Post on 05-Apr-2018
7/31/2019 Maxcom, Source Capital, November 2011
1/24
MaxcomTelecomunicaciones,S.A.B.deC.V. November22,2011
$200million11%SeniorNotesdueDecember2014(MAXTEL1112/14)
BUY
Analyst:
StephenBalinskas
sbalinskas@sourcegrp.com
Tel:2033413500
Extension237
OurfundamentalopinionisunchangedsinceourMarchreport:We
thinkthat
the
company
has
aliquidity
problem,
not
asolvency
problem,
andtheriskisthusoneofrefinancingthebonds.Thisrefinancingisstill
threefullyearsaway.
Negativefundamentalsattenuating,positivefundamentalspersisting.
MaxcomhashadaneventfulFY11todate,butmostoftheeventshave
beenpositive.Inparticular,thecompanyscoststructurehas
significantlyimproved.Negativefundamentalsdecliningcustomers,
revenuesandcashflowhavestabilizedoratleastattenuated.
Compellingupside.Wevereweightedthescenarioanalysispositedin
ourearlierreport.Wenowsuspectthatcreditors,shouldthe
refinancingthree
years
hence
fail,
might
be
in
astronger
position
than
wethoughtpreviously.Weproposethattherecouldbeways,for
enterprisingandcollaborativecreditors,totakeleadingpositionsinthe
bondsandstillcomplywithforeignownershiplimitationsonMexican
terrestrialtelecommunicationscompanies.WevalueMaxcombondsat
approximately88(previously89).Thisisa6to18monthpricetarget.
Limiteddownside.Inadditiontostrongunderlyingassetvalue,the
breakevenpriceonthenotesinayearis51(thecurrentpriceof62less
the11%coupon).Thebreakevenpriceintwoyearsis40.
Attractiverelative
value.
Maxcoms
bonds
trade
24,000
and
21,000
bps
widerthanissuesofcomparableratingsorcreditsupport.Wefindthe
spreadhighlyexcessive.
Atcurrentindicativepricesinthe60sandyieldsupwardsof30%,we
findthatthebondshavecompellingupsideandlimiteddownside.
Forresearchdisclosures,pleaseseepage24ofthisreport.
MAXTEL 11% due 12/2014 62 33.3 2.1 199.5 Caa1/CCC+
Prices strictly indicative.
7/31/2019 Maxcom, Source Capital, November 2011
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Page2/24
CompanyDescription
MaxcomTelecomunicaciones,S.A.B.deC.V.(Maxcom)isalandlinetelephony,internetandTV
serviceproviderinMexico.Thecompanyprimarilytargetslowerandmiddleincomeresidential
customers,butalsohasasignificantcommercial/SMEcustomerbase.Thecompanyhasmorethan
8,600kmsoffiberandlastmilenetworkinfrastructure,inandaroundtheCentralMexicancitiesof
MxicoDF,Quertaro,PeublaandSanLuisPotos.Maxcomisamongthesmallesttelephonyproviders
inahighlycompetitivemarket.
Background
WeinitiatedonMaxcominMarchofthisyearwhenthebondswereinthemid70s,withthe
recommendationthatinvestorsbuythebonds,withapricetargetofthehigh80s.
1Q11resultsrevealedmarginaldeclinesinthecustomerbaseand7%YoYdeclineinrevenue.Theyalso
revealedareductioninthecompanyscoststructurethat,weestimate,improvedEBITDAmarginby
about700bps,likelyadding~MXN180mtothisyearsEBITDA,constitutingYoYgrowthofabout20%.
Thereafter,thebondsstrengthenedapproximatelytenpoints,tothelowtomid80s.2Qand3Q11
resultsrevealedastablecustomerbase,levelofrevenueandcoststructure.Insummary,thenegatives
declining
customers,
revenues
and
cash
flow,
have
attenuated,
and
the
positive
an
improved
cost
structure,haveheldfirm.Notwithstanding,thebondshavefallentoapproximately60.Withno
particularnegativechangestothecompanyoritsindustry,wefindthebondsmoreattractivethan
before.
RecentEvents
Reducedfixedtomobileinterconnectioncharges.In1Q11results,Maxcomrevealedthat,beginningon
January1ofthisyear,thecompanybegantoaccrueandpayalowerrateforcallsoriginatedonits
(primarilyfixedline)networkandterminatedonmobilenetworks.Thisratewassubsequentlyapproved
bytheMexicantelecommunicationsregulator,ComisinFederaldeTelecomunicaciones(COFETEL).The
newratewasMXN0.3912,down61%fromtheformerrateofMXN1.0.Whileweshouldspeakonlyfor
ourselves,
we
venture
that
this
reduction
was
not
widely
anticipated
by
the
market.
MostMexicansareconsumersofmobile,asopposedtofixedline,telephony.Forthesakeof
perspective,Telcel,thedominant(>70%marketshare)mobiletelephonyprovider,counted64million
subscribersinMexicoatFYE10,whileTelmex,thedominantfixedlineoperator,countedlessthan16
millionlinesinservice.Theupshotis,mostcallsonMaxcomsnetworkareterminatedonmobile
networks.ThereducedinterconnectiontariffssignificantlyreducedMaxcomscoststructure,likely
improving,perourestimates,thecompanysoverallFY11EBITDAandEBITDAmarginbyabout
MXN180mand~700bps,respectively.
Creditratingdowngrade.Aswewarnedinourlastreport,downgraderiskwasafactor.Thisriskwas
realizedwhenS&PdowngradedthecompanysbondstoCCC+(negativeoutlook)fromB.Thisfollows
Moodysdowngrade
to
Caa1
at
the
end
of
2010.
Still,
the
notes
were
split
rated
for
several
months.
"ThedowngradereflectsMaxcom'slowerrevenuegeneration,continuednegativefreeoperatingcash
flow,andacashpositionthatrestrictsthecompany'sfinancialflexibility"saidthepressrelease.Wetake
issuewiththenegativeoperatingcashflow;thecompanyisFCFpositive2011todateandweexpectit
toremainso.Still,thedowngradewaswelltelegraphedandnotbasedonanynewinformation,inour
opinion
7/31/2019 Maxcom, Source Capital, November 2011
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Page3/24
Competitiveenvironmentunchanged.Maxcomstelephonycustomerbasereflectsthesametrend
observedgloballyamigrationfromfixedlinetomobile.Thedeteriorationofitsfixedlinetelephony
customerbaseexceedsthatofpeers,butnotbymuch;fixedlinepeersTelmexandAxtelareallslowly
losingtelephonycustomers,ormoreprecisely:revenuegeneratingunits(RGUs),intheparlanceofthe
industry.MaxcomisaddingTVandinternetcustomersanddoingsoatarateinlinewiththatofpeers.
Relatedly,stillnoTelmexinTV.TelfonosdeMxico,(Telmex)isMexicoslegacyandstilldominantfixedlinetelecommunicationsserviceprovider.AmricaMvil,formersubsidiaryofTelmex,announced
thatitwouldcompletelysubsumeitsformerparent.AmricaMvilsMexicanwirelessoperation,Telcel,
isnotonlyMexicosdominantwirelesstelephonyprovider,butitslargesttelephonyconcernoverall.
Telmexhassince2006beenpetitioningtheconcernedregulatoryagenciesforpermissiontomarketTV
services.Atissueareantitrustconcerns.Telmex/AmricaMvilunderstandthebusiness.Thelatteris
alreadytheleadingTVproviderinLatinAmerica,withlargeTVoperationsinBrazil.Telmex/Amrica
Mvilarelarge,capitalrichcompanieswithconsiderableinfluence.
Ifanything,however,recentregulatoryrulingshavegonenotfortheincumbent,butagainstit.TheCOFETEL
approved
the
aforementioned
61%
in
interconnection
charge
(though
the
loss
to
Amrica
MvilismitigatedbythemoneysavedbyTelmex,itssoontobewhollyownedsubsidiary).The
COFETELisalsoproposinglowertariffsforothertelephonyservicessuchasruralandlocal
interconnection.
WhileawaitingregulatorypermissiontoofferTVservices,Telmexhasprovedanimpatientapplicant.
Earlierthisyear,Telmexbeganstreamingshows,news,sports,andculturalprogrammingforfreeonthe
Web.TVAzteca,Mexicossecondlargestcontentprovider,subsequentlysuedAmricaMviland
Telmex.StreamingontheInternetisntTV,saidaTelmexspokesman.Wedoubtsuchactionsare
endearingtoregulators.Ultimately,webelievethatTelmex/AmricaMvilwillultimatelyobtain
permissiontomarketTVservices,butcannotsaywhenorunderwhatterms.
Inanycase,however,MaxcomalreadycompeteswithTelmex.ItsprovencompetitivewithTelmexin
residentialtelecommunicationsinitsareasofservice.Thecompanyhasnotbeencompetitivewith
Telmex(orothertelecommunicationspeers)intheareaofbusinessservices,butthatsnotgoingtoget
worsewithTelmexacquiringaTVlicense.
Insummary,thearrivalofTelmexintheTVsegmentwillservetoincreasecompetitivepressures,but
theywontservetoweakenrecentfavorabledevelopments,inouropinion.
Companycontinuestodoitselfnofavorsindisclosureandcorporatecommunications.Wefind
Maxcomsomewhatmaddeninginsomeaspectsofitsdisclosure(thoughitdoesntdoanyworsethan
somepeersinthisregard).Thecompanydoesnotdecomposeminutesofuse(MOUs)orrevenuesand
marginsper
service
segment
(i.e.
telephony,
data,
TV),
presumably
for
competitive
reasons.
But
they
coulddobetter.
Inaddition,manyinvestorsmaybeconfusedbytheircashflowdisclosure.ThisisnotsomuchMaxcoms
faultasthatofinvestors.Still,Maxcomcouldhelp.
7/31/2019 Maxcom, Source Capital, November 2011
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Page4/24
ThecompanydisclosesquarterlycashflowasrequiredbyMexicanFinancialReportingStandards,or
MFRS.Foranhistoricalperspective,Mexicancompanieswereformerlyrequiredtodiscloseaquarterly
StatementofChangesinFinancialPosition.Thedisclosureresembledacashflowstatementinsome
respects,butitsprimaryfunctionwastoaccountfortheimpactofinflationandexchangeratevolatility
oncompaniesstates.In2007,Mexicodidawaywithinflationaccounting,whichallowedforother
changestodisclosure.ThenewCashFlowStatementresemblesboththeoldStatementofChangesin
FinancialPositionandatypicalUSGAAPpreparedstatement,butisyetneither.Itsimpossibletocompletelyreconciletheformertothelatter,butyoucancomeclose.Ourapproximatereconciliationis
inthebackofthisreport.
Per3Q11reporting,MaxcomsMFRScashflowstatementsuggestedtotheuninitiatedanalysta
sourceofMXN317m(aboutUSD22m)relatedtothenotes.TheoutstandingamountoftheUSD199.5m
ofnoteswas,ofcourse,fixed.Thecompanydidnotandcouldnothaveissuedmorenotes.Thechange
isuniquelyrelatedtothe16%depreciationoftheMXNagainsttheUSDduringtheperiod.Thechange
wasavaluationone,notoneofcashflow.Wedpreferthatthecompanyprovidesomesortof
unaudited,proformaUSGAAPishaddenduminitsquarterlyreporting;thereareprecedentsforit.
Inaddition,
the
company
assured
listeners
during
the
recent
3Q11
earnings
call
that
it
was
fighting
a
recentsanctionbythetelecommunicationsregulator.Itisnotcleartousquitewhatthesanctionis
about.Norwasitapparentlycleartootherlistenerseitherbecausetherewereatleasttwoquestions
aboutit.Ineffect,managementsresponsewaswerefightingitbuteitherwouldnotorcouldnot
(andfranklywerepartialtothelatter)explainwhatthesanctionwasabout.Managementcould
communicatesuchissuesbetter,inouropinion.Basedonourlimitedknowledgeofthesanction,wedo
notthinkthatitwillhaveasignificantimpact.
Recentinsidersale.OnOctober19,2011,MaxcomexecutiveJacquesGilksbergfiledtosellstockworth
USD76,058.Indicatedinthefieldinthedisclosurerelatedtotheexpectedtimingofthesalewas
ASAP.WenotethiswasBEFOREthereleaseof3Q11resultsonOctober26.However,3Q11results
were
not
particularly
surprising
or
disappointing.
The
sale
nonetheless
is
noteworthy
to
creditors.
7/31/2019 Maxcom, Source Capital, November 2011
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Page5/24
RecentFinancialResults
MaxcomSummaryFinancialStatistics
Source:CompanydisclosureandSourceCapitalGroupestimates Revenuesstable.ForthethirdfiscalquarterendedSeptember30,Maxcomsrevenueswereflat
sequentiallyand
down
8%
YoY.
Virtually
all
of
the
YoY
decline
can
be
attributed
to
the
sequential
declineobservedinthefirstquarterofthisyear.Inotherwords,revenueshavebeenstableoverthe
lasttwoquarters.
GrossProfitincreases.Grossmarginimprovedsequentiallyby153bps,primarilyasaresultofthecompanysaccruinglowerinterconnectionratesforcertainoperations(localtolocal,localtolong
distance,andnetworktonetwork).ThecompanyispetitioningtheCOFETELfortheseratestobe
approved.Confirmationisnotcertainandwedonotbelievethecompanyissettingasideareserve
intheeventapprovalisnotgranted.However,peerAlestrahasbeengrantedpermissiontousethe
samereducedrates.Moreover,thesamedynamictookplaceforthesubstantialreductioninfixed
towirelessinterconnectiontariffsearlierintheyear;Maxcomandotherfixedlinepeersbegan
usingtherevised,lowerratespriortotheofficialapproval.WeexpectMaxcomsuseofthesenew
ratesto
be
approved
as
well.
The
YOY
improvement
was
due
to
the
aforementioned
fixed
to
wirelessratereduction.
HigherSG&Aappropriateandwelcome.SG&Asequentiallyincreasedinabsolutetermsandasapercentageofsalesby7%and212bps,respectively.Theincreasemorethanoffsetthedeclinein
NetworkOperatingServicesexpense.Wearenotsureofthenatureorsubstanceoftheincrease,
butwethinkitappropriateandpositive.FromFY09toFY10,Maxcomcut27%ofitsemployeesto
improveitscoststructure.Morenotably,itsnumberofsalesrepresentativeswasalmosthalved.At
aminimum,thereductioninthesalesforcecouldnothavehelpedcustomeracquisitionand
revenues.
PrimarilyduetothehigherSG&A,EBITDAmarginsequentiallydeclinedby60bps.InUSDterms,EBITDAdeclinedsequentiallyprimarilyduetothe10%depreciationofthepesoagainstthedollar.
Net Revenues (MXNk) 646,980 592,421 594,302 0% -8%
Gross Profit 375,564 392,865 403,184 3% 7%
EBITDA 169,524 201,058 198,159 -1% 17%
% sales 26.2% 33.9% 33.3% (60) bps 714 bps
EBITDA/Int Exp 2.2 2.8 2.4 -15% 8%
Net Debt/EBITDA 2.9 2.7 2.9 6% -1%
US GAAP FCF (approx) (119,986) 67,005 (34,297)
in USDk, for reference:
Net Revenues (USDk) 51,593 50,772 42,859 -16% -17%
EBITDA 13,519 17,231 14,290 -17% 6%
7/31/2019 Maxcom, Source Capital, November 2011
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Page6/24
Debtstable.Netleverage(netdebt/EBITDA)increasedto2.9xfrom2.7xlastquarter.TheincreasewasduetoaweakerMexicanPeso(MXN).InUSDterms,netdebtdeclined.Aswepointedoutin
ourlastreport,Maxcominvestorsareexposedtoexchangeraterisk.MaxcomservicesitsUSD
denominateddebtwithrevenuesdenominatedalmostentirelyinMXN.TheMexicanPeso(MXN)
weakenedtoMXN13.87/USD,down10%sequentially16%YoY.Thedeclinewasinlinewiththose
ofmanyemergingeconomiesassovereignconcernsdominatedglobalcapitalflows.Whilethe
impactonthecompanysdebtservicecapacityismateriallynegative,thedeclinewasentirelyinthe
rangeofnormalvolatilityandismanageablebythecompany,inouropinion.Werecalltoreaders
thatthecompanyhedgesthemajorityofcouponpayments.
GuidanceonTrack.Mostly.
Source:CompanydisclosureandSourceCapitalGroupestimatesThecompanyisontracktomeetorexceedtheguidanceitprovidedearlierthisyear,withthe
exceptionRGUgrowth.Thiswilllikelycomeinflatorintheverylowsingledigitpercentagepoints.
RGUperCustomerSegment
TotalcustomersandRGUsflat.Maxcomstotalnumberofcustomershasbarelymovedinayear,up
only1%YoY.ItsnumberofRGUsisdownabout1%.Stabilitycanbenice,butMaxcomscapital
structurewasconceivedwithgrowthinmind.MaxcomsoverallRGUgrowthalsocomparespoorlyto
Mexicantelecommunicationsatlarge:
ChangeinTotalRGUBaseSince3Q10
Source:CompanydisclosureandSourceCapitalGroupestimates
EOY Cash Bal MXN 340-350m
Rev growth flat
EBITDA growth 2-3%
RGU growth 10%
Capex USD 25m (~MXN 300m)
Cash flow breakeven
-Develop relationships with other companies to reach more customers
5%
0%
5%
10%
15%
20%
3Q10 4Q10 1Q11 2Q11 3Q11
Maxcom Telmex Axtel Megacable Tvisa
7/31/2019 Maxcom, Source Capital, November 2011
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Page7/24
Perourlastreport,recallthatpeersconsistofthefollowing:
Telmexisthedominantterrestrialtelecommunicationsprovider.ItprovidesvoiceanddataservicesthroughoutMexico.ItispetitioningforalicensetoprovideTVservices,
butdoesnotprovideanysuchservicesyet.
Axtel,likeMaxcom,isacompetitivelocalexchangeprovider(CLEC)and,wefind,Maxcomsbestcomp.UnlikeMaxcom,itdoesnotprovideTVservices,thoughit
recentlyannounceditwasstudyingtheprospect.
MegacableisMexicoslargestindependentcableTVprovider.LikecablecompaniesintheUS,ittooofferstripleplayTV,telephonyanddataservices.
TelevisaisasprawlingMexicanmediaconglomerate.ItisthelargestmediacontentproducerintheLatinworld.ItfurtherhasalargecableTVassetbase,andisalso
increasingitssalesoftelephonyanddataservices.
ThereasonsforthefailureofconsolidatedRGUstogroware:
Mobilecustomerbasecontinuestodecline.MaxcomoffersmobiletelephonyviaalicensingagreementwiththelocalMexicanaffiliateofSpainsTelefnica.Mobiletelephonyhasalwaysbeen
anancillary
service
that
Maxcom
offered
to
its
fixed
line,
and
primarily
residential,
customers.
Its
beenuncompetitive.Presumably,customersprefertosubscribedirectlytoTelcelorotherwireless
carriers.
...asdocommercialclients.Aswementionedinourlastreport,MaxcomhasbeenunabletocompetewithotherTelmexandotherCLECsinattractingandretainingcommercialclients,andin
particular,largescalecommercialclients.ThecommercialRGUbaseshrank15%inFY10.Duringthe
1Q11conferencecall,managementmentionedthatitwasrollingoutnewserviceofferingsinefforts
toappealtosmallandmediumsizebusinesses.Weobservenoapparentfruityet.Thenumberof
commercialcustomershascontinuedtodecline,andin3Q11,wasdown10%yeartodate.Still,
GiventhedeclineinFY10,itsnotablethatthenumberofcommercialRGUsandrevenuesseemto
haveatleaststabilizedFY11todate,meaningthenumberofcustomersisdiminishingbutthisis
morethan
offset
by
higher
sales
to
the
customers
they
have.
Voiceinseculardecline.Finally,voiceRGUsareinslowbutsteadydecline.CommercialvoiceRGUsweredown8%YoYandresidentialRGUsdown3%YoY.Together,theycomprisethelargestpart
54% ofthetotalRGUbase,soifthisservicesegmentdoesntincrease,itsdifficulttogenerate
overallgrowthwhenothersegmentsarewaxing(TVandinternet)orwaning(commercialservices).
7/31/2019 Maxcom, Source Capital, November 2011
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Page8/24
Maxcomfurtherappearstobelosingvoicecustomersatafasterratethantherestofthemarket:
ChangeinVoiceRGUBaseSince3Q10
Source:CompanydisclosureandSourceCapitalGroupestimatesHowever,thisrateisnotegregiouslygreaterthanTelmexandAxtel,itsfixedlinepeers,inouropinion.
TheyrealllosingcustomersduetothesameseculartrendobservedhereintheUS:continued
defectionsfromfixedlinetelephonytomobile:
InternetandTVclientbaseisgrowing,andataratethatcomparesfavorablytotherestofthe
market.Wecontend,however,thatthedeclinesincommercialandmobileRGUs,anddisappointing
growthinresidentialfixedlineRGUs,aremitigatedbygrowthofdataandTVcustomers.Growthinthis
partof
the
customer
base
furthermore
compares
favorably
to
that
of
competitors:
ChangeininternetRGUBaseSince3Q10 ChangeinTVRGUBaseSince3Q10
Source:CompanydisclosureandSourceCapitalGroupestimatesTodate,growthindataandTVcustomershasnotoffsetthelossofvoicecustomers,becausethevoice
customerscontinuetoconstitutethelargestpartofthecustomerbase.IfTVanddatacustomergrowth
persists,theirgrowthcouldoutpacethelossofcommercialcustomers.
10%
5%
0%
5%
10%
15%
20%
25%
30%35%
3Q10 4Q10 1Q11 2Q11 3Q11
Maxcom Telmex Axtel Megacable Tvisa
0%
10%
20%
30%
40%
50%
60%
3Q10 4Q10 1Q11 2Q11 3Q11
Maxcom Telmex Axtel Megacable Tvisa
2%
0%
2%
4%
6%
8%
10%
12%
3Q10 4Q10 1Q11 2Q11 3Q11
Maxcom Megacable Tvisa
7/31/2019 Maxcom, Source Capital, November 2011
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Page9/24
RevenuesandARPUbyCustomerSegment
Residentialrevenuesdeteriorateslightly,wholesalerevenuesup,andothercustomersegmentsstable
overtheyeartodate.WefindMaxcomsomewhatmaddeninginsomeaspectsofitsdisclosure(though
itdoesntdoanyworsethansomepeersinthisregard).Thecompanydoesnotdecomposerevenuesor
marginsperservicesegment(i.e.telephony,data,TV),onlybycustomersegment(residential,
commercial,etc.).Thelatterisfarlessrevealing.Still,basedonthislimiteddisclosure,revenuesfrom
mosttypesofcustomershavebeenflatorindeclineoverthecourseoftheyear:
RevenuesandAverageRevenueperRGU
Source:CompanydisclosureandSourceCapitalGroupestimatesAnotableexceptioniswholesalerevenues,whichhaveincreasedsignificantly.ARPUinthiscaseisof
limitedvalue,however.Thebusinessoperatesaccordingtotrafficandminutesofuse(MOUs),which
thecompanydoesnotdisclose.Still,wecaninferthatwholesaletraffichasincreasedsignificantly.
(100)
100
300
500
700
900
1,100
1,300
1,500
1,700
50
100
150
200
250
300
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11e
Residential Commercial PublicTel
Wholesale ResidentialARPU(right) CommercialARPU(right)
PublicTelARPU(right) WholesaleARPU(right)
7/31/2019 Maxcom, Source Capital, November 2011
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Page10/24
EstimatingRevenuesandARPUbyServiceSegment
Asmentionedabove,Maxcomdoesnotdiscloserevenuesandmarginsaccordingtotelephony,TV,
internet,etc.Evenifthecompanydid,itmaynotbeveryinterestingbecausemuchoftherevenueis
somewhatfungible.Servicesaretypicallybundled,likeintripleplaypackages.Still,wesuspectthat,
inferringfrompeerdisclosure,Maxcomgenerates,asaveryroughapproximation,thefollowingEBITDA
contributionperbusinesssegment:
Source:Companydisclosure,peerdisclosure,andSourceCapitalGroupestimatesIf
the
foregoing
is
roughly
accurate,
voice
would
seem
avery
profitable,
if
declining,
business.
We
would
furtherconcludethatTVissignificantlylessprofitablethanotherservices,butisusefulasameansof
retaining/acquiringvoiceclientsviapackedservices.
Evolutionofbusinessmodelnotclear.TorepeatourselvesfromourMarchreport,itsnotcleartous
howtodefinethecompany.Typically,cableprovidershavebranchedintoofferingdata/voiceservicesin
additiontotheircoreTVservices.IsMaxcomaCLECthatiseffectingthissametransitioninreverse,
becomingacableserviceproviderasanyother?Inallcandor,wecanttell.
Voice 130 58%
Data 157 24%
Mobile 84 4%
TV 59 5%
Wholesale and Other NA 8%
7/31/2019 Maxcom, Source Capital, November 2011
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Page11/24
Industry
SelectIndustryPeers
CustomerandRGUdata3Q11orlatestavail;financialdataFY11eSource:CompanydisclosureandSourceCapitalGroupestimatesComparedtopeers,Maxcomremainsonthebasisofitscustomerbaseandrevenues.Intermsof
marginsand
profitability
per
customer
(EBITDA
per
RGU),
it
compares
favorably.
Its
furthermore
easily
thelowestvalued.
Competitorsacquisitiveandevolving.TheMexicantelecommunications/mediaspaceisasdynamicas
itsbeeninyears.Sinceourlastreport,inadditiontothesurprisingaforementionedreductioninfixed
tomobileinterconnectioncharges,thefollowingeventshavetakenplace:
TelevisaannouncedandexecutedtheacquisitionoftheremainingequityofCablemas,previouslya53%ownedcablesubsidiary.ThetransactionvaluedthecompanyatapproximatelyMXN11.2b,or
aboutUSD600persubscriber,accordingtoourestimates.
AmricaMvil,formersubsidiaryofTelmex,announcedthatitwouldcompletelysubsumeitsformerparent.ItsMexicanwirelessoperation,Telcel,isnowMexicosdominanttelephonyconcern.
Telmex,aspreviouslydescribed,continuestopetitiontheconcernedregulatoryauthoritiesforlicensestodistributeTV. MegacablealsoacquiredsomecablepropertiesinCentralMexico,adding44thousandvideo
subscribers,10thousandinternetsubscribersand2thousandfixedlinesubscribers.Megacablealso
addednearly700kmofcabledistributionnetwork,passing112,000homeswithanestimated
populationofover400thousand.ManagementdisclosedthatthevaluewasUSD700750per
subscriber.
Market Cap m USD 72 USD 13,641 USD 456 USD 1,668 USD 1,438 Televisa Sub Totl Tvisa Alfa Sub
Debt Rating Caa1/CCC+ A3/A- B3/B+ Ba3 Cbl Subs B1/B+Fiber Kms 6,426 112,570 11,000 39,687
Custs 247,669 757,000 1,912,940
Voice RGUs 296,505 15,127,000 1,040,000 474,000 231,700 248,713 609,832
Data/Internet RGUs 102,414 7,892,000 822,000 647,000 367,520 425,389 975,084
TV RGUs 54,452 - - 1,864,368 704,580 1,050,415 2,122,159 -
Total RGUs 552,781 23,019,000 1,862,000 2,985,368 1,303,800 1,724,517 3,707,075 887,000
Rev/RGU, monthly 358 395 486 228 444 224 305 440
EBITDA/RGU, monthly 119 159 164 96 156 86 108
Revs, (MXNm) 2,361 109,671 4,661 8,517 6,915 NA 13,129 4,686
EBITDA 793 44,139 1,492 3,644 2,146 NA 4,464 1,587
EBITDA margin 33.6% 40.2% 32.0% 42.8% 31.0% NA 34.0% 33.9%
EBITDA/Int Exp 2.5x 15.0x 3.7x 44.7x 7.1x NA NA 4.7x
Net Debt/EBITDA 2.9x 1.6x 2.3x -0.3x 0.3x NA NA 1.4x
FCF 33 15,266 208 1,634 93 NA NA
EV/Rev 1.0 2.3 1.3 2.7 2.9 NA NAEV/EBITDA 3.1 5.7 4.1 6.3 9.5 NA NA
EV/Gross PP&E 0.3 0.6 0.4 1.7 1.4 NA NA
EV/Net PP&E 0.6 2.6 1.0 2.8 2.3 NA NA
EV/NW 0.9 5.0 2.0 1.7 3.2 NA NA
PE (2.4) 12.3 (16.6) 12.0 62.5 NA NA
PB 0.4 3.8 0.9 1.8 3.1 NA NA
FCF Yield 3.4% 7.4% 3.3% 6.8% 0.6% NA NA
EV/RGU 4,363 10,868 7,550 7,448 15,164 6,327 NA
EV/Cust 9,600 19,129 11,737
7/31/2019 Maxcom, Source Capital, November 2011
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NobodyneedsMaxcom,butwethinkthatanumberofserviceproviderswouldliketohaveit.Webase
partofourvaluationofMaxcomonitsattractivenessasanacquisitioncandidate.Ourthesishere
remainsthesame.Fromacompetitiveorconsolidationstandpoint,Maxcomisattractiveandcheap.We
notethatTelevisaalonehas,throughthefirstninemonthsofthisyear,putcapexofMXN3.1bintoits
cableoperations.Thisamountis30%greaterthanMaxcomsentireenterprisevalueatNovember18.
Suchconsolidationisofcourseimpossibletotime.WenotethatperMegacablesmanagementduring
their3Qearningscall:
Wellthereisnotverymuchmarketsizeorsmaller,orlargeorsmalloperatorstobeacquired
anymore.[Wevebeen]thinkingforthepasttwoyearsthatconsolidationshouldbefasterand
we[]stillexpectthat.
Capitalization
Source:CompanydisclosureandSourceCapitalGroupestimatesMaxcommust,inouropinion,continuetolivebyitscashbalance.Maxcommaynotpresentlyincur
additionaldebtthatisseniororparipassutothenotes,subjecttoaleverageratiointhebond
indenture.OurreadingoftheindenturesuggeststousthatMaxcomcouldobtainsubordinated
debtHowever,thecurrentmarketpriceofitsseniordebtrendersthisunlikely,inouropinion.Recallthat
anyequityparticipationassociatedwithmezzaninedebtwouldbecomplicatedbythatpeskyrule
wherebynonMexicanshareholdersarelimitedto49%votinginterestinterrestrial
telecommunicationsnetworks.Inshort,liquiditywillremaintightatleastuntilthecurrentnotescanbe
refinancedor
exchanged.
Book % Debt/ Mkt Mkt
value Total EBITDA Price Value
Cash 444,112 16% 444,112Investments 92,633 3% 92,633
Other Debt (assumed senior) 98,790 4% 0.1x 100% 98,790
11% Notes due 12/2014 2,684,340 96% 3.5x 60% 1,610,604
Total Debt 2,783,130 100% 3.6x 61% 1,709,394
Net Debt 2,246,385 81% 2.9x 52% 1,172,649
Equity 2,667,333 49% MXN 3.65 1,014,160
Total Capzn 5,450,463 100%
7/31/2019 Maxcom, Source Capital, November 2011
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Page13/24
UpdatedFinancialProjectionsandValuation
Ouropinionisunchanged:WethinkMaxcomwillsurvive.Wethinkthatthecompanyhasaliquidity
problem,notasolvencyproblem,andtheriskisthusoneofrefinancing.Wehave,however,
reconsideredtheweightingofourdecisiontreeanalysis.Thisisnotbasedonanychangeinthe
performanceofthecompanyorthemarketpricesforassets.Infact,webaseourchangeonour
suspicionthatcreditorsmightbeinastrongerpositionthanwethoughtpreviously.
ScenarioAnalysis
Wethinkitmostefficienttovaluethebondsonadecisiontreemanner,perthefollowingscenariosand
whatwebelievetobetheirrespectiveprobabilities:
1. Muddlethrough:bondstradeupandarerefinanced:probability25%(previously29%)2. Acquisition:20%(20%)3. Defaultandrestructuring:25%(20%)4. Consensualrestructuring,e.g.anexchangeoffer:30%(31%)
Andyes,
we
are
recommending
bonds
that
have
anet
likelihood
of
being
restructured.
Muddlethrough:probability25%
Wethinkourbasecaseaconservativeone.Wevetweakedittoaccountforthelastthreequartersof
performance,buttheconclusionremainsthesame.WeassumethatTVandinternetRGUscontinueto
increase,whilemobileandcommercialRGUsdecline,resultinginoverallflatRGUlevels.Revenuesand
EBITDAdecline13%and26%,respectively.Webasethelatteronslightmargincompressionpresuming
recentinterconnectionratereductionsarepassedontothecustomer.Ourcapexspendingestimate
remainsUSD28mvs.guidanceofUSD25m.
Projectionsundemandingandsuggestissueisoneofliquidity,notsolvency.Ourprojectionssuggest
that
the
company
would
achieve
FCF
neutral
and
that
the
company
has
liquidity
issue,
and
not
a
solvencyissue.Thecatalysttoadeclineinyieldssuchthatthebondcouldberefinancedisthe30%yield
currentlyonoffer.Wenotethatonarelativevaluebasis,Maxcomsnotesyieldmorethan15,000
20,000basispointsmorethanbondshavingwhatwedeemtobeonlyslightlystrongercreditmetrics.
Pleaseseetherelativevaluesectionlaterinthisreport.
Bondrepurchaseanoptionandpotentialcatalyst.Itwassuggestedduringthe3Q11conferencecallthe
companyconsiderrepurchasingsomeofitsdebt;thatatyieldsof30%,itsunlikelythecompanywould
findauseforthecashthatwouldbemoreprofitableonanIRRbasis.Weagreewiththatassessment
entirely.Butdisagreethatitshouldbedoneinthenearterm.ThebondsmatureinDecember,2014,or
threefullyearsfromnow.Refinancingdoesntbecomeapressingissuefortwoyears.Untilthen,the
companyshould,inouropinion,useitscashbalanceforrunningthebusinessandmaintainingamargin
offinancial
safety.
7/31/2019 Maxcom, Source Capital, November 2011
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Page14/24
Comecrunchtime,abondrepurchaseshouldbefeasible.Weestimatethatthecompanycouldbuilda
cashbalanceofaboutMXN500m,orUSD38m(atMXN13.5/USD)byFYE13.Ifatthattimebondprices
remainstubbornlylow,sayinthe80s,implyingayieldof~40%,thenthecompanycoulduseaportionof
thatcashbalancetorepurchasebonds.UsingUSD20mofitscashbalancecouldreduceoutstanding
debtbyUSD25m.Theactioncouldnotonlycatalyzebondyieldstodecline,butalso,duetothereduced
debtoutstanding,makingrefinancingmoreappealingtobanks.
Finally,thereismoneyoutthere.OnNovember17,2011,competitorAxtel(B3/B+)obtaineda
USD100msyndicatedcreditfacilty.
WefeelthatifMaxcomdemonstratesthatitisexecutingonitsbusinessplanandthevalueelsewherein
themarket,thebondscouldtradetopar.WethinkthatthemostMaxcomwould(orcould)everpayon
newbondsis12.5%.Thiswouldimplyapriceof95.5ontheexistingnotes.
Acquisition:20%
Maxcomwantstobeacquired.Weretemptedtoqualifythatasouropinion,butwethinkthatsthe
objectivetakeawayfromthepubliccommentsofmanagement.
Asbefore,weruleoutforeignbuyers(suchasSpainsTelefnica,withwhomithasanagreementto
providemobileservices)asthiswouldalmostcertainlyrequireliftingtherulelimitingnonMexican
shareholdersto49%votinginterestinterrestrialtelecommunicationsnetworks.Changingthelawhas
beendebatedformanyyears.Butanychangewouldnotbeintheinterestofinfluential,entrenched
incumbents,inouropinion.Ataminimum,wedontseethelawchangingbeforeMaxcomsbonds
mature.Still,wesuspectthatMaxcomsassetsaredesirableenoughtobeanattractiveacquisition
andsmallenoughtobeafeasibleacquisition.RecallfromourpeeranalysisthatMaxcomisthelowest
valuedtelephonyproviderofanysize.Thebondshaveachangeofcontrolputat101,whichisour
targetpriceinanacquisitionscenario.
Default
and
restructuring:
25%
Weveincreasedtolikelihoodofthisscenarioto25%from20%notbecauseofanychangestoour
perceptionofthecompanysperformance.Instead,wethinkthatinvestorsmaybestronger,andthus
theprospectofanadversarialrestructuringmoreappealing,thanwepreviouslythought.
Wereuncertainhowtheownershiplimitationwouldbeenforced.Firstly,werenotsurehowthe
ownershiplimitationmaybeenforcedintheeventofdefaultandaccelerationofpayments.Would
creditorscumequityholdersbecompletelyunabletoasserttheirclaims?Mighttheyhavesixor18
monthstocomplywiththelimitation(i.e.divesttheirequityholdings)?Toourknowledge,therulehas
notbeentested.
Theremaybecreativewaystocomplywiththelimitation.Secondly,wethinkthatforenterprisingand
collaborativecreditors,
there
may
be
away
to
take
aleading
role
of
the
bankruptcy
process.
There
is
precedenceforUSinvestorstohavealeadingeconomicinterest,thoughnotamajorityvotinginterest,
inaMexicanterrestrialtelecommunicationsconcern:Alestra.
7/31/2019 Maxcom, Source Capital, November 2011
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Page15/24
Inthe1990s,Alestrawasconceivedbyitsshareholdersas,amongotherthings,anAT&TofMexico,
fromwhichtheUSparentwouldbenefituponliberalizationoftheMexicantelecommunicationssector.
Thatliberalizationtooklongerthanexpected.Theoriginalshareholderstructurewasasfollows:
Source:CompanydisclosureandSourceCapitalGroupestimatesAT&Tcontributed49%oftheoriginalcapital.Twolocalpartnerscontributedthebalanceofequityviaan
intermediaryholdingcompany.Alfa,aconglomeratewithinterestsin,amongotherthings,foodand
autoscontributedtheslightmajorityofequitytotheholding,withtheMexicanbankBancomer
contributingthebalance.AT&Tcouldthusclaimthelargesteconomicinterestofthethreepartners.
Fortherecord,thecompanylaterdefaultedonthetwobondissuesaggregatingUSD570m.Ina
restructuring,theshareholderskickedinadditionalequityandnewdebtwasissued.
Inthecontextofanaccelerationofpayments,nonMexicanbondholdersmightbeabletoobtaina
controllingportionofthedebtviaasimilararrangement,andstillcomplywiththelimitation.The
arrangement,ofcourse,wouldtakecreativityandcollaborationamongcreditors.Still,wethink
interestedandcapablepartiescouldbefound.
7/31/2019 Maxcom, Source Capital, November 2011
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Page16/24
Ifoperatingperformancedeterioratesmoremarkedlythanwecurrentlyexpect,thereissubstantial
assetvalueinthecompanyevenintheeventofinsolvency.
MarketMultiples
Intheforegoingweusethelowestofpeermultiples(whichareinmostcasesthoseofAxtel).The
resultingvalues
suggest
that
there
is
plenty
of
value
to
cover
the
notes.
SustainableDebt:
Source:CompanydisclosureandSourceCapitalGroupestimatesInourlastanalysis,weestimatedthatMaxcomcouldproduceaboutMXN200minunleveredfreecash
flowperyearbasedonthenearlyMXN120minunleveredfreecashflowitgeneratedinFY10andits
plantocutcapexbyhalf.Suchestimatessuggestedapriceof64onthenotes.
WenowhavetoaccountforthecompanysimprovingEBITDAmarginby700bpstonearly34%onthe
backoflowerinterconnectioncosts.WeestimatethatevenifEBITDAmargindeclinesto28%,the
companyshouldstillbeabletogenerateMXN300mperyear.Weestimatethatthisamountofcash
flowcould,atcurrentinterestrates(i.e.11%),support98%ofthecurrentlyoutstandingfacevalueof
thenotes.
Sayaswell,however,thatonceacompanyhasmorecash,itfindsawaytospendit.Itmightbetempted
toincreasecapexmarginally,especiallygiventhecompetitivenatureofthemarket.Assuch,we
contendthatlongtermunleveredFCFgenerationofMXN250misfeasible,suggestingapriceof81.
Mult Implied EV Sen Claims Avail for Notes Implied Price
1 EV/Rev 1.3 3,131,542 (530,958) 2,600,584 932 EV/EBITDA 4.1 3,213,634 (530,958) 2,682,676 96
3 EV/Gross PP&E 0.4 3,905,764 (530,958) 3,374,806 121
4 EV/Net PP&E 1.0 3,990,526 (530,958) 3,459,568 124
5 EV/NW 1.7 4,511,474 (530,958) 3,980,515 142
6 EV/RGU 6,327 3,528,661 (530,958) 2,997,703 107
7 EV/Cust 11,737 2,975,594 (530,958) 2,444,636 87
All values per Source Capital Group FY11 estimates, unless otherwise indicated
1, 2, 3, 4, 5 per Axtel; 6: per Cablemas; 7 per recent Megacable acquisition value.
Sen Claims includes pensions, taxes, vendor financing and AP, though some is likely parri passu
Unlevered FCF
150,000 175,000 200,000 225,000 250,000 275,000 300,000 325,000
8% 66 78 89 101 113 124 136 148
9% 58 69 79 89 100 110 120 131
Cost 10% 52 62 71 80 89 99 108 117
of 11% 47 56 64 73 81 89 98 106
Funds 12% 43 51 58 66 74 82 89 97
13% 39 46 54 61 68 75 82 89
14% 36 43 50 56 63 69 76 83
7/31/2019 Maxcom, Source Capital, November 2011
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Page17/24
LiquidationAnalysis:
Anynotionofliquidationisalongwayoff.Besides,wethinkthecompanywillcontinuetoserviceits
debtthroughmaturity.Refinancingistheissue.Still,wedontthinkthatconstructingaFY12ebalance
sheetisastretchgivenwhatweconsidertobethefixednatureofthecompanysbalancesheet:
Source:CompanydisclosureandSourceCapitalGroupestimatesIfthecompanyrestructures,itllbetheFY14orevenFY15balancesheetwellbeconcernedabout.
Notwithstanding,theexercisedemonstratesthatthereisplentyofassetvalueinthenotes.
Assets
Cash 470,661 0% - (assume exhausted)
AR 750,488 70% 525,342
Inventories 18,390 50% 9,195
Prepaid 26,829 20% 5,366
VAT AR 182,440 80% 145,952
Other CA 45,655 0% -
Total CA 1,494,463 685,854
- -
Investments 92,633 0% -
Deferred Tax Asset - -
- - -
Gross PP&E 9,709,207 -
Accum Dep (5,909,416) -
Net PP&E 3,799,791 50% 1,899,895
Intangibles 164,803 0% -
Frequency Rights 42,420 0% -
Other 2 9,771 0% -
Total LTA 4,109,418 1,899,895
Less Liabilities:
Claims Senior to Notes (assumes pensions, taxes, vendor financing and AP are treated preferentially)
STD (& Accrued FY11e Coupons) 18,861 100% 18,861
AP 321,673 100% 321,673
Accrued 108,387 100% 108,387
Other CL 1,910 100% 1,910
Other Debt 5,656 100% 5,656
LT AP 41,831 100% 41,831
Def'd tax liabs - 100% -
Pensions 35,076 100% 35,076
Notes 2,743,125 100% 2,743,125 98% 2,014,390 73
Other LTL 51,699 100% 51,699 2% 37,965 73
100% 2,052,355 73
7/31/2019 Maxcom, Source Capital, November 2011
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Page18/24
Consensualrestructuring,e.g.anexchangeoffer:30%
Maxcomhasdoneitbefore.InOctober,2001,MaxcomhiredCreditSuissetorestructureitsUSD250m
ofdebtthatwas,atthetime,tradingatabout20.PleaseseeourMarchreportforadditional
information.
Estimatingthepriceatwhichanexchangecouldgetdoneismoreartthanscience.Itwouldbeaprice
belowthemaximumyieldatwhichthebondscouldberefinanced,andyetabovewhatbondholderscouldobtainbyotherwisefightingfortheassets.Wevealreadypositedthattheformerpriceas95.5
andthelatterasanywherefrom73towelloverpar.Weposit85,representingayieldof16.5%,asthe
priceintheeventofabondexchange.
Conclusion
Weightingourscenariosandpricesasdescribed,thebondswouldbeunderpriced:
Source:CompanydisclosureandSourceCapitalGroupestimatesLimiteddownside.Thebreakevenpriceonthenotesinayearis51(thecurrentpriceof62lessthe11%
coupon).The
breakeven
price
in
two
years
is
40.
Atcurrentindicativepricesinthe60s,atyieldsofupwardsof30%,wefindthatthebondshave
compellingupsideandlimiteddownside.
Muddle through: 25% 96 24
Acquisition 20% 101 20
Default and Restructuring:
Market multiples 96
Sustainable debt 81
Liquidation 73
MINIMUM 25% 73 18
Consensual restructuring 30% 85 26
7/31/2019 Maxcom, Source Capital, November 2011
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Page19/24
RelativeValue
Spreadtocomparablebondissuesoverdone.MaxcomsbondsarecomparativelyratedtoDigicel,and
theircreditsupportisnotsignificantlyweakerthanAxtels.However,theytrade24,000and21,000
widerthaneach,respectively.Wefindthisoverdone.
Source:CompanydisclosureandSourceCapitalGroupestimates
Source:CompanydisclosureandSourceCapitalGroupestimatesOnarelativevaluebasis,Maxcomsbondsarewellwideofwhatwedeemtobesimilarissues,thus
offeringcompellingvalueatcurrentprices.
YTM
Modified Duration
Maxtel112014
Axtel7.6252017 Axtel92019
Tza7.52018Nihd8.8752019Nihd102016
Alestr11.752014Dlltd122014
Dlltd8.8752015
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1.0 2.0 3.0 4.0 5.0 6.0
Maxtel 11 2014 62.2 2.1 33.3 199.5 Caa1 / CCC+ 2.5x 2.9x 33
Axtel 7.625 2017 84.5 4.0 11.7 275.0 B3 / B+ 3.7x 2.3x 208
Axtel 9 2019 86.0 5.2 11.8 490.0 B3 / B+ 3.7x 2.3x 208
Tza 7.5 2018 100.6 4.3 7.4 300.0 WR / NR 5.3x 0.5x 1,060
Nihd 8.875 2019 106.6 4.5 7.8 500.0 B2 / 5.8x 0.7x (1,761)
Nihd 10 2016 113.0 1.6 6.7 800.0 B2 / 5.8x 0.7x (1,761)
Alestr 11.75 2014 111.3 2.3 7.1 194.4 B1 / B+ 4.7x 1.4x NA
Dlltd 12 2014 111.1 2.0 6.8 585.0 B1 / NA NA NA
Dlltd 8.875 2015 99.5 2.6 9.0 1,000.0 Caa1 / NA NA NA
Dlltd 9.125 2015 101.5 1.0 8.6 415.1 Caa1 / NA NA NA
Dlltd 8.25 2017 101.5 3.1 7.9 800.0 B1 / NA NA NA
7/31/2019 Maxcom, Source Capital, November 2011
20/24
Source: ompanydisclos reandSourceC pitalGroupesti ates
7/31/2019 Maxcom, Source Capital, November 2011
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Source: ompanydisclos reandSourceC pitalGroupesti ates
7/31/2019 Maxcom, Source Capital, November 2011
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Source: ompanydisclos reandSourceC pitalGroupesti ates
7/31/2019 Maxcom, Source Capital, November 2011
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Source: ompanydisclos reandSourceC pitalGroupesti ates
7/31/2019 Maxcom, Source Capital, November 2011
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ResearchDisclosure
Theanalysttheauthorofthisreportdidnotreceivecompensationfromthecompaniesmentioned
hereinforhisorherwork.
Theopinionsandrecommendationsexpressedwithinthisreportarethoseoftheanalyst.
Theanalystdoesnothaveapositioninthesecurityonwhichthisreportprovidesarecommendation.
SourceCapitalGrouphasnotperformedpaidinvestmentbankingservicesforthesecuritysissuer.
Informationinthispublicationhasbeenobtainedfromsourcesbelievedtobeaccurateandreliable;
however,wedonotguaranteetheaccuracy,adequacyorcompletenessofanyinformationandarenot
responsibleforanyerrorsoromissionsorfortheresultsobtainedfromtheuseofsuchinformation.
Redistributionorreproductionofthisreportisprohibitedwithoutwrittenpermission.