies that Rocket is already marketing in Latin America. As you can see, the businesses of each of these ventures is quite specific. So it doesn't mean that marginally there could be for 1% or 2% of the business some overlap, but we are quite confident that the level of overlap between these businesses is very, very marginal or insignificant. Plus we have a commitment from Rocket that these companies will not compete one against the other.
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Thomas Heath, Handelsbanken - Analyst [36]
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Okay, thank you very much.
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Operator [37]
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Lena Osterberg, Carnegie.
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Lena Osterberg, Carnegie - Analyst [38]
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I was just wondering, given the guidance that you have for revenues for this year, how much -- have you already achieved -- what sort of revenues have been generated so far by the ventures? And also relating to a question that was based earlier, when do you expect all of the ventures to reach breakeven? Will you still have [lost this] in 2016 or will you be at a breakeven then?
And should we expect you to contribute further money as you go or will you just stay with these ventures as they are? And if we look five years out in time, what sort of portion of revenues do you see your old business have versus having your online revenues? Then -- sorry, go ahead. Start with that then.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [39]
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As you know, these businesses are really developing and growing fast which exponentially to take even that most of them are very recent in creation and development, as Mikael indicated, which means that at the end of June we have done less than half of the full year. But the figure that we gave, we are confident that it will be reached.
As I indicated earlier, these companies on average expect to reach a cash breakeven accumulated after 18 months -- some of them will reach it a little bit later, some of them will reach it a little bit later. This does not mean, don't conclude from that, that at the end of 2013 in 18 months from now we will have reached a cat break even, because there is a pipeline of new venture that will be launched.
So we will look at it individually and review each -- if each and every single project in delivering cash generation that is close to that objective of being breakeven on an accumulated basis after 18 months or close to it.
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Lena Osterberg, Carnegie - Analyst [40]
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But should we expect (multiple speakers)? Should we expect losses in 2016 as well?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [41]
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We have given an indication of $250 million of losses at the EBITDA level for the next three years, which means 2012 -- 2013, 2014, 2015, sorry. So 2016 -- so 2016 most probably not.
What I can send you tell you to be a little bit more specific, I think that we would be extremely disappointed if we were reaching less than $1 billion of revenues by 2016. And even I know that some of you may have the question -- we had the question at the beginning -- what would you decide to exercise the call option.
Obviously if we see that we are below that level in terms of trend, and is a path that we see at the end of 2012, 2013, 2014 and so forth is that we will not deliver more than $1 billion of revenue by 2016, then we may review our -- I mean we may review the case for exercising these options.
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Lena Osterberg, Carnegie - Analyst [42]
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Okay.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [43]
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Actually around that sort of the kind of a revenue expectation we would look at consumer data, penetration, brand preferences, cash flows, operating margins. But the key driver there is of course that you get the revenues. We think the demand is there, we think the combination of Rocket and Millicom will offer a platform to really in a more accelerated way build this business then each of us would have done it on our own.
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Lena Osterberg, Carnegie - Analyst [44]
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May I ask you two more questions then? You have no management rights for the first two years, which, given that these are very new companies, I believe is a bit odd. You said you had Board representation, but is that on a holding company level or do you have Board representation in each of the ventures?
And then also, given that Kinnevik owns 25% of the Rocket, don't you think it is a bit odd from a corporate governance point of view that you are investing into this?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [45]
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Let me add that the Board first, we spent quite a lot of time with the Rocket people and, as I said, what really impressed us is the detailed KPI that they track on a daily and hourly basis, which we will have full access point of view too.
So I think at the Board level we will have a very high visibility on everything that is going on. And we have the same objective with Rocket, i.e. to develop a success out of this. So we don't feel it's a handicap for the two first periods not to have full management rights. They have the expertise; we have value added to come with, so we think it is a good combination.
In terms of it, we don't really see a conflict here. I mean it's an opportunity for us to accelerate something. It is not the direct relationship with Kinnevik here, we are dealing with Rocket. Kinnevik has not been part to any agreement that has been entered into, it is all -- all these agreements are between us and Rocket.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [46]
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If I may add a few things, we don't have management rights in the short-term, but we have obviously protective rights. To be more a specific answer to your question, we don't have any Board representation at operating level but we have a Board representation at holding level.
But we have a certain number of protective rights including the right to second people in these businesses and so forth because the objective is obviously for us to gradually take over the management of this company.
Regarding the potential conflict of interest, I just want to clarify everything. There is no cash that is paid one way or the other directly or indirectly to Kinnevik, we did not negotiate with Kinnevik. And we are not a partner of Kinnevik in these businesses.
Kinnevik happens to have stakes at the operating level in some of these companies and it happens to be minority shareholders with Rocket, which is an independent process. But we did not interact directly with them. Just to clarify the decision process for this investment, it has been made by the management with independent Board members only in order to precisely avoid any conflict of interest.
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Lena Osterberg, Carnegie - Analyst [47]
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You also here touched upon the 2012 special dividend, what about next year when you'll run into significant losses and you have a fairly cash contribution to make?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [48]
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Significant losses, let's see because anyway in the -- for 75% of next year we will have only 20% stake. So we are not going to have -- the only thing that we can talk of huge losses. We will communicate anyway with early next year on our shareholder remuneration, as we always do.
And let's not forget one thing as well is that the losses will be funded by cash injection. All the money that we are injecting we are not buying share there; we are doing capital increases, which means that the cash is going to be invested in the companies.
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Lena Osterberg, Carnegie - Analyst [49]
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Okay, thank you.
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Operator [50]
------------------------------
(Operator Instructions). Andreas Joelsson, SEB.
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Andreas Joelsson, SEB Enskilda - Analyst [51]
------------------------------
A question on the business that is outside where your current existing business is. How much of the EUR35 million in revenues are from outside your current markets? And of the $1 billion that you expect, how much of that do you expect come from countries where you are not present at the moment?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [52]
------------------------------
There is basically in the EUR35 million and that is zero businesses that are outside. We looked at these businesses that were already up and running, but they had a number of financial investors in them and we would have ended up with such a minority share with no part for control and that is not our (inaudible) we want to create an operating business that we can fully manage in the future. And the $1 billion estimation we've given for 2016, it's from with the businesses within the structures that we had agreed with Rocket Internet and does not contain the businesses that are outside.
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Andreas Joelsson, SEB Enskilda - Analyst [53]
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Brilliant, thank you.
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Operator [54]
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[George Dent], Walter Scott.
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George Dent, Walter Scott - Analyst [55]
------------------------------
So thanks for the clarification on the corporate governance elements which answers one of my questions. The other thing I should ask about is simply be incentives for the Rocket employees. Clearly one of the exciting things about being involved with a small tech start-up is having some form of kind of equity participation. How are they going to be remunerated kind of going forward?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [56]
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Basically the key management have equity incentives that typically sort of shares granted over three years, so that is the set up. Rocket has been very good at targeting and finding talented people with sophisticated experiences from either the McKinsey's or the Bain's or even some of the banks who are numerically very smart and obviously very competent, but also know how to do man management. So the key people in -- both at the holding company level as well as the operating level, have an equity component.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [57]
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Which is already included in the percentages that we disclosed in the presentation, which means that the percentages you have already contemplated the dilution coming from management rights on equity.
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George Dent, Walter Scott - Analyst [58]
------------------------------
Okay, thanks.
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Operator [59]
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Bill Miller, J.M. Hartwell.
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Bill Miller, J.M. Hartwell - Analyst [60]
------------------------------
A couple of thoughts. One, as you are accounting for this in fully consolidating it, my understanding is you are fully consolidating your revenues but taking in only your existing or the 20% or the 50% or whatever of the losses, is that how you will account for it?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [61]
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Absolutely yes. Because of IFRS and given that we have a path to control with an option to buy the remaining 50% in September 2016. So we have to fully consolidate these assets from signing, which would take place before the end of the year, which means that we will consolidate 100% of revenue, 100% of EBITDA, but obviously we will consolidate only 20% of net profit of the Company, the difference will go to minority interest. We'll consolidate as well 100% of the cash injected in this Company. So it will not directly impact our net debt to EBITDA ratio.
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Bill Miller, J.M. Hartwell - Analyst [62]
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Perfect, thanks. Let me go from there. The two most probable businesses that you will try to use will be what -- the financial service end of it, the MFS and also the medical. Where you -- which markets will you introduce them and how soon will you introduce those products as an augment or a complement to your existing efforts in those two areas?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [63]
------------------------------
Yes, I think we will probably do so maybe within the next six months. The key markets for interest for us is probably Paraguay and Tanzania where we have the highest Mobile Financial Service penetration. So those would lend themselves very probably from a feasibility point of view as the start for introduction.
On the medical side we are already offering medical, similar medical services in Central America -- access to doctors, a triage service and so on, which we are going to continue to build on and see how we can combine with what Rocket has to offer. As I said within -- yes, go ahead.
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Bill Miller, J.M. Hartwell - Analyst [64]
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Sorry. No, you go ahead.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [65]
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Yes, so I think it's within six months, we probably -- six to eight months we could be live in our existing markets in two existing markets.
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Bill Miller, J.M. Hartwell - Analyst [66]
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How much augmentation of your existing growth in those markets and those two product areas do you think you'll get? Will you be able to double them quickly or triple them or what --?
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [67]
------------------------------
Well, I think since these are markets where we have operating experience bringing an online business in there should have a very quick takeoff because we have a strong customer base that we can leverage for that, we have the mobile financial services in place that would facilitate payment on a totally different level.
So we think bringing these businesses in markets where we operate should allow these businesses to take faster takeoff. And on top of that I mean we have businesses in place that can offer services on a third-party basis from call centers to office space and so on. So this should be very fast entries and fast growth in the markets where we are in.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [68]
------------------------------
What kind of branding or common branding will you use, if any, in those markets with the Rocket? Will you be able to utilize the Tigo brand or do you have that sorted out yet?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [69]
------------------------------
These businesses will be introduced with their own brand names. At some point of time if we take full control of these businesses we'll have an opportunity to assess then if it would make any sense to use the Tigo brand-name or some or many of them. But that is a decision for a later stage.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [70]
------------------------------
And if we were talking about it, say a normal -- well, let's use your $1 billion in 2016, what kind of EBITDA margins would you expect with say $1 billion of revenue?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [71]
------------------------------
We had indicated in the presentation that we provided that we expected an EBITDA margin between 15% to 25% at maturity.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [72]
------------------------------
At maturity. And obviously you don't think 2016 is maturity?
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [73]
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Some of these businesses could be at maturity; some of these businesses might still be in a startup stage. Remember, we have a pipeline of businesses to roll out over the next three years. So some will have -- might have got into maturity, some might still be in the build out stage.
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Bill Miller, J.M. Hartwell - Analyst [74]
------------------------------
Right. Francois, with the articulated goal of getting to 1 to 1 and the level of interest rates around the world right now would you plan on going -- getting beyond one-to-one or just doing enough long-term financing to get to one-to-one or how do you -- can you give us any color on exactly how you are going to get there?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [75]
------------------------------
As I said, these two acquisitions between Rocket and Cablevision Paraguay are good opportunities for us to get closer to one, even without reaching it. We had said that we would feel comfortable under normal circumstances to be at one. And we had said that we would be ready to go further in case of a significant acquisition, which is not the case with that dealer.
Let's not forget we are talking of $340 million -- maybe in euro which is close to $400 million of a three year period. So it is not a significant pressure on our cash and balance sheet, which is the reason why, by the way, we confirm our shareholder remuneration intention for 2012. The topic we -- you are covering, which is a further leverage of our balance sheet, is a different topic which is independent from this Rocket Internet deal.
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Bill Miller, J.M. Hartwell - Analyst [76]
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Can you give us any color on that or are you going to hold that for a later date?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [77]
------------------------------
I think in general we would like to stay below -- around 1 or below 1, to have the flexibility to react if any opportunities do come up to acquire the right assets. So we don't really believe that we should at this stage push that beyond that one number.
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Bill Miller, J.M. Hartwell - Analyst [78]
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And if you were talking, Francois, as you used the word exponential, how long do you think that this company -- or that Rocket investment will have that exponential growth? And could you quantify it as -- quantify exponential besides just saying well 2016 will be at least (multiple speakers)?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [79]
------------------------------
I mean we can't go beyond what we said in terms of lower -- low end of expectations for 2016, after that much depends on the number of new ventures that will be launched, the development of these new ventures. We have a plan; there is a planned agreed with Rocket with a certain level of assumption of usually going forward at a time even when we will give some further color on the year 2013 in February next year.
We will have more visibility, so we will provide more when we fine-tune expectations and guidance for the short to medium term over the next couple of months. But we are, as Mikael said as an introduction we are very, very positive about the growth opportunity that it represents.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [80]
------------------------------
Great. Thanks very much.
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [81]
------------------------------
And just now I can add one comment on the debt, which is that as the consequence of what I said earlier, which is the fact that we are going to finance these two projects with debt, so you are likely to announce some financing. We are now looking at different options, private or public, that we will finalize before the end of the year and you will hear from me between now and the end of the year.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [82]
------------------------------
Terrific. Thanks very much.
------------------------------
Operator [83]
------------------------------
Stefan Gauffin, Nordea Bank.
------------------------------
Stefan Gauffin, Nordea Bank - Analyst [84]
------------------------------
Just to follow up regarding the -- I know there have been some questions around it, but regarding the $1 billion in 2016, could you say roughly what percentage the e-Commerce would account for?
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [85]
------------------------------
No, at this stage -- you know, that number is an expectation. We have plans developed by concept, but at this stage we are not prepared to give any detail between the different -- five different business models that exist in this world.
------------------------------
Stefan Gauffin, Nordea Bank - Analyst [86]
------------------------------
Okay, thank you.
------------------------------
Operator [87]
------------------------------
Mark Walker, Goldman Sachs.
------------------------------
Mark Walker, Goldman Sachs - Analyst [88]
------------------------------
Hi, guys, just a couple of follow-up questions, please. Firstly on shareholder returns, you said that you would return excess cash at the end of the year to shareholders and that would then determine any kind of special dividends to be paid. Does that then rule out a special dividend at Q3?
And then secondly, on your $1 billion expectation for revenues by 2016, given that you expect to make losses over the next three years that implies well over $1 billion of costs, but you are only investing EUR340 million in that time. Can you tell me how the remainder of those costs are then funded? Thank you.
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [89]
------------------------------
I don't think you need to look at it that way because these businesses typically, and if you look at the big e-Commerce side, have a very strong cash flow because you tend to pay the suppliers let's say between whatever you can negotiate, 69 to 90 days, and the consumers pay cash on delivery. So they are extremely, from a customer point of view, very positive. So can you really clarify your question, have you arrived at that angle?
------------------------------
Mark Walker, Goldman Sachs - Analyst [90]
------------------------------
Yes. So it does sound like the rest is funded by working capital. So if you have $1 billion of revenue by 2016, but you are going to -- you are not going to make any profit in the time leading up to that and that is obviously well over $1 billion of costs, but -- and you are funding the EBITDA losses via your capital injections, but that's at least $340 million, I'm just trying to reconcile the shortfall.
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [91]
------------------------------
But the $250 million of proceeds, it is accumulated over three years because you are assuming that we will not be profitable in 2016. We may be profitable in 2016 which the likelihood that we will be profitable in 2016 is high.
And just coming back to your earlier question on shareholder return, as we did -- well, first of all, we are not committing to anything at this stage. But we said that we will follow the same as what we did in the last two years which is to return excess cash to shareholders. The $200 million of share buyback that we confirm, we can do it without any problem between now and the end of the year.
We could do more, but I think that we never wanted to put any pressure on the stock price either. So obviously is there (inaudible) any additional shareholder remuneration later in the year, logically it should come as an exceptional dividend, because a share buyback we cannot accommodate too much. If there was any because, once again, it depends on a certain number of opportunities.
But we stick to what we have committed in terms of shareholder remuneration since the beginning of the year. This is subject as well to obviously Board approval if there was anything.
------------------------------
Mark Walker, Goldman Sachs - Analyst [92]
------------------------------
Okay, thank you.
------------------------------
Operator [93]
------------------------------
Thomas Heath, Handelsbanken.
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Thomas Heath, Handelsbanken - Analyst [94]
------------------------------
Thank you, just a last follow-up question. If you start online businesses in existing markets, the Millicom markets like Paraguay and Tanzania, will you launch them through Latin America Internet Holding in that case to use Rocket management? And if so would you give out shares in such operating companies to local management as is done for the other operating companies? I'm trying to figure out if there will come out more minorities in the future.
And also about the minorities in the operating companies that exist, do you expect them to stay forever or is there any plan to buy out those minorities at operating level after you fully consolidate the Company? Thanks.
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [95]
------------------------------
Yes, I think if we launch any online businesses in the Millicom markets we will do that by Rocket Internet who has both the man power as well as the detail know how how to do it today.
I just pointed out that in our -- in the markets where we are operating probably could get traction quicker because we have a large customer base that we can market to, we have MFS in place and we have a lot of operating know-how in these markets that we can share with Rocket Internet.
And like any start-up business, the management then would have an equity stake -- a small equity stake, as they have on the other Rocket operating businesses.
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [96]
------------------------------
You had a second question, I missed it, sorry?
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [97]
------------------------------
Can you repeat the second question?
------------------------------
Thomas Heath, Handelsbanken - Analyst [98]
------------------------------
Yes, just on the minority ownership in management (inaudible) in the operating companies, is there any plan to acquire that by Millicom once you acquire all of Rocket? Do you have any plan to then go on to acquire the minority operating company level?
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [99]
------------------------------
First of all, we have no obligation. I mean, there is no put option granted to any minority shareholders. We have no obligation or liability whatsoever. I think it would make sense over time that we acquire minorities, but this will take place through separate negotiation between those minorities.
If there were conflict of interest such as (inaudible) it will be handled in the proper way to preserve an abundance of decision-making. But I mean we are not at that stage locally and anyway we don't need that as part of our path to control. So this is more -- we are more talking of I mean raising our economic interest in that case, but it doesn't make a difference as far as control and management (inaudible).
------------------------------
Thomas Heath, Handelsbanken - Analyst [100]
------------------------------
Okay, thank you very much.
------------------------------
Operator [101]
------------------------------
Sven Skold, Swedbank.
------------------------------
Sven Skold, Swedbank - Analyst [102]
------------------------------
One further question here. Thanks for giving the target of $1 billion in 2016. However, I'm actually a bit surprised that you gave the figure because what is based at -- or based on? I mean, it's based on the success for all these businesses or -- I mean, normally when you start up these kinds of portfolio investments some of them are really successful, some of them have to be shut down even one or two years after start-up. So I mean what -- is it based on the success for all businesses or -- why do you give (multiple speakers)?
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [103]
------------------------------
Okay, yes, let us put this now in a little bit in perspective, because we are basically more or less bringing proven concepts into the emerging markets. So we know these concepts have worked internationally, being it in the US or Europe or even in other emerging markets. So to us the parallel a little bit like this when you came with the mobile phone into the emerging markets, it was a proven concept and there was a big pent-up demand. So we see the same.
So we don't at this stage assume that these are sort of experimental concepts. These are proven concepts, we just need to execute with great consumer understanding and cost effectiveness to be successful in other markets. We have a long-term plan. Naturally no long-term plan can be exactly correct, but there is enough variation on the revenues and the cost lines for the aggregate to aim for something like $1 billion as an expectation we set for 2016.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [104]
------------------------------
Just to be clear, this is not a target. We said that we would be disappointed if we were not reaching more than $1 billion of revenue by 2016. This is to give you an indication of the way we see the growth of the business, not to leave few totally in the dark.
As Mikael said, this is -- the figure is largely extracted and derived from planning that we did ourselves with Rocket, reviewed by the investment bank that advised us on this deal, looking at I mean the development of these businesses obviously internationally, as Mikael just said.
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Sven Skold, Swedbank - Analyst [105]
------------------------------
Okay. Thanks, guys.
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Operator [106]
------------------------------
Lena Osterberg, Carnegie.
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Lena Osterberg, Carnegie - Analyst [107]
------------------------------
Just to return to the question just now, what sort of success rate are you assuming for these ventures? It sounded just now that you assume that all of them would succeed. And then also, to set the $1 billion sales target into perspective, Mercado Libre, which is hugely successful, after seven years of operations had sales of $50 million, which is what you are assuming for this year for a handful of ventures which [just] started.
And then also, what losses should we assume for the fourth quarter this year? You have said the revenues, but what should we assume for EBITDA losses? And also, in these companies that you are currently acquiring which are existing, in which of those does Kinnevik own a minority?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [108]
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The losses for 2012 at the EBITDA level will be minimal because those we need to close. So we have not closed yet. So the impact will be minimal in 2012. Referring to these businesses, it's in our portfolio of countries today; some are more successful than others. So obviously we are taking a global view taking into consideration that some of them may work better than others, but we believe that the plan that we have is reasonable.
We reflected that in the work and, as I indicated earlier, the work that we retained for the DCS is significantly higher than the work of Millicom, which reflects the degree of risk of entering into new businesses that are in an early stage of development.
The fact that there is more than -- it is not one single country or it is not one single business, it is a set of different businesses in different markets in Africa and in Latin America, which mitigates somewhat I mean the risk of failing and which secures the likelihood of a significant success.
------------------------------
Lena Osterberg, Carnegie - Analyst [109]
------------------------------
But you are assuming 100% success ratio that all of these ventures will be successful (multiple speakers).
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [110]
------------------------------
No, we are not -- no, we are not, we are not.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [111]
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We are not securing 100%. There is a whole sort of spend of performance, a revenue range that we can hit. So we just say if we add it all together our expectation is to be able to generate about $1 billion by 2016.
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [112]
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The fact that we took a work which is significantly higher than the work of Millicom reflects precisely the fact that we don't expect all of these businesses to succeed.
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Lena Osterberg, Carnegie - Analyst [113]
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Which work were you using?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [114]
------------------------------
The work that is significantly higher than Millicom work.
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Lena Osterberg, Carnegie - Analyst [115]
------------------------------
Well, you should, I mean nothing is in place at the moment, right, really?
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Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [116]
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No, some of them are already operating in these businesses.
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Mikael Grahne, Millicom International Cellular S.A. - President & CEO [117]
------------------------------
But again, as I -- it is about bringing proven concepts. So it is a little bit the same as when we went with the mobile phone to emerging markets with limited penetration. We knew the demand was there and you got a tremendous traction if you could find the right value points, the right distribution points, the right quality and the right services to meet that.
So from a success point of view we know we can generate -- there is a demand. We know from our own around categories like Mobile Financial Services, when you come with a product that really matches a consumer need you have a great takeoff.
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Lena Osterberg, Carnegie - Analyst [118]
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Okay, my final question. Which of these companies does Kinnevik own minority directly?
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [119]
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Kinnevik owns minority stakes in most of Latin America companies and indirectly in most African companies as well.
------------------------------
Lena Osterberg, Carnegie - Analyst [120]
------------------------------
Via Rocket?
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [121]
------------------------------
Minority -- no, no, no, no, not via Rocket, directly at operating level -- directly or indirectly, but not through Rocket.
------------------------------
Lena Osterberg, Carnegie - Analyst [122]
------------------------------
Okay, so in Africa it is also directly and indirectly excluding Rocket?
------------------------------
Francois-Xavier Roger, Millicom International Cellular S.A. - CFO [123]
------------------------------
Yes.
------------------------------
Lena Osterberg, Carnegie - Analyst [124]
------------------------------
Okay. Can you say on average how much Kinnevik owns in these assets?
------------------------------
Justine Dimovic, Millicom International Cellular S.A. - Head of IR [125]
------------------------------
Lena, hi, this is Justin. We are not going to answer questions on behalf of Kinnevik. So if you have some questions you'd like to ask them it is better to contact them (technical difficulty) on their behalf.
------------------------------
Lena Osterberg, Carnegie - Analyst [126]
------------------------------
Okay, thank you.
------------------------------
Justine Dimovic, Millicom International Cellular S.A. - Head of IR [127]
------------------------------
Operator, may we have the last question please? If there is any.
------------------------------
Operator [128]
------------------------------
Bill Miller, J.M. Hartwell.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [129]
------------------------------
Just one final. Mikael, many thanks for all you have done for Millicom, it is really -- impressed over the last several years that you have been the CEO and really appreciate it. But now that the baton is being passed to a new fellow, could you give us a little color on his background and why -- not why he is going to become CEO necessarily, but whether he has confidence in all these new businesses like this as well as in the traditional Millicom businesses?
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [130]
------------------------------
Thank you, Bill, for your kind comments. Just a slight reminder, when I became the CEO you were a little bit skeptical of my abilities to run the business.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [131]
------------------------------
No, not a little bit -- not a little bit -- I was very, very skeptical.
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [132]
------------------------------
You were very skeptical. So I am absolutely certain that Hans-Holger will surprise you with his performance in a similar fashion and even better than I had done. Hans-Holger is an experienced CEO, is used to emerging market and mature.
He actually has more online experience than I have because MTG, the company he is still the CEO for, developed an online concept for the Nordic suite and some Nordic markets called [CDON] that a year ago was basically spun off from MTG as a separate listed company. So he comes already with ready experience in this field and he is a very strong supporter and happy to grab this challenge and run with it. So I think he is going to be a great CEO.
------------------------------
Bill Miller, J.M. Hartwell - Analyst [133]
------------------------------
Well, thank you again for everything.
------------------------------
Mikael Grahne, Millicom International Cellular S.A. - President & CEO [134]
------------------------------
Thank you.
------------------------------
Justine Dimovic, Millicom International Cellular S.A. - Head of IR [135]
------------------------------
Thank you very much, everyone. I think there are no further questions. So if you have any follow-up, please don't hesitate to contact the Investor Relations team. Thank you very much again.
------------------------------
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