Important notice IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the attached offering memorandum (the “Offering Memorandum”), and you are therefore advised to read this disclaimer page carefully before reading, accessing or making any other use of the attached Offering Memorandum. In accessing the attached Offering Memorandum, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access. Confirmation of Your Representation: In order to be eligible to view this Offering Memorandum or make an investment decision with respect to the securities offered therein, you must: (i) not be a U.S. person (as defined in Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”)), and be outside the United States; or (ii) be a qualified institutional buyer (as defined in Rule 144A under the Securities Act). You have been sent the attached Offering Memorandum on the basis that you have confirmed to each of the initial purchasers set forth in the attached Offering Memorandum (collectively, the “Initial Purchasers”), being the sender or senders of the attached Offering Memorandum, that either: (A)(i) you and any customers you represent are not U.S. persons; and (ii) the e-mail address to which this Offering Memorandum has been delivered is not located in the United States, its territories and possessions, any state of the United States or the District of Columbia; “possessions” include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands; or (B) you and any customers you represent are qualified institutional buyers and, in either case, that you consent to delivery of the attached Offering Memorandum by electronic transmission. This Offering Memorandum has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of transmission and, consequently, none of Millicom International Cellular S.A., the Initial Purchasers, any person who controls any Initial Purchaser, or any of their respective subsidiaries, nor any director, officer, employer, employee or agent of theirs, or affiliate of any such person, accepts any liability or responsibility whatsoever in respect of any difference between the Offering Memorandum distributed to you in electronic format and the hard copy version available to you on request from the Initial Purchasers. You are reminded that the attached Offering Memorandum has been delivered to you on the basis that you are a person into whose possession this Offering Memorandum may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not nor are you authorized to deliver this Offering Memorandum to any other person. You will not transmit the attached Offering Memorandum (or any copy of it or part thereof) or disclose, whether orally or in writing, any of its contents to any other person except with the consent of the Initial Purchasers. Restrictions: Any securities to be issued will not be registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act) except to (i) qualified institutional buyers in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A or (ii) non-U.S. persons in offshore transactions in reliance on Regulation S. This communication is directed solely at persons who (i) are investment professionals, as such term is defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Financial Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any Notes (as defined in the attached Offering Memorandum) may otherwise be lawfully communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). Any investment or investment activity to which the attached Offering Memorandum relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on the attached Offering Memorandum or any of its contents. OFFERING MEMORANDUM NOT FOR GENERAL DISTRIBUTION IN THE UNITED STATES CONFIDENTIAL
Millicom International Cellular S.A. $500,000,000 4.750% Senior Notes due 2020 Millicom International Cellular S.A. (the “Issuer”) is offering $500,000,000 aggregate principal amount of its 4.750% Senior Notes due 2020 (the “Notes”). The Issuer will pay interest on the Notes semi-annually on each May 22 and November 22, commencing on November 22, 2013. The Notes will mature on May 22, 2020. The Issuer may redeem some or all of the Notes at any time prior to May 22, 2017 at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest and additional amounts, if any, to the redemption date and a “make whole” premium and at any time on or after May 22, 2017 at the redemption prices set forth in this offering memorandum plus accrued and unpaid interest and additional amounts, if any, to the redemption date. In addition, at any time on or prior to May 22, 2016, up to 35% of the aggregate principal amount of the Notes may be redeemed with the net proceeds of certain equity offerings, including certain equity offerings of our subsidiaries or from the sale of certain specified assets at a redemption price equal to 104.750% of the principal amount thereof plus accrued and unpaid interest and additional amounts, if any, to the redemption date if at least 65% of the originally issued aggregate principal amount of the Notes remains outstanding. All of the Notes may also be redeemed at 100% of their principal amount plus accrued interest to the redemption date upon the occurrence of certain changes in applicable tax law. Upon the occurrence of certain change of control events and a ratings decline, each holder of the Notes may require the Issuer to repurchase all or a portion of its Notes. The Notes will be senior obligations of the Issuer and will rank pari passu in right of payment with all of the Issuer’s existing and future indebtedness and senior in right of payment with all of the Issuer’s existing and future subordinated indebtedness. There is currently no public market for the Notes. Application has been made to list the Notes on the Official List of the Luxembourg Stock Exchange and to admit the Notes for trading on the Euro MTF Market; however, this offering memorandum cannot be considered as either a listing document or a prospectus approved by either the Luxembourg Commission de Surveillance du Secteur Financier or the Luxembourg Stock Exchange. Investing in the Notes involves a high degree of risk. You should consider carefully the risk factors beginning on page 19 of this offering memorandum before investing in the Notes.
Price: 99.266% plus accrued interest, if any, from the issue date.
The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any other jurisdiction. Unless they are registered, the Notes may be offered only in transactions that are exempt from registration under the Securities Act or the securities laws of any other jurisdiction. Accordingly, the Notes are being offered and sold only to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S under the Securities Act. For further details about eligible offerees and resale restrictions, see “Transfer Restrictions.” We expect that the Notes will be delivered to investors in book-entry form through The Depository Trust Company, Euroclear and Clearstream on or about May 22, 2013. Interests in each global note will be exchangeable for the relevant definitive notes only in certain limited circumstances. See “Book-Entry, Delivery and Form.” Joint Global Co-ordinators and Joint Bookrunners J.P. Morgan Standard Bank
Joint Bookrunner BNP PARIBAS The date of this offering memorandum is May 17, 2013. Central America: South America: Africa: Total population: 39m 63m 186m 288m
Guatemala 14m Honduras 8m Nicaragua 6m Senegal 13m Chad 11m
Ownership: 55.0% Ownership: 66.7% AMNET Ownership: 100% Ownership: 100% Mobile market position: #1 of 3 Mobile market position: #1 of 4 Ownership: 100% Market position: #2 of 4 Market position: #1 of 3 Customers: 8.3m Customers: 4.9m Operations: cable Customers: 2.7m Customers: 2.0m Operations: mobile, cable Operations: mobile, cable Operations: mobile Operations: mobile
El Salvador 6m Ghana 25m
Ownership: 100% Ownership: 100% Mobile market position: #1 of 5 Make position: #2 of 3 Customers: 3.3m Customers: 3.2m Operations: mobile, cable Operations: mobile
Costa Rica Tanzania 48m 5m Ownership: 100% AMNET Market position: #2 of 7 Ownership: 100% Customers: 6.1m Operations: cable Operations: mobile
Colombia 46m Rwanda 12m
Ownership: 50% + 1 share Ownership: 87.5% Market position: #3 of 3 Market position: #2 of 3 Customers: 6.0m Customers: 1.5m Operations: mobile Operations: mobile
Democratic Republic of Bolivia 10m Paraguay 7m the Congo 76m Mauritius 1m
Ownership: 100% Ownership: 100% Ownership: 100% Ownership: 50.0% Market position: #2 of 3 Mobile market position: #1 of 4 Market position: #1 of 6 (KBC region) Market position: #2 of 3 Customers: 2.9m Customers: 4.1m Customers: 2.9m Customers: 0.5m Operations: mobile Operations: mobile, cable Operations: mobile Operations: mobile
Information presented is as of March 31, 2013. See "Industry, market and subscriber data" for a discussion of how we calculate market position. Table of contents Important information about this Our markets and our industry ...... 85 offering memorandum ...... ii Our business ...... 106 Industry, market and subscriber data . . . vi Telecommunications regulations ...... 131 Trademarks ...... vii Major shareholders and related party Cautionary statement regarding transactions ...... 137 forward-looking statements ...... viii Management ...... 142 Presentation of financial and other Description of other indebtedness ..... 150 information ...... x Description of the Notes ...... 158 Summary ...... 1 Book-entry, delivery and form ...... 194 The offering ...... 11 Transfer restrictions ...... 199 Summary historical financial Tax considerations ...... 203 information and operating ERISA considerations ...... 211 information ...... 14 Certain insolvency considerations ...... 213 Risk factors ...... 19 Plan of distribution ...... 217 Use of proceeds ...... 39 Legal matters ...... 221 Capitalization ...... 40 Independent auditors ...... 222 Selected historical financial and other Service of process and enforcement of data ...... 41 judgments ...... 223 Management’s discussion and analysis Listing and general information ...... 225 of financial condition and results of Glossary ...... 228 operations ...... 45 Index of financial statements ...... F-1
i Important information about this offering memorandum The Issuer, having made all reasonable inquiries, confirms that the information contained in this offering memorandum with regard to us is true and accurate in all material respects, that the opinions and intentions expressed in this offering memorandum are honestly held, and that there are no other facts the omission of which would make this offering memorandum as a whole or any of such information or the expression of any such opinions or intentions misleading in any material respect. We accept responsibility accordingly. You should rely only on the information contained in this offering memorandum. We have not, and J.P. Morgan Securities plc, Standard Bank Plc and BNP Paribas (the “Initial Purchasers”) have not, authorized any other person to provide you with information that is different. The information in this offering memorandum is accurate only as of the date on the front cover of this offering memorandum or otherwise as of the date specifically referred to in connection with the particular information. Our business, prospects, financial condition and results of operations may have changed since that date. Neither the delivery of this offering memorandum nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the date hereof or that the information contained herein is correct as of any time subsequent to its date. This offering memorandum summarizes certain material documents and other information, but references are made to the actual documents for complete information. All such summaries are qualified in their entirety by such references. The Notes have not been and will not be registered under the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Notes are not transferable except in accordance with the restrictions described herein. See the sections headed “Plan of Distribution” and “Transfer Restrictions” in this offering memorandum. You are hereby notified that sellers of the securities, including the Notes, may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. This offering memorandum is being provided for informational use solely in connection with consideration of a purchase of the Notes (i) to U.S. investors that the Issuer reasonably believes to be qualified institutional buyers as defined in Rule 144A under the Securities Act, and (ii) to certain persons in offshore transactions complying with Rule 903 or Rule 904 of Regulation S under the Securities Act. Its use for any other purpose is not authorized. This offering memorandum may not be copied or reproduced in whole or in part nor may it be distributed or any of its contents be disclosed to anyone other than the qualified institutional buyers described in (i) above or to persons considering a purchase of the Notes in offshore transactions described in (ii) above. This offering memorandum does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates, and this offering memorandum does not constitute an offer to sell or the solicitation of an offer to buy such securities by any person in any circumstances in which such offer or solicitation is unlawful. In particular, the terms and conditions relating to this offering memorandum have not been approved by and will not be submitted for approval to the Luxembourg Financial Services Authority (Commission de Surveillance du Secteur Financier) for the purposes of a public offering or sale in or from Luxembourg. Accordingly, the Notes may not be offered or sold to the public in Luxembourg, directly or indirectly, and neither this offering memorandum nor any other circular, prospectus, form of application, advertisement, communication or other material may be distributed, or otherwise made available in or from, or published in, Luxembourg except in circumstances where the offer is made in accordance with applicable law and regulations and, in particular, where such offer benefits from an exemption to or constitutes a transaction otherwise not subject to the requirement to publish a prospectus for the purpose of the Luxembourg law dated July 10, 2005 on prospectuses for securities, as amended from time to time (the “Prospectus Law”). In addition, there may be legal restrictions on the distribution of this offering memorandum, this
ii offering and the sale of the Notes in certain jurisdictions. If you come into possession of this offering memorandum, we and the Initial Purchasers require that you inform yourself about and observe any such restrictions. The Notes are subject to restrictions on sale and resale and transfer, as described under “Plan of Distribution” and “Transfer Restrictions” in this offering memorandum. You may be required to bear the financial risks of investing in the Notes for an indefinite period of time.
Neither the U.S. Securities and Exchange Commission (the “SEC”), nor any state securities commission in the United States has approved or disapproved of these securities or determined if this offering memorandum is truthful, complete or adequate. Any representation to the contrary is a criminal offense.
Each person receiving this offering memorandum acknowledges that: (i) such person has been afforded an opportunity to request from us and to review, and has received, all additional information considered by it to be necessary to verify the accuracy of, or to supplement, the information contained herein; (ii) such person has not relied on the Initial Purchasers, the Trustee or the Agents or any person affiliated with the Initial Purchasers, the Trustee or the Agents in connection with any investigation of the accuracy of such information or its investment decision; and (iii) no person has been authorized to give any information or to make any representation concerning us, our subsidiaries and affiliates or the Notes (other than as contained herein and information given by our duly authorized officers and employees in connection with investors’ examination of us and the terms of the offering of the Notes) and, if given or made, any such other information or representation should not be relied upon as having been authorized by us or the Initial Purchasers.
This offering memorandum is confidential. You should not reproduce or distribute this offering memorandum, in whole or in part, and should not disclose any of its contents or use any information in this offering memorandum for any purpose other than considering an investment in the Notes. However, notwithstanding any provision in this offering memorandum or any agreement to the contrary, the Initial Purchasers, each holder and offeree (and their respective employees, representatives and other agents) may disclose to any and all persons, without limitation of any kind, the U.S. federal income tax treatment and tax structure of the Notes and all materials of any kind (including opinions or other tax analyses) that are provided by us or the Initial Purchasers relating to such tax treatment and tax structure, except where confidentiality is reasonably necessary to comply with securities laws.
We are furnishing this offering memorandum solely for the purpose of enabling you to consider the purchase of the Notes. You should not consider this offering memorandum to be legal, business or tax advice. In making an investment decision, you must rely on your own examination of us and the terms of the offering, including the merits and risks involved. If you are in any doubt about this offering memorandum, you should consult your legal counsel, professional accountant or other professional advisors. We have provided the information contained in this offering memorandum and have also relied on other identified sources. The Initial Purchasers make no representation or warranty, express or implied, as to the accuracy or completeness of such information, and you should not rely on anything contained in this offering memorandum as a promise or representation by the Initial Purchasers whether as to the past or the future. By accepting delivery of this offering memorandum, you agree to these terms. You are responsible for making your own examination of us and your own assessment of the merits and risks of investing in the Notes.
We reserve the right to withdraw the offering of the Notes at any time, and the Initial Purchasers reserve the right to reject any commitment to subscribe for or purchase the Notes in whole or in part and to allot to any prospective purchaser less than the full amount of purchase of the Notes sought by such purchaser. The Initial Purchasers and certain related entities may acquire for their own account a portion of the Notes.
The Issuer has prepared this offering memorandum solely for use in connection with this offering and for applying to the Luxembourg Stock Exchange for the Notes to be admitted to listing on
iii the Official List of the Luxembourg Stock Exchange and to trading on the Euro MTF market. The Issuer cannot guarantee that its application for the admission of the Notes to trading on the Euro MTF market and to listing of the Notes on the Official List of the Luxembourg Stock Exchange, will be approved as of the settlement date for the Notes or at any time thereafter, and settlement of the Notes is not conditioned on obtaining this listing. The Luxembourg Stock Exchange takes no responsibility for the contents of this offering memorandum, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this offering circular.
In the United States, you may not distribute this offering memorandum or make copies of it without the Issuer’s prior written consent other than to people you have retained to advise you in connection with this offering.
IN CONNECTION WITH THIS OFFERING OF NOTES, J.P. MORGAN SECURITIES PLC MAY OVER- ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT J.P. MORGAN SECURITIES PLC WILL UNDERTAKE ANY SUCH STABILIZATION ACTION. SUCH STABILIZATION ACTION, IF COMMENCED, MAY BEGIN ON OR AFTER THE DATE OF ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES AND MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 CALENDAR DAYS AFTER THE DATE ON WHICH THE ISSUER RECEIVED THE PROCEEDS OF THE ISSUE AND 60 CALENDAR DAYS AFTER THE DATE OF ALLOTMENT OF THE NOTES.
U.S. Treasury Department Circular 230 disclosure PURSUANT TO U.S. TREASURY DEPARTMENT CIRCULAR 230, YOU ARE HEREBY INFORMED THAT ANY DISCUSSION HEREIN OF U.S. FEDERAL TAX ISSUES WAS NOT INTENDED OR WRITTEN TO BE USED, AND SUCH DISCUSSION CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER UNDER THE U.S. INTERNAL REVENUE CODE OF 1986, AS AMENDED. SUCH DESCRIPTION WAS WRITTEN IN CONNECTION WITH THE MARKETING BY THE ISSUER OF THE NOTES. TAXPAYERS SHOULD SEEK ADVICE BASED ON THE TAXPAYERS’ PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
Notice to New Hampshire residents NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
Notice to U.S. investors Each purchaser of the Notes will be deemed to have made the representations, warranties and acknowledgements that are described in this offering memorandum under “Transfer Restrictions.” The Notes have not been and will not be registered under the Securities Act or the securities laws of any state of the United States and are subject to certain restrictions on transfer. Prospective purchasers are hereby notified that the seller of any Notes may be relying on the
iv exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of certain further restrictions on resale or transfer of the Notes, see “Transfer Restrictions.” The Notes may not be offered to the public within any jurisdiction. By accepting delivery of this offering memorandum, you agree not to offer, sell, resell, transfer or deliver, directly or indirectly, any Notes to the public. Notice to European Economic Area investors In relation to each member state of the EEA which has implemented the Prospectus Directive (each, a “Relevant Member State”), each Initial Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), it has not made and will not make an offer of Notes which are the subject of the offering contemplated by this offering memorandum to the public in that Relevant Member State other than: (a) to any legal entity which is a qualified investor as defined in the Prospectus Directive; (b) to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the relevant Initial Purchaser or Initial Purchasers nominated by the Issuer for any such offer; or (c) in any other circumstances falling within Article 3(2) of the Prospectus Directive; provided that no such offer of the Notes shall require the publication by the Issuer or any Initial Purchaser of a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospective Directive other than in reliance of Article 3(2)(b). For the purposes of this provision, the expression an “offer of Notes to the public” in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU. Each subscriber for or purchaser of the Notes in the offering located within a member state of the EEA will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of Article 2(1)(e) of the Prospectus Directive. The Issuer, the Initial Purchasers and their affiliates, and others will rely upon the trust and accuracy of the foregoing representation, acknowledgement and agreement. Notwithstanding the above, a person who is not a qualified investor and who has notified the Initial Purchasers of such fact in writing may, with the consent of the Initial Purchasers, be permitted to subscribe for or purchase the Notes in the offering. THIS OFFERING MEMORANDUM CONTAINS IMPORTANT INFORMATION WHICH YOU SHOULD READ BEFORE YOU MAKE ANY DECISION WITH RESPECT TO AN INVESTMENT IN THE NOTES.
See “Risk Factors,” following the “Summary,” for a description of certain factors relating to an investment in the Notes, including information about our business. None of us, the Initial Purchasers or any of their representatives is making any representation to you regarding the legality of an investment by you under applicable legal investment or similar laws. You should consult with your own advisors as to legal, tax, business, financial and related aspects of a purchase of the Notes.
v Industry, market and subscriber data Subscriber data The subscriber data included in this offering memorandum, including penetration rates and ARPU, are determined by management, are not part of the Millicom Group’s financial statements and have not been audited or otherwise reviewed by an outside auditor, consultant or expert. The Millicom Group defines ARPU as average total recurring revenue (including revenue earned from carriage fees and rental set-top boxes and excluding interconnection revenue, installation fees, mobile telephone equipment sales revenue and set-top box sales) for the indicated period, divided by the average of the opening and closing RGU (Revenue Generating Unit) base or active customer relationships (as described below under “—Churn”), as applicable, for the period. Each subscriber to any of the Millicom Group’s non-mobile services is counted as one RGU for each service subscribed. Thus, a subscriber who receives cable television, broadband internet and fixed-line telephone services from the Millicom Group (regardless of their number of telephone access lines) would be counted as three RGUs.
Market and industry data The Millicom Group operates in countries in which it is difficult to obtain precise market and industry information. Other than for the calculation of market share and churn, we have generally obtained the market, industry and competitive position data in this offering memorandum from regulatory reports, reports from our competitors and industry analytical services, such as TeleGeography, World Cellular Information Services (“WCIS”) and Dataxis, that we believe to be reliable. However, none of the Issuer, the Initial Purchasers or any of their respective advisors can verify the accuracy and completeness of such information and none of the Issuer, the Initial Purchasers or any of their respective advisors has independently verified or audited such market and position data. The Issuer does, however, accept responsibility for the correct reproduction of this information and, as far as it is aware and is able to ascertain from information published, no facts have been omitted that would render the reproduced information inaccurate or misleading. In addition, in many cases the Issuer has made statements in this offering memorandum regarding the Millicom Group’s industry and position in the industry based on the Millicom Group’s experience and the Millicom Group’s own investigation of market conditions. None of the Issuer, the Initial Purchasers or any of their respective advisors can assure you that any of these assumptions are accurate or correctly reflect its position in the industry, and none of the Millicom Group’s internal surveys or information have been verified by independent sources.
Market share and penetration rates Mobile market share refers to a share of all mobile customers in a particular market, and mobile penetration rate refers to the portion of the population that are active mobile customers within a specific market. Cable or broadband market share refers to our share of all cable or broadband customers in a particular market, and our fixed penetration rate refers to the number of households which subscribe to our fixed cable, broadband and/or fixed telephone services as a percentage of the total number of homes passed by our cable infrastructure in a market. Market share and penetration rate can be calculated using different methodologies. We calculate mobile market share by using the traffic passing through our mobile network as a basis for determining usage, by identifying the number of our customers making calls to other customers on our networks (on-net calls) and the number of our competitors’ customers calling or receiving calls from our customers (cross-net calls). We calculate our mobile penetration rate by estimating the total number of active customers (as described below) in the relevant market based on interconnect traffic on our network. As we do not have data for subscribers that make on-net calls in our competitors’ networks, we calculate the ratio of our ‘on-net only users’ to our cross- net traffic and then apply such ratios to our competitors based on cross-net calls made to or from their networks and our network.
vi This methodology adjusts for inactive subscribers, which we define as any customer who has not been active for 60 days, that may be reported by our competitors, and which may otherwise inflate our competitors’ market share calculations. Regulators and some of our competitors define inactive subscribers differently, often applying a longer period to determine when a customer has become an inactive subscriber (as discussed below under “—Churn”). We believe that, in view of the lack of any official public figures on market share in our markets, our process accurately determines our penetration rate, market share, the market share of our competitors and the size of the entire market. Although we believe our market share and penetration rate data is appropriate and accurately reflects the market, we cannot assure you this is the case. Regulators, independent third parties and our competitors may calculate market share and penetration rate figures differently than us and, as a result, they may report different market shares and penetration rates for the Millicom Group and its competitors, and these differences may be material.
Churn
Churn rates are calculated by dividing the number of customers whose service is disconnected during a period, whether voluntarily or involuntarily (such as when a customer fails to pay a bill) by the average number of customers during the period. We believe that we apply conservative policies in calculating customer totals and related churn rates. For example, we count a customer as an active “customer” only when the customer has made a revenue generating call within a 60-day period. Other operators with whom we compete generally use less restrictive definitions, such as labeling an active “customer” any customer who has made a revenue generating call within a 90-day or 120-day period. Our more conservative definitions may result in different churn rates than if we used criteria or methodologies employed by other operators in calculating customer churn and market share.
Trademarks As further discussed under “Our Business—Research and Development, Patents, Trademarks and Licenses,” we own or have rights to certain trademarks in our business, including the following trademarks used in this offering memorandum: tigo®, Girostigo® and . This offering memorandum also refers to brand names, trademarks or service marks of other companies. All brand names and other trademarks or service marks of any other company cited in this offering memorandum are the property of their respective holders.
vii Cautionary statement regarding forward-looking statements This offering memorandum contains statements that constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Many of the forward-looking statements contained in this offering memorandum can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others. These statements appear in a number of places in this offering memorandum and include, but are not limited to, statements regarding our intent, belief or current expectations with respect to:
• the implementation of our principal operating and funding strategies and capital expenditure plans;
• our level of capitalization;
• the performance of the economies in the countries in which we operate and global economies in general;
• developments in, or changes to, the laws, regulations, tax matters and governmental policies governing or affecting our business;
• adverse legal or regulatory disputes or proceedings;
• the declaration or payment of extraordinary dividends;
• other factors or trends affecting our financial condition or results of operations;
• general economic conditions, government and regulatory policies and business conditions in the markets in which our group operates;
• telecommunications usage levels, including traffic and customer growth;
• competitive forces, including pricing pressures, technological developments and the ability of our group to retain market share in the face of competition from existing and new market entrants;
• regulatory developments and changes, including with respect to the level of tariffs, the terms of interconnection, customer access and international settlement arrangements, and the outcome of litigation related to regulation;
• the success of business, operating and financing initiatives, the level and timing of the growth and profitability of new initiatives, start-up costs associated with entering new markets, costs of handsets and other equipment, the successful deployment of new systems and applications to support new initiatives, and local conditions;
• the availability, terms and use of capital, the impact of regulatory and competitive developments on capital outlays, the ability to achieve cost savings and realize productivity improvements, and the success of our group’s investments, operations and alliances;
• the other factors discussed under the section of this offering memorandum entitled “Risk Factors”; and
• other statements contained in this offering memorandum regarding matters that are not historical facts.
Forward-looking statements are only our current expectations and are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including, but not limited to, those identified under the section of this offering memorandum entitled “Risk Factors.” These risks and uncertainties include factors relating to the
viii markets in which we operate and global economies, securities and foreign exchange markets, which exhibit volatility and can be adversely affected by developments in other countries, factors relating to the telecommunications industry in the markets in which we operate and changes in its regulatory environment and factors relating to the competitive markets in which we operate. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
ix Presentation of financial and other information Financial information
We have included in this offering memorandum the audited consolidated financial statements of MIC S.A. and its subsidiaries as of and for the years ended December 31, 2009, 2010, 2011 and 2012, and the unaudited interim condensed consolidated financial statements of MIC S.A. and its subsidiaries as of and for the three months ended March 31, 2012 and 2013. The audited consolidated financial statements of MIC S.A. included herein and the accompanying notes thereto have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”). The unaudited interim condensed consolidated financial statements of MIC S.A. included herein and the accompanying notes thereto have been prepared in accordance with IAS 34 “Interim Financial Information,” the IFRS standard applicable to interim reporting.
Due to a misstatement in MIC S.A.’s previously issued consolidated financial statements for the year ended December 31, 2010, MIC S.A. restated its financial statements for the period then ended. The restated consolidated financial statements as of and for the year ended December 31, 2010, correct the accounting treatment for the Millicom Group’s July 2010 acquisition of a controlling interest in Celtel, its mobile phone operation in Honduras. The restatement was made to recognize a liability and corresponding reserve for the put option provided to our local partner who holds a non-controlling interest in our Honduran operation. The Celtel acquisition and the effects of the restatement are discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting the Millicom Group’s Business.”
In making an investment decision, you must rely upon your own examination of the terms of the offering and the financial information contained in this offering memorandum. You should consult your own professional advisors for an understanding of the differences between IFRS and U.S. GAAP and how those differences could affect the financial information contained in this offering memorandum.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Millicom Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to our financial statements, are disclosed in our audited consolidated financial statements.
The accounting policies set forth in the financial statements included in this offering memorandum have been consistently applied to all periods presented.
We end our fiscal year on December 31. References to fiscal 2010, fiscal 2011 and fiscal 2012 refer to results for the years ended December 31, 2010, 2011 and 2012, respectively.
Other financial measures
This offering memorandum contains non-IFRS measures and ratios, including earnings before interest, tax depreciation and amortization (“EBITDA”), adjusted EBITDA, Free Cash Flow (which is defined as operating profit plus (i) depreciation and amortization, (ii) loss (gain) on disposal and impairment of assets, (iii) net interest expense, (iv) taxes paid, (v) purchase of intangible assets and license renewals, (vi) purchase of property, plant and equipment, (vii) proceeds from paid sale of property, plant and equipment, (viii) share-based compensation and (ix) changes to working capital, each as reported in the Millicom Group’s consolidated statements of cash flows), and leverage ratios that are not required by, or presented in accordance with, IFRS. We present non-IFRS measures because we believe that they and similar measures are widely used by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity. The non-IFRS measures may not be comparable to similarly titled measures of other companies, have limitations as analytical tools and should not be considered in
x isolation or as a substitute for an analysis of our operating results as reported under IFRS. These non-IFRS measures and ratios are not measurements of our performance or liquidity under IFRS or any other generally accepted accounting principles. Other companies in our industry may calculate these measures differently and, consequently, our presentation may not be readily comparable to other companies’ figures. In particular, you should not consider adjusted EBITDA as an alternative to operating income or income for the period (as determined in accordance with IFRS) as a measure of our operating performance, cash flows from operating, investing and financing activities, as a measure of our ability to meet our cash needs or as an alternative to any other measures of performance under generally accepted accounting principles.
The term “Consolidated EBITDA,” as used in “Description of the Notes” summarizing certain provisions of the Indenture and the Notes, is calculated differently from adjusted EBITDA presented in this offering memorandum and is not a measurement of financial performance or liquidity under IFRS.
Macroeconomic data
Population information, gross domestic product (“GDP”) per capita and other macroeconomic and country data have been based on the U.S. Central Intelligence Agency’s “The World Factbook” and information published by TeleGeography’s GlobalComms Database Service.
Rounding
We have made rounding adjustments to reach some of the figures included in this offering memorandum. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them and percentage calculations using these adjusted figures may not result in the same percentage values as are shown in this offering memorandum.
Currency presentation
In this offering memorandum, unless otherwise indicated, all references to “U.S. dollars,” “dollars” or “$” are to the lawful currency of the United States of America; and all references to “Euro” or “€” are to the lawful currency of the participating Member States in the Third Stage of European Economic and Monetary Union of the Treaty Establishing the European Community, as amended from time to time.
Definitions
Unless otherwise specified or the context requires otherwise in this offering memorandum:
• any references to “Agents” refer collectively to the Registrar, Transfer Agent, Principal Paying Agent and Listing Agent listed on the back cover of this offering memorandum;
• any reference to “day” or “days” is to calendar days and any reference to “business day” or “business days” means any day of the year that is not a Saturday, Sunday or a day on which banking institutions in New York, New York, London and Luxembourg are authorized or required by law to close;
• all references to the “EU” are to the European Union;
• all references to the “Indenture” are to the indenture governing the Notes;
• all references to the “Initial Purchasers” are to J.P. Morgan Securities plc, Standard Bank Plc and BNP Paribas;
• all references to “Issue Date” are to the date on which the Notes are delivered;
• all references to “Luxembourg” are to the Grand Duchy of Luxembourg;
xi • all references to the “Issuer“ and “MIC S.A.” are to Millicom International Cellular S.A., a public limited liability company (société anonyme) organized and established under the laws of Luxembourg, having its registered office at 2, rue du Fort Bourbon, L-1249 Luxembourg and registered with the Luxembourg Trade and Companies Register under number B40630;
• all references to the “Millicom Group” are to MIC S.A. and its consolidated subsidiaries;
• all references to the “Trustee” are to Citibank, N.A., London Branch, in its capacity as trustee under the Indenture;
• all references to the “U.S.” are to the United States of America; and
• all references to “we,” “us” and “our” are to MIC S.A. and its consolidated subsidiaries, unless the context requires otherwise.
For an explanation or definition of certain other terms used in this offering memorandum, see “Glossary” included elsewhere in this offering memorandum.
xii Summary This summary highlights information contained elsewhere in this offering memorandum. This summary may not contain all the information that may be important to you, and we urge you to read this entire offering memorandum carefully, including the “Risk Factors” and the Millicom Group’s audited and unaudited condensed consolidated financial statements and the notes to those statements, included elsewhere in this offering memorandum, before deciding to invest in the Notes.
Business overview Established in 1992, the Millicom Group is a leading international telecommunications and media group dedicated to emerging markets in Latin America and Africa, providing mobile communications and data services, cable television, broadband and other related products to its customers. We position ourselves as a fast-moving consumer goods company and, operating under the “Tigo” brand, we hold the number one or number two market position in at least 11 of the 13 markets in which we offer mobile telephone services. We are evolving beyond, traditional mobile communications and data services to offer a combination of fixed telephone, pay television and fixed broadband services through our cable operations in six markets in Latin America. Our existing mobile and cable licenses cover a combined population of approximately 288 million people. As of March 31, 2013, we had approximately 47 million mobile customers and provided cable services to approximately 800,000 homes. Our mobile services benefit from our extensive distribution network of over 640,000 points of sale across 13 countries. The Millicom Group has mobile operations in the following countries: in Central America: El Salvador, Guatemala and Honduras; in South America: Bolivia, Colombia and Paraguay; and in Africa: Chad, DRC, Ghana, Mauritius, Rwanda, Senegal and Tanzania. The Millicom Group has cable operations in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua in Central America and Paraguay in South America. We offer our products in four primary categories, each as further described below: • Mobile (voice, SMS, data and other value-added services); • Cable and Digital Media (fixed telephone, fixed broadband and cable TV); • Mobile Financial Services (“MFS”); and • Online (Rocket Internet). For the twelve-month period ended March 31, 2013, the Millicom Group generated $4,891 million in revenue and adjusted EBITDA of $1,880 million, yielding an adjusted EBITDA margin of 38%. The following illustrations show the distribution of our revenue by business category and geographic area for the twelve months ended March 31, 2013: Total Revenue by Business Category Total Revenue by Geographic Area
7% 20% 8%
39%
41% 85%
Mobile ($4,144.7 million) Central America ($1,891.6 million) Cable and Digital Media ($379.1 million) South America ($2,001.1 million) MFS ($50.1 million) Africa ($973.6 million) Online and other ($317.4 million) Online and other ($24.8 million)
1 Our mobile services continue to be the primary driver of growth, with our other product offerings increasing their contribution as utilization of new products and services continue to increase solidly among our existing clients and our new customers. In the twelve-month period ended March 31, 2013, our number of mobile customers increased by 5% in Central America, 11% in South America and 9% in Africa, for total growth of 8%. Within the Mobile category, value-added services comprising all products other than standard mobile voice, including SMS and data (“VAS”), accounted for 33.5% of our revenue in the three-month period ended March 31, 2013 compared to 29.4% in the three-month period ended March 31, 2012. VAS as a percentage of our total revenue was 31.8% in the twelve-month period ended March 31, 2013, and 30.8% in fiscal 2012, 26.6% in fiscal 2011 and 23.0% in fiscal 2010.
Mobile. Our Mobile category, which represents our primary source of revenue, includes voice, SMS, data and other VAS. Our mobile services are provided via 2G and (in 10 out of 13 of our markets) 3G mobile networks, which benefit from our extensive distribution network of over 640,000 points of sale across 13 countries. We are investing in expanding our coverage in Africa and increasing our capacity in Latin America, and expect to continue investing in technology to meet market demands in line with our overall business strategy. Revenue in our Mobile category increased by 1.4% for the three-month period ended March 31, 2013 as compared with the three-month period ended March 31, 2012, from $1,016 million to $1,030 million.
The following table shows our estimated market share position, mobile penetration rate and population data of our mobile operations as of March 31, 2013.
Market share Mobile Population Market position(1) penetration(2) area(3) Central America (unaudited) (in millions) El Salvador ...... 1of5 110% 6 Guatemala ...... 1of3 99% 14 Honduras ...... 1of4 80% 8 South America Bolivia ...... 2of3 70% 10 Colombia ...... 3of3 104% 46 Paraguay ...... 1of4 98% 7 Africa Chad ...... 1of3 30% 11 DRC ...... 1of6(4) 59% 76 Ghana ...... 2/3of6(5) 75% 25 Mauritius ...... 2of3 97% 1 Rwanda ...... 2of3 38% 12 Senegal ...... 2of4 69% 13 Tanzania ...... 2of7 44% 48
(1) The Millicom Group derives its market share position from internal estimates, measuring its active customers (those customers who have been active within 60 days) based on interconnect activity on its own networks. The Millicom Group’s market share calculations may differ from the calculation methodology used by different operators and other third party sources, as discussed under “Industry, Market and Subscriber Data—Market Share and Penetration Rates.” (2) The Millicom Group derives penetration rates from estimates of the total active customers in the relevant market based on interconnect activity on its own networks. This methodology may differ from the penetration rate methodology used by different operations and other third party sources, as discussed under “Industry, Market and Subscriber Data—Market Share and Penetration Rates.” (3) Estimated population data are 2013 estimates derived from the World Factbook. (4) DRC market share position relates to the Kinshasa/Bas-Congo area only. (5) Millicom Ghana’s market share position regularly fluctuates between second and third position.
Cable and Digital Media. Our Cable and Digital Media category includes residential cable and pay television, residential and corporate broadband, digital media and fixed telephone services throughout Latin America. In our Latin American cable business, we provided services to 776,124
2 homes as of March 31, 2013, representing 1,055,797 RGUs and a 35.4% penetration rate of homes passed. In October 2012, we acquired Cablevisión Paraguay, Paraguay’s leading provider of pay-TV services, which expanded and diversified our presence in the Paraguay telecommunications market, where we were already the number one provider of mobile services. In our Latin American broadband business, we had approximately 245,000 fixed broadband RGUs as of March 31, 2013, and the fixed broadband penetration rate in our pay-TV customer base was 36.0%. We have significantly increased the speed offered to our cable broadband customers, with 63.6% of our cable broadband customers enjoying speeds in excess of 1Mbps as of March 31, 2013, compared to 43.3% as of March 31, 2012. Revenue in our Cable and Digital Media category increased by 30% during the three-month period ended March 31, 2013 as compared with the three-month period ended March 31, 2012, from $82 million to $107 million. MFS. MFS offers our existing customers, many of whom have limited access to traditional banking services, the ability to use their mobile phone to transfer funds to any other registered in-country customer on our network. We have rolled out MFS in El Salvador, Guatemala, Honduras, Paraguay, Bolivia, Chad, DRC, Ghana, Tanzania and Rwanda, and we expect to offer MFS in Colombia and Mauritius before the end of the third quarter of 2013. As of March 31, 2013, 12% of our mobile customer base were using MFS in the countries where we offer MFS, with 40% of our total mobile customer base actively using MFS in Tanzania, 26% in Paraguay and Rwanda, 5% in El Salvador, and 3% in Ghana and Honduras. Revenue in our MFS category increased by 167% during the three-month period ended March 31, 2013, as compared with the three-month period ended March 31, 2012, from $6 million to $16 million. Online. We entered into an agreement with Rocket Internet GmbH in August 2012 to jointly develop franchises in the online sector in Latin America and Africa by acquiring interests in two Rocket Internet subsidiaries, which we believe will position us well for growth in the emerging data markets. Through our partnership with Rocket Internet, we aim to establish proven e-commerce models in markets where large western players are not yet present and to realize synergies in our markets over time. Since the fourth quarter of 2012, we have been rolling out the online food ordering site, Hellofood, throughout South America, Ghana and Senegal, and the taxi ordering application, EasyTaxi, throughout South America. In the first quarter of 2013, we launched Jumia, a general merchandise e-commerce site, in Kenya and have expanded its operations into four markets. We also launched Kaymu, a marketplace site, and Vamida, which provides on-line real estate classified, in Nigeria. Revenue in our Online category for the three- month period ended March 31, 2013, the second full quarter in which we had operations in this category, was $11 million.
Our strengths We believe that we benefit from the following key strengths:
We have established strong market positions in our operating countries, with a history of stable or growing market share. We are the number one or two provider of mobile services in at least 11 of the 13 countries in which we offer mobile services. We also offer a combination of fixed telephone, pay television and fixed broadband services through our cable operations in six markets in Latin America, a segment of our business which was recently strengthened when we acquired the leading provider of cable pay-TV services in Paraguay. Our leading positions provide us with a competitive advantage, as it is more difficult for other providers to compete with our in-country scale and our high on-net customer base in our mobile business.
Our globally diversified footprint supports varied revenue streams and additional growth opportunities. We have emphasized strategic growth in each of our operating countries, obtaining a leading position in many of our markets. With no individual country accounting for more than 18% of
3 our total revenue for the twelve months ended March 31, 2013, our revenue streams are well- diversified. Our significant geographic footprint means we are not reliant on operations in any one country to achieve profitability at the Millicom Group level. This strategy allows us to pursue new investment opportunities and long-term growth while still realizing strong revenues among our more-established markets. Our geographic diversity also helps to insulate us from concentrated risks associated with potential economic or political instability in a particular country or region.
In order to maintain our competitive position and strong cash flow generation, we innovate and adapt to our customers’ needs. We have capitalized on our market-leading mobile business to expand the products we offer our existing loyal customers, such as MFS, mobile data, media and entertainment, as well as expanding our product offerings into new product areas, such as cable, broadband and e-commerce activities, to win new customers. We also see future growth opportunities from additional penetration of VAS across our customer base and continued penetration of our African markets, where mobile penetration rates as of March 31, 2013 averaged approximately 59%. As data-capable handsets continue to become more affordable, we are well-positioned to capitalize on increased demand for data consumption and digital services based on our strategic investments in 3G-enabled networks in Latin America and Africa. Our investments in high growth internet businesses also support our focus on consumer demand for digital content, such as music, videos and commerce, across our platforms.
We have a consumer-focused culture which has driven innovation and customer retention.
We are a customer-focused service provider, and we tailor our offerings to the needs of the communities we serve. While overseen from central group functions, in-country management teams have significant autonomy in developing locally focused offerings. We believe that our customer-driven solutions underpin our strong market position and we innovate in a number of ways. We use segmentation to define customer profiles in voice and offer bundles of products that we believe are suited to our customers, thereby extracting maximum value from our markets. We conduct extensive focus groups, which we believe provide us with a competitive edge in product development and customer retention. We believe our customer analysis allows us to anticipate our customers’ needs and proactively tailor our product offerings accordingly.
We believe our innovative solutions and services, such as the following products, are well-suited to the challenges of our lower-income consumer base:
• Air-time products: we offer selective air-time balance lending and transfers via “Tigo Lends You,” and our zero balance initiative provides customers with a depleted credit balance with temporary offers based on their customer’s usage and payment history;
• MFS: through Tigo Cash enterprises, we provide money transfer services where customers otherwise have limited access to traditional banking services;
• International money transfers: through our partnership with Western Union, we offer international money transfers to our Paraguayan customers, and we expect to roll out this service in our other Latin American markets and Rwanda in 2013; and
• Micro-insurance products: we have introduced micro-insurance products in Ghana and intend to roll out this service to our customers in some of our other markets in the near term.
Our proven track record as a customer-focused service provider has led to high brand awareness and, when combined with innovative VAS, to loyalty among our customers. We believe that we are well positioned to maintain our market share of voice and capture future growth in other product categories, such as data and VAS, as we continue to develop and innovate across our footprint.
4 We have a strong brand identity.
The Tigo brand is one of our most valuable assets. In 2013, Brand Finance estimated Tigo’s brand value at $2.7 billion. The strength of our Tigo brand is a significant competitive advantage and has helped us maintain a strong position in each of our markets. Our brand visibility has grown rapidly in our new markets, such as Colombia, where Tigo is already a top ten brand among all consumer brands only five years after launch. We believe that the Tigo brand is generally associated with high quality, availability, affordability, customer service and innovation.
We believe that our focus on branded services helps us to expand our market share and reduce our operating costs. We value the reputation that our brand has earned in our markets and the trust that our customers place in Tigo. We have endeavored to enhance our positive reputation by continually improving our service offering and fulfilling our duty to be a responsible corporate citizen.
We have an extensive distribution network.
Our distribution network serves to enhance brand visibility, maintain customer contact and expand the services we provide to our customers. Accessibility through an extensive distribution network and simple activation processes is key to customer retention and growth in the prepaid mobile market. We have over 640,000 points of sale across 13 countries and operate a Distribution Management System (DMS), which is a proprietary system that provides real time information on mobile phone air-time stock levels, sales and network performance. We are also developing new technologies to address accessibility, such as the “e-wallet” to accelerate the introduction of MFS in our markets.
When we release new products, our sales force runs training sessions with our distributors. In Tanzania, we have introduced trade marketing supervisors and a monitoring tool to oversee brand visibility at our points of sale and at temporary sites operated by freelancers. In Senegal, we have introduced kiosks for direct sales in strategic locations. In other locations, we have significantly increased our street-level presence and visibility through larger direct sales forces and the use of motorbike taxis selling ePIN reloads. We are also making increased use of direct marketing through targeted methods of communication with our customers, such as targeted SMS broadcasts. Additionally, our cable services are now branded “Tigo Home” and provide dual, triple and quadruple play services to customers.
Our high quality mobile network and strategic capital investments provide a competitive edge in developing markets.
We have 2G and 3G networks across our markets. Our networks are supplied by leading telecom equipment manufacturers including Ericsson and Huawei. We have 3G-enabled networks in Latin America, Ghana, Tanzania, Mauritius and Rwanda, and we intend to launch our 3G networks in DRC and Senegal by mid-2013, which will provide 3G access to our mobile markets in 12 of the 13 countries in which we operate. Across our markets, investments in 3G will allow us to promote new business opportunities and increase provision of additional services, such as wireless broadband and MFS, while further enhancing voice and data capacity. We also plan to introduce HSPA+ in some of our Latin American markets during 2013, which will provide our users with even higher speed downloads and access. We strategically manage roll-out of 3G offerings in response to market opportunities and demand. We are in compliance with all of our material licenses, a majority of which are valid through or have been renewed beyond 2020. We have a 10-year license to operate a nationwide GSM network in Chad that will expire in 2014, for which we expect to submit a formal renewal application to the regulator in the second half of 2013. We have also adopted Universal Mobile Telecommunications Service, a 3G mobile networking standard used to upgrade 2G networks to 3G standards. In addition, we have outsourced the management of some of our towers to third party tower operators with strict service and uptime requirements.
5 We have an established record of strong Free Cash Flow generation and conservative capital structure.
The Millicom Group has a proven track record of profitable growth and high cash flow generation, while maintaining conservative leverage. Our growing customer base and our innovative product offerings have provided us with strong revenues over time. Our year-on-year revenue growth was 16.2% in fiscal 2010, 15.5% in fiscal 2011, 6.3% in fiscal 2012 and 6.7% for the three-month period ended March 31, 2013 as compared with the three-month period ended March 31, 2012. Our adjusted EBITDA margin has historically averaged approximately 40% for the previous seven fiscal years. During fiscal 2012 and the twelve-month period ended March 31, 2013, we generated $699 million and $395 million, respectively, in Free Cash Flow. Further, we employ conservative policies with respect to leverage at the Millicom Group level, with a ratio of consolidated external net debt (excluding restricted cash) to adjusted EBITDA of 1.1x for the year ended December 31, 2012. We have a proven ability to upstream cash through a combination of dividends, royalties, business support services, technical service fees and shareholder loan repayments. We upstreamed $254 million from 5 of the 15 countries in which we operate for the three months ended March 31, 2013. In each of fiscal years 2012, 2011 and 2010, we upstreamed $858 million, $912 million and $819 million, respectively.
We have valuable experience and a proven track record of success in emerging markets and benefit from a strong management team.
We have offered mobile services in emerging markets for over 20 years and have leveraged this experience to bring our best practices to our newer markets as we pursue diversification and growth opportunities. We have a demonstrated track record of cost-efficient management and sustainable growth, as exhibited by our adjusted EBITDA margins, which have historically averaged approximately 40% and, we believe, exceed or are in line with the margins of many of our major competitors. Our decentralized structure cultivates and relies upon local expertise, while MIC S.A. provides valuable advisory and support services to its subsidiaries. Our local management teams have also benefited from secondments to other Millicom Group operations across the world, which has enhanced their global knowledge and expertise.
Our senior management team includes the following members:
• Hans-Holger Albrecht, our President and CEO, has over 17 years of experience in leadership positions in the telecommunications industry, serving as President and CEO of Modern Times Group for 12 years before joining the Millicom Group. Mr. Albrecht assumed the role of CEO in November 2012 after having been a MIC S.A. director since 2010.
• François-Xavier Roger, our Senior Executive Vice President and CFO, has significant experience in finance in Latin American and African markets, and has been CFO since 2008. Mr. Roger previously served as VP of Corporate Finance of Danone Group and CFO of Danone Asia.
• Mario Zanotti, our Senior Executive Vice President of Operations, has significant operational experience in his 21 years with the Millicom Group, having previously served as Chief of Latin America and Head of Central America.
Our strategy
Our success is built on offering affordable, useful and innovative services via mass market distribution methods. Our careful attention to managing operating costs has allowed us to pursue growth while continually delivering operating profitability. As we seek to grow further, we will look to deliver innovative and customer-centric products and increase penetration of our innovative VAS, data provision and digital entertainment and consumer services across the customer base while expanding our customer base in countries with lower mobile penetration.
6 Offer affordable products and innovative services focused on customer needs.
We offer our products and services to approximately 48 million customers. We aim to improve our operations through innovation and implementing our quadruple ‘A’ strategy: to improve the availability of our network, the accessibility and affordability of our products and services and an affinity with our customers.
• “Availability” means providing our customers with an extensive and robust network and sufficient capacity so that our products are readily available to our customers in as many locations as possible.
• “Accessibility” means providing easy access to our products through our numerous points of sale, providing direct sales forces, pre- and post-paid offerings and simple activation processes.
• “Affordability” means not only offering competitive prices for our products, but also providing service options structured to make our offerings more accessible to our customer base, such as per-second billing and low increment credit top-ups, which provides more flexibility to our lower income consumers.
• “Affinity” means being close to our customers and creating a link with them that extends beyond product functionality and value for money by developing solutions that meet their day-to-day needs, such as alternate ways to continue talking when they run out of balance via our “Tigo Lends You” and zero balance initiative offerings.
We believe this strategy will continue to drive higher penetration rates and increased product consumption, as well as increased uptake of our complementary cable and broadband services in those markets in which we provide them. We believe these vital and interdependent ingredients are key to successfully selling mobile services in our Latin American and African markets.
As part of our quadruple ‘A’ strategy, we will continue to focus on the smart pricing of our products and services to reinforce our value for money and affordability perception while continuing to work towards creating more affordable voice and data technology solutions for lower-income segments of the market. We will continue to increase the number of our distribution outlets and strengthen our network in order to further increase the accessibility and availability of our services and the visibility of our brand. We will also continue to innovate in order to offer our customers new products and services, such as mobile data and MFS, that meet their needs both now and into the future, which we believe will support ARPU. We continue to focus on deepening our understanding of our customers so we can accelerate the development of these new products and services.
Pursue selective strategic investments and selective acquisitions and divestitures.
While we hold strong market positions in each of the countries in which we operate, we continuously evaluate strategic opportunities for market consolidation, entering new markets, product offering expansion and vertical integration within a selective and conservative investment framework, some of which may be material and may be in the near term. When evaluating an investment, among other criteria, we consider whether the investment aligns with our strategy, complements our suite of products and services, is geographically within our scope of operations, enhances our client base and satisfies our return-on-investment criteria over the medium term.
After acquiring our first cable operations in Latin America in 2008, we did not make any significant acquisitions until 2012, when we acquired interests in Rocket Internet subsidiaries and Cablevisión S.A. in Paraguay, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Acquisitions.” The Rocket Internet acquisition has enabled us to grow our internet-related offerings and expand the
7 services we offer to our customers into the realm of e-commerce. Cablevisión S.A. is the number one pay-TV cable provider in Paraguay, which will expand our presence in Paraguay. We are also in discussions to substantially expand our telecom and cable television businesses in Colombia, as further described below under “—Recent Developments—Proposed Business Combination in Colombia.”
We will continue to pursue selective acquisitions, divestitures or business combinations when we believe to do so will enhance our long-term growth and profitability via increased market share, diversified and innovative product offerings that enhance the spectrum of services we currently offer to our customers.
Grow our business in a cost-efficient manner.
Our cost-efficient approach is supported by a relatively decentralized operating model and lean head office structure. In addition, we continue to look for means of reducing operating costs while increasing revenue and therefore improving profitability. As of 2013, we re-structured our business around four categories: Mobile, Cable and Digital Media, MFS and Online. These organizational categories position us as a customer-centric organization while supporting efficient introduction of new products and categories of services.
In 2010, we determined that, in certain markets, owning passive infrastructure, such as mobile telecommunications towers, no longer conferred a competitive advantage. When management has deemed it attractive, we have outsourced the management of some of our towers to third party tower operators with strict service and uptime requirements. In 2010 and 2011, we signed sale and lease-back agreements with tower management companies in DRC, Ghana, Tanzania and Colombia whereby we sold a significant amount of our passive infrastructure (towers) in those countries and leased back a dedicated portion of each tower to house our network equipment in exchange for cash and investments in the tower companies (e.g., tower operation and management services). See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.” We retained an approximate 40% equity interest in the tower companies to which we transferred the towers.
These tower transfers have created significant value for us through a reduction of operating expenses and a decrease of future capital expenditure, in addition to a contribution of cash and retention of equity stakes in the newly created tower companies. Total cash proceeds from tower sales from 2011 to 2013 are expected to be approximately $320 million.
We may continue to review the opportunity to dispose of tower assets in other countries over time and may seek further opportunities to share part of our infrastructure and spectrum assets when doing so would improve cost-efficiency.
Focus on corporate responsibility and integrity.
By offering access to our suite of products under the Tigo brand and ensuring that our services are affordable, accessible and readily available, we are making an active and positive contribution to the sustainable economic and social development of our Latin American and African markets. We greatly value the reputation that the Tigo brand has earned and the trust our customers place in it. We endeavor to enhance this reputation by continually improving our service offering, hiring the highest quality individuals who are committed to our mission and generally fulfilling our duty to be a responsible corporate citizen. We are committed to moving beyond compliance with applicable local laws and company policy to seek social return as a desired by-product of our financial investment.
At the end of 2012, we created Millicom Foundation to support the communities in which we operate by providing information and communications technology in remote areas to support
8 the development of mobile healthcare, entrepreneurship and education and training. Millicom Foundation aspires to be present and committed to promoting societies and our customers’ social and economic growth.
Recent developments Proposed business combination in Colombia On February 5, 2013, we announced that we are engaged in exclusive negotiations with Empresas Públicas de Medellín (“EPM”), an industrial and commercial conglomerate owned by the municipality of Medellín, for a potential combination of its and our telecom businesses in Colombia. EPM is the largest shareholder of UNE EPM Telecomunicaciones (“UNE EPM Telecom”), which provides cable TV and fixed telephone services in Medellín, Colombia’s second largest city. UNE EPM Telecom and Millicom Colombia already jointly own our Colombian operating company, Colombia Móvil S.A. E.S.P. Any transaction would be subject to regulatory approval, and we do not anticipate that the Millicom Group’s consolidated Net Debt to adjusted EBITDA ratio would increase by more than 0.5x adjusted EBITDA following the successful completion of this transaction. Discussions are on-going, which we anticipate concluding by the end of June of 2013.
License tender in Myanmar On April 11, 2013, Myanmar’s Ministry of Communications, Posts and Telegraph (MCPT) informed the Millicom Group that it was one of 12 bidders selected from a field of 91 applicants to advance to the third and final bidding round for two nationwide telecommunications licenses. Final applications are due by June 3, 2013, with winners scheduled to be announced by June 27, 2013. With approximately 1.3 million mobile subscribers at the end of October 2012, Myanmar’s reported mobile penetration rate was approximately 7%, serviced by Myanmar’s two incumbent operators.
Acquisition of spectrum In December 2012, our Colombian operation renewed its license for 40 MHz of spectrum in the 1900 MHz band for another 10 years (until February 2023), for which it paid approximately $52.4 million to the Colombian government in January 2013, with the total consideration to be determined by the Arbitrage Court (Tribunal de Arbitramiento) by mid-2014, as further described under “Our Business—Litigation and Legal Proceedings—Colombia.” In addition, our Bolivian operation was recently awarded 2x10MHz of spectrum in the 1900MHz band, for which it paid $15 million. On May 9, 2013, we confirmed our participation in a 4G license tender in Colombia as part of a consortium of other mobile operators.
Termination of Exchange Act reporting MIC S.A. has terminated its registration under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and its reporting obligations ended on October 12, 2012. As of January 11, 2013, the termination of MIC S.A.’s reporting and disclosure obligations under the Exchange Act became fully effective. However, MIC S.A. has announced its intention to voluntarily continue to comply with many of the corporate governance and disclosure requirements of the Exchange Act. Additionally, MIC S.A. maintains its listing on the NASDAQ OMX Stockholm and remains subject to its listing rules and reporting requirements, as well as remaining subject to the Swedish Code of Corporate Governance. MIC S.A. intends to continue to provide the same high level of investor disclosure that it has provided in the past.
Dividends On February 12, 2013, MIC S.A. announced that it will propose for approval at the general meeting of shareholders scheduled for May 28, 2013 a dividend distribution of $2.64 per share to be paid out of the Millicom Group’s 2012 profits.
9 Simplified Millicom Group structure
The following is a simplified structure chart showing the Millicom Group’s corporate structure. For more information on our ownership interests in our subsidiaries, see “Our Business.”
4.750% $500m MIC S.A. (1) Notes offered Issuer hereby (2)
South Central African American American Subsidiaries (5), (6) Subsidiaries (3), (6) Subsidiaries (4), (6)
(1) The Issuer, Millicom International Cellular S.A., is 37% owned by Investment AB Kinnevik and 1% owned by the Stenbeck family, who control Investment AB Kinnevik. The Issuer’s shares are listed in the form of Swedish depository receipts on the NASDAQ OMX Stockholm stock exchange. For more information on the Issuer’s shareholding, see “Major Shareholders and Related Party Transactions.”
(2) The Notes will be general senior obligations of the Issuer. The Notes will not be guaranteed by any of the Issuer’s subsidiaries.
(3) Not all of our Central American subsidiaries are wholly-owned. We have a 66.7% and 55% ownership interest in our Honduras and Guatemalan subsidiaries, respectively. For accounting purposes, our operations in Honduras are fully consolidated while our operations in Guatemala are consolidated using the proportional method of accounting for joint ventures under IFRS.
(4) Not all of our South American subsidiaries are wholly owned. We have a 50%+ 1 share interest in our Colombian operations, which is fully consolidated in our results of operations.
(5) Not all of our African subsidiaries are wholly owned. We have a 87.5% and 50% ownership interest in our Rwandan and Mauritius subsidiaries, respectively. For accounting purposes, our operations in Rwanda are fully consolidated while our operations in Mauritius are consolidated using the proportional method of accounting for joint ventures under IFRS.
(6) For the twelve-month period ended March 31, 2013, the Issuer’s subsidiaries, which will not guarantee the Notes, had $2,999 of total indebtedness and generated 100% of the Millicom Group’s adjusted EBITDA and represented 100% of the Millicom Group’s total assets. See “Risk Factors—Risk relating to the Notes—The Notes will be structurally subordinated to all indebtedness of the Millicom Group’s subsidiaries and will be effectively subordinated to any of the Issuer’s existing and future obligations that are secured by assets or property that do not secure the Notes.”
10 The offering The following summary is provided solely for your convenience. This summary is not intended to be complete. You should read the full text and more specific details contained elsewhere in this offering memorandum. For a more detailed description of the Notes, see “Description of the Notes.” Issuer ...... Millicom International Cellular S.A. Issue Date ...... May22,2013. Notes ...... $500million aggregate principal amount of 4.750% Senior Notes due 2020. Issue Price ...... 99.266% of the principal amount. Maturity Date ...... May22,2020. Interest Payment Dates . . . May 22 and November 22, beginning November 22, 2013. Interest ...... TheNotes will bear interest from May 22, 2013 at the annual rate of 4.750%, payable semiannually in arrears on each interest payment date. Additional Amounts ..... Anyandallpayments in respect of the Notes shall be made free and clear of, and without withholding or deduction for, any taxes imposed, levied, collected, withheld or assessed by the relevant taxing jurisdiction or any political subdivision or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law. In that event, the Issuer shall pay, subject to certain exceptions, such additional amounts necessary so that the net amount received after such withholding or deduction is the same as would have been received if no such withholding or deduction had been required. See “Description of the Notes—Additional Amounts.” Use of Proceeds ...... Thenetproceeds of the offering will be used to refinance indebtedness of MIC S.A.’s operating subsidiaries in Chad, DRC, Ghana, Senegal and Tanzania, as further discussed under “Description of Other Indebtedness”, for capital expenditures and for general corporate purposes. See “Use of Proceeds.” Ranking ...... TheNotes will: • be the general obligations of the Issuer; • rank equally in right of payment with all of the Issuer’s existing and future obligations that are not subordinated in right of payment to the Notes; • be senior in right of payment to any of the Issuer’s existing and future debt that is subordinated in right of payment to the Notes; • be effectively subordinated to any existing and future obligations of the Issuer that are secured by property or assets that do not secure the Notes, to the extent of the value of property and assets securing such obligations; and • be structurally subordinated to all existing and future obligations of the Issuer’s subsidiaries. See “Risk Factors—Risks relating to the Notes—The Notes will be structurally subordinated to all indebtedness of the Millicom Group’s subsidiaries and will be effectively subordinated to any of the Issuer’s existing and future obligations that are secured by assets or property that do not secure the Notes.”
11 Original Issue Discount . . . The Notes may be issued with original issue discount (“OID”) for U.S. federal income tax purposes. If the Notes are issued with more than a statutorily defined de minimis amount of OID, a U.S. holder of a Note will have to include such OID in gross income as it accrues (prior to the receipt of cash to which such income is attributable), based on a constant yield method and regardless of the U.S. holder’s regular method of accounting for U.S. federal income tax purposes. See “Tax Considerations—Certain U.S. Federal Income Tax Consequences for U.S. Holders.” Optional Redemption .... Prior to May 22, 2017, the Issuer may redeem all or a portion of the Notes by paying the relevant “make whole” premium described in this offering memorandum and accrued and unpaid interest and additional amounts, if any, to the redemption date. On or after May 22, 2017, the Issuer may redeem some or all of the Notes at any time at specified redemption prices plus accrued and unpaid interest and additional amounts, if any, to the redemption date as set forth under “Description of the Notes—Optional Redemption.” Prior to May 22, 2016, the Issuer may redeem up to 35% of the Notes with the proceeds of one or more equity offerings, including certain equity offerings of our subsidiaries, at a redemption price equal to 104.750% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, to the redemption date. Prior to May 22, 2016, the Issuer may redeem up to 35% of the Notes with the proceeds from the sale of one or more of the assets specified under “Description of the Notes—Optional Redemption—Optional redemption prior to May 22, 2016, upon Specified Subsidiary Sale” at a redemption price equal to 104.750% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, to the redemption date. Change of Control ...... Upon the occurrence of certain events constituting a change of control and an accompanying ratings decline, as described in the Indenture, the Issuer may be required to offer to repurchase all outstanding Notes at a purchase price equal to 101% of the principal amount thereof on the date of purchase plus accrued and unpaid interest and additional amounts, if any, to the date of purchase. See “Description of the Notes—Change of Control.” Tax Redemption ...... Intheevent of certain developments affecting taxation or certain other circumstances, the Issuer may redeem the Notes in whole, but not in part, at any time at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, and additional amounts, if any, to the date of redemption. See “Description of the Notes—Optional Redemption—Redemption upon Changes in Withholding Taxes.” Negative Covenants ..... TheNotes will be issued under an Indenture which will, among other things, limit the ability of the Issuer to: • incur or guarantee additional indebtedness; • make certain asset sales;
12 • create or permit to exist certain liens; and
• consolidate, merge or sell all or substantially all of our assets.
All of these limitations will be subject to a number of important qualifications and exceptions. See “Description of the Notes—Certain Covenants.”
Book Entry; Form and Denominations ...... TheNotes will be represented on issue by one or more Global Notes which will be delivered through The Depository Trust Company, Euroclear and Clearstream. Interests in the Global Notes will be exchangeable for the relevant definitive Notes in only certain limited circumstances. See “Book-Entry, Delivery and Form.”
Each Note will have a minimum denomination of $200,000 and integral multiples of $1,000 in excess thereof.
Listing ...... Application has been made to list the Notes on the Official List of the Luxembourg Stock Exchange and to admit the Notes for trading on the Euro MTF Market.
Transfer Restrictions ..... TheNotes will not be registered under the Securities Act or under any other national, federal, state or local securities laws and, as such, are subject to restrictions on transfer. See “Important Notice.”
Governing Law ...... TheIndenture and the Notes will be governed by, and construed in accordance with, the laws of the State of New York. For the avoidance of doubt, articles 86 to 94-8 of the Luxembourg law on commercial companies dated August 10, 1915 (as amended) (the “Luxembourg Companies Law”) are excluded.
Trustee ...... Citibank, N.A., London Branch.
Listing Agent ...... Banque Internationale à Luxembourg S.A.
Transfer Agent and Principal Paying Agent . . . Citibank, N.A., London Branch.
Registrar ...... Citigroup Global Markets Deutschland AG.
Risk Factors ...... Youshould carefully consider all of the information contained in this offering memorandum prior to investing in the Notes. In particular, we urge you to carefully consider the information set forth under “Risk Factors” beginning on page 19 for a discussion of risks and uncertainties relating to us, our business, the industry and markets in which we operate, our shareholders, our debt and the Notes.
13 Summary historical financial information and operating information The following tables present summary historical financial data for the Millicom Group. The income statements for the Millicom Group set forth below for the years ended December 31, 2010, 2011 and 2012 and the statement of financial position set forth below as of December 31, 2010, 2011 and 2012 are derived from the Millicom Group’s annual audited consolidated financial statements included elsewhere in this offering memorandum. The income statements for the three-month periods ended March 31, 2012 and 2013 and the statement of financial position data as of March 31, 2013 are derived from the Millicom Group’s unaudited interim condensed consolidated financial statements that are included elsewhere in this offering memorandum.
The Millicom Group’s consolidated financial statements for the years ended December 31, 2009, 2010 and 2011 included in this offering memorandum have been audited by PricewaterhouseCoopers, Société coopérative (formerly PricewaterhouseCoopers S.à r.l.) independent auditors (réviseur d’enterprises agréé). The Millicom Group’s consolidated financial statements for the year ended December 31, 2012 included in this offering memorandum have been audited by Ernst & Young S.A. independent auditors (cabinet de révision agréé), as stated in its report appearing herein. The Millicom Group’s unaudited interim condensed consolidated financial statements for the three months ended March 31, 2013 included in this offering memorandum have been reviewed by Ernst & Young S.A. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth herein.
The Millicom Group’s summary consolidated financial information for the twelve months ended March 31, 2013 has been derived by adding the Millicom Group’s summary consolidated financial information for the year ended December 31, 2012 to the Millicom Group’s summary consolidated financial information for the three months ended March 31, 2013 and subtracting the Millicom Group’s summary consolidated financial information for the three months ended March 31, 2012. The Millicom Group’s summary consolidated financial information for the twelve months ended March 31, 2013 has been prepared for illustrative purposes only and is not necessarily representative of the Millicom Group’s results for any future period or the Millicom Group’s financial condition at any such date. Such compilation has not been audited.
You should read this summary financial data together with “Capitalization,” “Selected Historical Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included in this offering memorandum. The historical results are not necessarily indicative of the Millicom Group’s future results of operations or financial condition.
14 Summary consolidated income statements for the years ended December 31, 2010, 2011 and 2012, the three-month periods ended March 31, 2012 and 2013, and the twelve-month period ended March 31, 2013
Twelve months Three months ended Year ended December 31, ended March 31, March 31, 2010 (as restated)(*) 2011 2012 2012 2013 2013 (unaudited) (U.S. dollars in millions, except per share data) Revenues ...... 3,920 4,530 4,814 1,168 1,246 4,892 Cost of sales ...... (1,330) (1,565) (1,737) (421) (468) (1,784) Gross profit ...... 2,590 2,965 3,077 747 778 3,108 Sales and marketing ...... (737) (817) (914) (211) (246) (949) General and administrative expenses ...... (739) (839) (956) (224) (257) (989) Other operating expenses . . (75) (96) (122) (22) (40) (140) Other operating income .... 3 44 19 5 3 17 Operating profit ...... 1,042 1,257 1,104 295 238 1,047 Interest expense ...... (215) (187) (220) (47) (66) (239) Interest and other financial income ...... 15 15 14 4 3 13 Revaluation of previously held interests ...... 1,060 –––– – Other non operating (expenses) income, net . . . (62) (4) 22 (52) 42 116 (Loss) profit from associates ...... (2) (10) (23) – (6) (29) Profit before tax from continuing operations .... 1,838 1,071 897 200 211 908 Credit (charge) for taxes .... (227) 19 (393) (91) (68) (370) Profit from the period from continuing operations .... 1,611 1,090 504 109 143 538 Profit from the period from discontinued operations, netoftax...... 12 39 – – – – Net profit for the period .... 1,623 1,129 504 109 143 538
(*) Restated to recognize the liability for the put option provided to our local partner in Honduras for its 33% stake in our Honduras operation and the related change in the value of the liability from July 1, 2010 to December 31, 2010, as discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Effects of Restatement.”
15 Summary consolidated statements of financial position as of December 31, 2010, December 31, 2011, December 31, 2012 and March 31, 2013
December 31, March 31, 2010 (as restated)(1) 2011 2012 2013 (U.S. dollars in millions) (unaudited)
Assets Current assets: Cash and cash equivalents(2) ...... 1,023 861 1,174 1,137 Other current assets ...... 627 853 904 1,020 Total current assets ...... 1,650 1,714 2,078 2,157 Non-current assets: Intangible assets, net ...... 2,282 2,170 2,419 2,459 Property, plant and equipment, net .... 2,768 2,865 3,108 3,020 Other non-current assets ...... 110 467 585 561 Total non-current assets ...... 5,160 5,502 6,112 6,040 Assets held for sale(3) ...... 185 66 21 19 Total assets ...... 6,995 7,282 8,211 8,216 Liabilities and equity Current liabilities: Debt and financing ...... 555 621 693 760 Put option liability(4) ...... 769 745 730 678 Other current liabilities ...... 1,130 1,323 1,570 1,481 Total current liabilities ...... 2,454 2,689 2,993 2,919 Non-current liabilities: Debt and financing ...... 1,797 1,817 2,566 2,535 Other non-current liabilities ...... 294 321 311 296 Total non-current liabilities ...... 2,091 2,138 2,877 2,831 Liabilities directly associated with assets held for sale ...... 61 9 5 4 Total liabilities ...... 4,605 4,836 5,875 5,754 Parent’s equity interests ...... 2,344 2,255 2,024 2,199 Non-controlling equity interests ...... 46 191 312 263 Total shareholders’ equity ...... 2,390 2,446 2,336 2,462 Total equity and liabilities ...... 6,995 7,282 8,211 8,216
(1) Restated to recognize the liability for the put option provided to our local partner in Honduras for its 33% stake in our Honduras operation and the related change in the value of the liability from July 1, 2010 to December 31, 2010, as discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Effects of Restatement.”
(2) Cash and cash equivalents excludes the following amounts of restricted cash for our MFS business: $20 million (fiscal 2011), $43 million (fiscal 2012) and $48 million (March 31, 2013).
(3) Assets held for sale represents discontinued operations and towers sold but not yet transferred to the tower companies and not part of the sale-leaseback arrangement.
(4) Put option liability represents the redemption price of the Honduras put option discussed in note 1 above. For details of the valuation of the redemption price, see note 28 to the Millicom Group’s annual consolidated financial statements included elsewhere in this offering memorandum.
16 Summary of other financial information for the years ended December 31, 2010, 2011 and 2012 and the twelve-month period ended March 31, 2013
Twelve months Year ended December 31, ended March 31, 2010 2011 2012 2013 (U.S. dollars in millions, except as indicated, unaudited) Adjusted EBITDA(1) ...... 1,735 1,974 1,921 1,880 Adjusted EBITDA margin(2) ...... 44% 44% 40% 38% Total debt(3) ...... 2,352 2,438 3,259 3,303 Cash and cash equivalents(4) ...... 1,023 861 1,174 1,137 Net debt (excluding restricted cash) (5) ...... 1,329 1,577 2,085 2,166 Net debt (excluding restricted cash)/adjusted EBITDA ratio ...... 0.8x 0.8x 1.1x 1.2x Free Cash Flow(6) ...... 786 981 699 395 Capital expenditures ...... 747 849 1,120 1,141 Financial information and ratios adjusted for this offering:(7) As adjusted total debt ...... 3,338 As adjusted interest expense(8) ...... 244 Adjusted EBITDA/as adjusted interest expense ...... 7.7x As adjusted total debt/adjusted EBITDA ...... 1.8x As adjusted net debt (excluding restricted cash)(9) ...... 2,181 As adjusted net debt (excluding restricted cash)/adjusted EBITDA ...... 1.2x
(1) We calculate adjusted EBITDA by adding depreciation and amortization and deducting the net gain or loss on the disposal and impairment of assets to operating profit (which is calculated by deducting cost of sales, sales and marketing costs and general and administrative expenses from revenue and adding other operating income, net). A reconciliation of operating profit to adjusted EBITDA is included below. Adjusted EBITDA should not be considered as an alternative to net profit as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Adjusted EBITDA as used herein is not the same as “Consolidated EBITDA” as defined in the Indenture for the purpose of the Notes. Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. (2) We define adjusted EBITDA margin as adjusted EBITDA divided by revenues. Adjusted EBITDA margin is not a recognized term or measure of performance under IFRS. (3) Total debt represents all indebtedness from borrowings. (4) Cash and cash equivalents does not include $20 million (fiscal 2011), $43 million (fiscal 2012), $27 million (March 31, 2012) and $48 million (March 31, 2013) held as restricted cash for our MFS business. (5) Net debt represents our total debt less our cash and cash equivalents. (6) A reconciliation of operating profit to Free Cash Flow is included below. Free Cash Flow should not be considered as an alternative to net profit as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Free Cash Flow as presented may not be comparable to similarly titled measures of other companies. (7) The adjusted financial information and ratios presented in this table have been prepared for the purpose of showing the effect of this offering and the expected use of net proceeds as described under “Use of Proceeds” as if this offering had occurred on March 31, 2013, with respect to balance sheet data, and April 1, 2012, with respect to income statement data, and has been prepared for illustrative purposes only. This table should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this offering memorandum and the other information about our operations, results and indebtedness elsewhere in this offering memorandum. Because of its nature, as adjusted financial information and ratios presented address a hypothetical situation and, therefore, do not represent our actual financial position. (8) As adjusted interest expense comprises the cash interest expense in connection with our outstanding indebtedness (including interest payable on the Notes) as if the offering had taken place on April 1, 2012. (9) As adjusted net debt (excluding restricted cash) represents our net debt (excluding restricted cash) after completion of this offering and application of the proceeds to the repayment of indebtedness, as described in “Use of Proceeds.”
17 Reconciliation of the Millicom Group’s operating profit to adjusted EBITDA
Year ended Twelve months December 31, ended March 31, 2010 2011 2012 2013 (U.S. dollars in millions, unaudited) Operating profit ...... 1,042 1,257 1,104 1,047 Depreciation and amortization ...... 677 739 811 824 Net loss (gain) on disposal and impairment of assets ...... 16 (22) 6 9 Adjusted EBITDA ...... 1,735 1,974 1,921 1,880
Reconciliation of the Millicom Group’s operating profit to Free Cash Flow
Year ended Twelve months December 31, ended March 31, 2010 2011 2012 2013 (U.S. dollars in millions, unaudited) Operating profit ...... 1,042 1,257 1,104 1,047 Depreciation and amortization ...... 677 739 811 824 Net loss (gain) on disposal and impairment of assets ...... 16 (22) 6 9 Share-based compensation ...... 31 17 22 22 Changes in working capital ...... 1 15 84 43 Interest paid ...... (171) (141) (169) (176) Interest received ...... 15 14 11 9 Taxes paid ...... (239) (268) (284) (298) Purchase of intangible assets and license renewals ...... (26) (57) (159) (273) Purchase of property, plant and equipment ...... (597) (700) (842) (857) Proceeds from the sale of property, plant and equipment ...... 37 127 115 45 Free Cash Flow ...... 786 981 699 395
Summary of operating data for the years ended December 31, 2010, 2011 and 2012 and the three-month period ended March 31, 2013
Three months Year ended December 31, ended March 31, 2010 2011 2012 2013 Operating Data(1) (unaudited) Total Customers: Prepaid ...... 36,123,812 40,098,896 43,906,742 44,005,282 Postpaid ...... 2,465,768 2,986,194 3,321,958 3,398,847 Monthly Churn: Prepaid ...... 5.7% 5.1% 4.9% 4.7% Postpaid ...... 2.1% 2.4% 2.6% 2.8% ARPU: Central America ...... $ 11.11 $ 11.89 $ 11.24 $ 10.54 South America ...... $ 11.94 $ 13.13 $ 12.81 $ 12.74 Africa ...... $ 5.58 $ 5.07 $ 4.43 $ 4.19 (1) Operating data excludes discontinued operations.
18 Risk factors In addition to the other information contained in this offering memorandum, you should carefully consider the following risk factors before purchasing the Notes. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may also adversely affect the business, financial condition and results of operations of the Millicom Group. If any of the possible events described below were to occur, the business, financial condition and results of operations of the Millicom Group could be materially and adversely affected. If that happens, the Issuer may not be able to pay interest or principal on the Notes when due, and you could lose all or part of your investment. This offering memorandum also contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, including the risks described below and elsewhere in this offering memorandum.
Risks relating to our business and the telecommunications industry Many of the mobile telecommunications markets in which we operate have high mobile penetration levels, inhibiting growth opportunities, and we face intense competition from other telecommunications providers. High penetration Most of the Latin American markets in which we operate have mobile phone penetration levels close to or in excess of 100%, with the exception of Bolivia, Honduras and Guatemala. Although there are some opportunities for further growth, high penetration rates could lead to a slowdown in growth and the intensification of pricing pressures on voice telephone services. Likewise, urban areas in the African markets in which we operate have high mobile penetration rates, which has led to increases in pricing pressures. To pursue future growth, we are strengthening and expanding our services in urban areas while also increasing our mobile coverage in selected rural areas where we see the strongest expansion potential. However, in many rural areas, ARPU is lower and costs are higher, which could adversely affect our future profitability and returns on investments.
Pricing pressure The markets in which we operate are competitive in nature, and we expect that competition will continue to remain high. Our main competitors are America Móvil (Claro), MTN, Bharti Airtel, France Telecom (Orange), Vodafone, and Telefonica. Most of our competitors have substantially greater resources than we do in terms of access to capital, and in some of our markets, our competitors may have a greater coverage area than we do. Emerging markets mobile telecommunications operators compete for customers principally on the basis of price, services offered, advertising and brand image, quality and reliability of service and coverage area. Price competition is significant on voice and SMS services, which still represent the vast majority of the Millicom Group’s revenues (together they represented 68% of the Millicom Group’s revenues in 2012), but they are largely commoditized, as the ability to differentiate these services among operators is limited and penetration is high. Competition has resulted in pricing pressure, reduced margins and profitability, increased customer churn and the loss of revenue and market share, especially in competitive markets like Ghana and Tanzania where we face strong, well- funded competitors.
High number of competitors In some of our markets, there may be more mobile telephone operators than the market is able to sustain, and additional licenses may be awarded in already competitive markets. In Chad and Colombia, for example, regulators are considering auctioning new telecom licenses that would favor new entrants. If new competitors enter into our markets and price competition intensifies, our customers may move to another mobile operator, especially as most of our customers are
19 prepaid which allows them to switch operators at any time. Mobile number portability is required in some of our markets, which we believe also facilitates free movement among providers. This movement may result in a decline in our number of customers, which would adversely affect our results. In addition, the emergence of new entrants with Voice over Internet Protocol (“VoIP”) offerings for both voice and instant messaging, and the convergence of social and search products or other Over-The-Top content (OTT) services further increases competitive risks. Any failure by us to compete effectively, or aggressive competitive behavior by our competitors, including MVNOs and resellers in Latin America, in pricing their services or acquiring new customers, could have a material adverse effect on our business, financial condition and results of operations.
Our revenue sources are short-term in nature. Prepaid customers, which are customers who pay for service in advance through the purchase of wireless airtime, represented 93% of our customers as of March 31, 2013, and 62% of our revenues for the three-month period ended March 31, 2013. As prepaid customers do not sign service contracts, our customer base is more likely than postpaid customers to switch mobile service providers. As a result, we cannot be certain that prepaid customers will continue to use our services in the future, which makes our future revenue expectations unpredictable.
Migration between mobile service providers and ARPU sharing can negatively impact our churn and revenue. Our customers have a tendency to migrate among service providers. To the extent our competitors offer incentives to switch wireless service providers, by eliminating connection fees or subsidizing or giving away handsets, the risk of churn increases. Our inability to retain existing prepaid customers and manage churn levels could cause short-term adverse revenue impacts, which could have a material adverse effect on our business, financial condition and results of operations. In Africa, our churn rate fluctuates and is higher upon the entrance of new competitors to the markets. Our churn rate is more stable in Latin America as the market is more stable. The average monthly churn rates for our Central American, South American and African operating segments were 3.2%, 4.7% and 5.5%, respectively, for the three months ended March 31, 2013, which compares with churn rates for our Central American operating segment for fiscal 2012, 2011 and 2010 of 4.1%, 4.6% and 4.7%, respectively, churn rates for our South American operating segment for fiscal 2012, 2011 and 2010 of 4.1%, 4.0% and 4.2%, respectively, and churn rates for our African operating segment for fiscal 2012, 2011 and 2010 of 5.1%, 6.2% and 6.7%, respectively. ARPU sharing is also common in many of the markets in which we operate. This is the use by a prepaid customer of SIM cards from multiple providers to avoid paying higher prices for calls made to numbers outside of network of customers, or ‘off-net’ calls. Historically, off-net calls have been more expensive than on-net calls. For this reason, many prepaid customers engage in SIM card switching, resulting in ARPU sharing, which has negatively affected our revenues with respect to customers who use our network as their primary service provider. In response to ARPU sharing, we have developed a “smart pricing strategy,” in which we create different products based on the needs of our different customers, offering the services they need for a reduced price. However, despite the adoption of our “smart pricing strategy,” we cannot ensure that ARPU sharing will decrease or remain at current levels. If we are unable to effectively price and market our services in our stronger markets, we could lose a larger percentage of our revenue due to ARPU sharing, which could have a material adverse effect on our business, financial condition and results of operations.
If we cannot successfully develop and operate our networks and distribution systems, we will be unable to expand our customer base and will lose market share and revenues. Our ability to increase or maintain our market share and revenue is partly dependent on the success of our efforts to expand our business, the quality of our services and the management of our networks and distribution. The build-out of our networks and distribution is a capital
20 intensive process that is subject to risks and uncertainties which may delay the introduction of service and increase the cost of network construction or upgrade. Such uncertainties include constraints on our ability to fund additional capital expenditures, as well as external forces, such as obtaining necessary permits from regulatory and other local authorities. To the extent we fail to expand and upgrade our network and distribution capabilities on a timely basis, either through a lack of funding for capital expenditures or other external forces, we may experience difficulty in expanding our customer base.
In addition, our ability to operate successfully is dependent upon our ability to deploy sufficient resources to operate the networks we own or manage, including those which are managed independently through tower sharing arrangements with other operators. The failure or breakdown of key components of our networks, including hardware and software, may have a material adverse effect on the results of our operations. In addition, a breach in network security could cause network downtime, revenue leakage and brand impact. Some of the emerging services have a higher degree of risk as the equipment for them is not yet standardized. Cyber attacks are becoming more frequent in the telecommunications industry. We have an information security framework and organization in place; however, a cyber attack to any of our switches or core platforms could cause service downtime and negatively affect our revenues and brand. For example, our IT system in one of our markets was recently hacked while undergoing remote maintenance, resulting in the termination of a substantial number of international calls on our network. We have implemented a project to strengthen our network security throughout our markets in response to this incident. However, we cannot assure you that we will be able to prevent future attacks of this nature, and if we are unable to do so, there could be a material adverse effect on our results of operations.
We are increasingly dependent on key suppliers to source required network resources.
We seek to standardize our equipment to ease equipment replacement and reduce downtime of our network, which means that we are increasingly relying on a limited number of leading international communications equipment manufacturers to provide network and telecommunications equipment and technical support. The key suppliers of equipment for our existing networks are Ericsson, Huawei, Converse Tellabs, NEC, MACH and Tech Mahindra. The key suppliers of our handsets, both in terms of volume of sales and importance to our operations, are Nokia, Sony Ericsson, Samsung, BlackBerry and Apple. We have limited influence over our key suppliers and cannot assure you that we will be able to obtain required equipment on favorable terms or at all. We import all of the handsets we sell in our markets. While we believe that, notwithstanding recent consolidation in the industry, there are a number of alternative suppliers of network equipment, handsets and accessories available to us, if we are unable to obtain adequate alternative supplies of equipment or technical support in a timely manner or on acceptable commercial terms, or if there are significant increases in the cost of these supplies, including because of new barriers to import such products, our ability to maintain and expand our telecommunications networks and business may be materially and adversely affected.
Because our operations are dependent upon access to networks not controlled by us, we rely on interconnect agreements, the terms of which could be made less favorable due to market participants or regulatory changes.
Our ability to provide telecommunications services would be severely hampered if our access to local and long distance line capacity was limited or if the commercial terms of our interconnect agreements were significantly altered. Our ability to secure and maintain interconnect agreements with other wireless and local, domestic and international fixed-line operators on cost-effective terms is critical to the economic viability of our operations. Interconnection is required to complete calls that originate on our respective networks but terminate outside of our respective networks, or that originate from outside our networks and terminate on our respective networks. A significant increase in our costs with respect to our interconnect agreements as a result of new regulations or commercial decisions by other fixed-line operators
21 or a lack of available line capacity for interconnection could have a material adverse effect on our ability to provide services. Further, in some of our markets, regulators have reduced interconnection rates. As we are often one of the largest suppliers of telephone services in the countries in which we operate, and interconnect fees are a significant source of revenue for us, a reduction in interconnection rates could reduce our revenue. For example, in 2010 the regulator in El Salvador reduced interconnection rates by 70%, and in 2012, the regulator in Paraguay reduced interconnection rates by one-third. Because our customers in El Salvador receive significantly more off-network calls than they initiate, the change in the interconnect rate had a significant adverse impact on the revenues and profitability of our El Salvador operations. Although we are not aware of any other proposed cuts of this magnitude, if regulators in other markets instituted similar changes, the reduced interconnection rates could have a material adverse effect on our overall results of operations.
The mobile telecommunications industry is characterized by rapid technological change and continually evolving industry standards, which could harm our competitive position, render our products obsolete and cause us to incur substantial costs to replace our products or implement new technologies. The telecommunications industry is characterized by rapidly changing technology and evolving industry standards. Across the Millicom Group, our networks are based on the GSM standard, which has been most appropriate for our markets because it has the greatest availability of handsets with strong functionality and has relatively lower repair and maintenance costs compared to other technologies. We have 3G-enabled networks in Latin America, Ghana, Tanzania, Mauritius and Rwanda, and we intend to launch our 3G networks in DRC and Senegal by mid-2013. In many of our markets, our competitors already have 3G networks. Developing a 3G network, however, requires significant financial investments. In fiscal 2011, fiscal 2012 and the first three months of 2013, the Millicom Group spent $44 million, $155 million and $70 million, respectively, on acquisition of spectrum, and we expect to purchase significantly more spectrum in the next few years. We also expect to face future competition from networks that provide faster, higher quality data transfer and streaming capability than 2G and 3G networks, such as 4G or LTE.
Challenges in meeting customer demand for new technology The Millicom Group is experiencing customer demand for more sophisticated telecommunications and internet services, such as VoIP, push-to-talk services, location based services, mapping technology, social networking services, and high-speed data services, including streaming audio, streaming video, mobile gaming, advertisement paid services, video conferencing and other applications, particularly in our Latin American markets. Accordingly, our future growth and success will depend, in part, on the adoption of a favorable policy and regulation of standards for utilizing these technologies and meeting our customers’ demand for new and improved services and our ability to capture revenues proportionate to traffic volumes across our networks.
Challenges of adapting to future technological developments Our success will also depend on our ability to adapt to the changing technological landscape. It is possible that the technologies we utilize today will become obsolete or subject to competition from new technologies in the future for which we may be unable to obtain the appropriate licenses. We may not be able to meet all of these challenges in a timely and cost-effective manner. In addition, we may require additional or supplemental licenses to implement new technology in order to remain competitive, and we may be unable to acquire such licenses on reasonable terms or at all.
High cost of replacement or upgrade of existing infrastructure As new technologies are developed or upgraded, such as 4G systems, including WiMAX and LTE, our equipment may need to be replaced or upgraded or we may need to rebuild our mobile
22 telephone network, in whole or in part. Unforeseeable technological developments may also render our services unpopular with customers or obsolete. If our equipment or systems become obsolete, we may be required to recognize an impairment charge on such assets, which may have a material adverse effect on our results of operations. For example, LTE, a standard for 4G, is currently being implemented in some countries, including Tanzania and Mauritius, and we may have to invest a significant amount of money to follow competition and to secure our competitiveness with respect to this technology. Despite significant expenditures on spectrum, we cannot assure you that we will be able to develop a 3G network on commercially reasonable terms, that we will not experience delays in developing our 3G network or that we will be able to meet all of the license terms and conditions. If we experience substantial problems with our 3G services, or if we fail to introduce new services on a timely basis relative to our competitors, it may impair the success of our 3G services, delay or decrease revenues and profits and therefore may hinder recovery of our significant capital investments in 3G services as well as our growth.
The mobile telecommunications market is heavily regulated. The licensing, construction, ownership and operation of mobile telephone networks, and the grant, maintenance and renewal of mobile telephone licenses, as well as radio frequency allocations and interconnection arrangements, are regulated by national, state, regional or local governmental authorities in the markets in which we operate. In addition, such matters and certain other aspects of mobile telephone operations, including rates charged to customers and resale of mobile telephone services, and user registrations may be subject to public utility regulation in each market. Our operations also typically require government permits, including permits for the construction and operation of cell sites. In some of the countries where we operate, particularly in Tanzania, the lack of permits has caused delays in the deployment of necessary fiberoptic backbones. The Sentel license to provide mobile telephony services in Senegal was previously challenged by the Senegalese authorities. On October 12, 2012, we settled our dispute with the Senegal government over the validity of our license. In addition, the settlement agreement granted us a 3G license, an alignment of our license terms with those of other operators, additional spectrum and a 10-year extension of the license to 2028 for which we agreed to pay $103 million. Changes in regulations may subject us to claims or regulatory actions relating to past or future non-compliance with permit requirements, and changes in the regulation of our activities, such as increased or decreased regulation affecting prices or requirements for increased capital investments, may materially adversely affect us. For example, during the first three months of 2013, mobile termination rates were cut by 17% to 4 cents in Colombia, by 34% to 2 cents in Honduras, by 25% to 6 cents in DRC and by 70% in Tanzania to 2 cents. Such regulatory changes could have a material adverse effect on our results of operations.
Our licenses are granted for specified periods and they may not be extended or replaced upon expiration. Most of our licenses are granted for specified terms, and we can have no assurance that any license will be renewed upon expiration. Some of our telecommunications licenses have recently been renewed and extended beyond 2020. Other licenses are due to expire while the Notes will be outstanding, including our mobile telecommunications licenses in Chad (2014), Mauritius (2016), Bolivia (2015), Paraguay (2014, 2016 and 2017), El Salvador (2018) and Ghana (2019). If renewed, our licenses may contain additional obligations, including payment obligations, or may cover reduced service areas or permit a more limited scope of service.
Our licenses may be suspended or revoked and we may be fined or penalized for alleged violations of law or regulations. Our telecommunications licenses and legislation regulating the telecommunications industry in the countries in which we operate impose standards and conditions on our operations. If we fail
23 to comply with the conditions of our licenses or with the requirements established by the legislation regulating the telecommunications industry, or if we do not obtain permits for the operation of our equipment, use of frequencies or additional licenses for broadcasting directly or through agreements with broadcasting companies, we anticipate that we would have an opportunity to cure any non-compliance. However, we cannot assure you that we will receive a grace period, and we cannot assure you that any grace afforded to us would be sufficient to allow us to cure any remaining non-compliance. In the event that we do not cure any remaining non-compliance, the applicable regulator could decide to suspend and seek termination of the license. The occurrence of any of these events could materially adversely affect our ability to build out our networks in accordance with our plans and could harm our reputation. If we fail to fulfill the specific terms of any of our licenses, frequency permissions or other governmental permissions or if we provide services in a manner that violates applicable legislation, government regulators may levy fines, suspend or terminate our licenses, frequency permissions, or other governmental permissions or refuse to renew licenses that are up for renewal. A suspension and the subsequent termination of any of our telecommunications licenses or a refusal to renew our licenses could materially adversely affect our business, financial condition and results of operations.
Most of the countries in which we operate do not have universal service obligations; if such obligations were introduced, the profitability of our operations could be negatively impacted.
There is a divide in all of the countries in which we operate in relation to access to telecommunications services (mobile, internet access, and higher bandwidth telecommunication services) between urban and rural areas. When such services are available in rural areas, they are usually at significantly higher cost to the customer than in urban areas due to lower population density and access challenges due to lack of basic infrastructure, in particular roads and electricity. The purpose of universal service is to provide access to persons in non-urban and isolated areas to telephone and other telecommunications services by infrastructure build-out through subsidies. The goal of universal service is to promote the availability of quality services at fair, reasonable and affordable rates in all areas of a country, to increase access to advanced telecommunications services, and to enhance the availability of such services to all consumers, including those in isolated rural areas, at rates that are reasonably comparable to those charged in urban areas.
We believe that universal service obligations are a risk in the telecommunications industry and expect more of the countries in which we operate to introduce such obligations in the future. If universal service obligations were introduced in more of the markets in which we operate, we believe this could have a negative impact on our profitability.
Transferring the ownership and control of our passive infrastructure could adversely impact the availability and quality of service we can offer to our customers.
In 2010 and 2011, we entered into four transactions whereby we sold and leased back a significant amount of our passive infrastructure (towers) in DRC, Ghana, Tanzania and Colombia, and we may engage in similar transactions in the future in our other markets. Through these sale and lease-back transactions, the Millicom Group is transferring title and/or control of the passive infrastructure to a dedicated tower management company in which we retain an equity interest. Although the contracts impose performance obligations on the service providers, we cannot guarantee that they will meet these obligations or implement remedial action in a timely manner.
The towers transferred to tower management companies may be shared with other networks in each country (other than in Ghana, under the terms of the lease). The tower agreements allow us to withdraw for cause, including failure to obtain government permission, without restriction, subject to prior written notice (of a duration varying between 60 and 120 days, depending on the agreement), as further discussed under “Major Shareholders and Related Party Transactions— Related Party Transactions—Millicom Group—Helios Towers and American Towers.”
24 Equipment and network systems failures, including failures caused by unreliable electricity supply, could result in reduced user traffic and revenues, require unanticipated capital expenditures or harm our reputation. Our technological infrastructure is vulnerable to damage and disruptions from numerous events, including fire, flood, windstorms and other natural disasters, power outages, terrorist acts, equipment and system failures, human errors and intentional wrongdoings, including breaches of our network and information technology security. Unanticipated problems at our facilities, network or system failures or the occurrence of such unanticipated problems at the facilities, network or systems of third parties on which we rely could result in reduced user traffic and revenues, regulatory penalties or penal sanctions or require unanticipated capital expenditures. Risks to our network include sabotage, theft and poor equipment maintenance, which are ongoing risks, especially in DRC, Chad and in Central America. The occurrence of network or system failure could also harm our reputation or impair our ability to retain current subscribers or attract new subscribers, which could have a material adverse effect on our business, financial condition and results of operations. In addition, our business is dependent on certain sophisticated critical systems, including exchanges, switches and other key network elements, physical infrastructure and our billing and customer service systems. If damage were to occur to any of these systems, or if those systems develop other problems, such events could prevent us from providing services to our customers and result in substantial uninsured losses which could have a material adverse effect on our business, financial condition and results of operations.
We may incur significant costs from wireless fraud, which could adversely affect us. We incur costs and revenue losses associated with the unauthorized use of our networks and call bypass fraud, including administrative and capital costs associated with the unpaid use of our networks as well as with detecting, monitoring and reducing the incidences of fraud. Fraud also impacts interconnection costs, capacity costs, administrative costs and payments to other carriers for unbillable fraudulent roaming charges. For example, in February 2012, our operations in Mauritius reported two separate incidents of suspected international incoming call bypass fraud and illegal delivery of international calls to the Information and Communication Technologies Authority in Mauritius. These incidents involved three local companies that were suspected of using a cell site for the provision of unlicensed international long distance services. We take preventative actions in all the countries in which we operate with respect to fraud and bypass, such as dedicating employees to fraud detection and investigation. Most of our African operations have dedicated teams monitoring possible fraudulent activity, and we have controls in place to respond. When bypass fraud is detected by our monitoring team, we contact the regulator to have the illicit activities blocked. However, any continued or new fraudulent schemes could have an adverse effect on our business, financial condition and results of operations.
Some of our new mobile products and services, such as MFS, are complex and increase our exposure to fraud, money laundering, and reputational risk. Some of our new products and services, such as MFS, are unlike other existing services and involve new distribution channels, and new regulatory and compliance requirements. For example, in most markets in which we have launched MFS, there are no specific regulations governing our payment services, which do not come under the scope of banking or financial regulation, and the compliance requirements are continuing to evolve. These new products also involve cash handling, exposing us to risk of fraud and money laundering and potential reputational damage if these were to occur.
Our joint ventures are accompanied by inherent business risks. We have entered into joint ventures in respect of some of our operations where we do not exercise sole management control, and our ability to receive funds is dependent upon the consent of shareholders who are not under our control. In Guatemala and Mauritius, our local
25 partners have sufficient rights to prevent us from having full control. Our ability to withdraw funds, including dividends, from these operations and to exercise management control over our partners may depend on consent of the other participants. While the precise terms of the arrangements vary, our operations may be negatively affected in the event of disagreements with our partners. Further, emerging market joint ventures are often accompanied by risks, including in relation to:
• the possibility that a joint venture partner will default in connection with its obligations;
• the possibility that a joint venture partner will hinder development by blocking capital increases and other decisions if that partner runs out of money, disagrees with our views on developing the business, or loses interest in pursuing the joint projects;
• potential joint and several or secondary liability for transactions and liabilities of the joint venture entity;
• possible termination by the joint venture partner, either as a matter of right or by virtue of our alleged non-compliance with the applicable joint venture agreement;
• the difficulty of maintaining uniform standards, controls, procedures and policies; and
• the loss of a joint venture partner and the associated benefits, such as insight on operating a business in an economic, social and political environment that is unfamiliar to us.
If we undergo a change of control, we may have significant payment obligations to our Honduran local partner.
We have a 67% equity interest in our Honduras operation, Telefonica Celular S.A. de C.V. (Celtel). The remaining 33% of Celtel is owned by our local partner. On July 1, 2010, we reached an agreement with our local partner whereby it granted us an unconditional call option for the next five years for its 33% stake in Celtel, and we granted our local partner a conditional put option for the same duration in the event of a change of control of the Millicom Group. If MIC S.A. undergoes a change of control, and our local partner exercises its put option, we may have significant payment obligations to our local partner, which could have a material adverse effect on our financial condition and results of operations.
The level, structure and obligations connected with our debt, including the obligations under the Notes, could impair our liquidity and our ability to expand or finance our future operations.
As of March 31, 2013, the Millicom Group’s total consolidated debt was $3,303 million, of which $776 million benefited from corporate guarantees issued by MIC S.A. As of March 31, 2013, the total debt and financing of the Millicom Group that was secured by either pledged assets, pledged deposits issued to cover letters of credit or guarantees issued was $1,405 million.
If the Millicom Group substantially increases its consolidated level of debt, it may experience negative consequences. For example, it may:
• require the Millicom Group to dedicate a large portion of its cash flow from operations to fund debt payments, thereby reducing availability of its cash flow to fund working capital, capital expenditure and for other general corporate purposes;
• increase the Millicom Group’s vulnerability to adverse general economic or industry conditions or loss of significant operations;
• limit the Millicom Group’s flexibility in planning for, or reacting to, changes in its business or the industry or markets in which it operates;
• limit the Millicom Group’s ability to raise additional debt or equity capital, or increase the cost of such funding;
26 • restrict the Millicom Group from making strategic acquisitions or exploiting business opportunities;
• make it more difficult for the Millicom Group to satisfy its obligations with respect to its debt;
• reduce the Millicom Group’s ability to pay dividends and prevent it from complying with its dividend policy; and
• place the Millicom Group at a competitive disadvantage compared to competitors who might have less debt.
Fraud, labor disruptions or increased labor costs could materially adversely affect our business.
The lack of developed legal and regulatory frameworks can lead to incidences of fraud in many of the countries in which we operate. Though we have implemented and consistently evaluate our systems of internal controls, we have been in the past and may in the future be susceptible to fraudulent activity by our employees or third party contractors, which could have a material adverse effect on our results of operations. In addition, if we experience a material labor disruption, strike or material dispute with trade unions established by our employees, or significantly increased labor costs, we may not be able to timely or cost effectively meet customer demands and provide our standard level of customer care, which could reduce our profitability. Further, we have in the past been a party to labor disputes with some of our employees on an individual basis. We cannot assure you that these claims or future claims will not have an adverse effect on our business, financial conditions or results of operations. Additionally, labor issues that affect third parties that we rely on for services and technology could also have a material adverse effect on us if those issues interfere with our ability to obtain necessary services and technology on a timely basis.
In Senegal during the second half of 2012 and 2013, we have been engaged in discussions with our employee union, which has generated some labor disruptions and limited strikes during the course of these discussions. On May 10, 2013, our employee union began an unlimited strike to pressure management into concessions, including commencing collective bargaining agreement discussions. The labor ministry has been involved, and our network operations in Senegal have not been adversely affected. In addition, in December 2011, Millicom Tchad received notification of a labor strike in our operations in Chad. The strike lasted for three days before being resolved through negotiations. If we experience similar labor disputes in any of our other operations, it could materially adversely affect our business, financial conditions, or results of operations.
Failure to maintain the historical reputation of our brand or impairment of our key intellectual property rights would adversely affect our business.
Our intellectual property rights, including our key trademarks and domain names, which are well known in the telecommunications markets in which we operate, are important to our business. The brand name “Tigo” and currently used figurative trademark are extremely important assets. If we are unable to maintain the reputation of and value associated with our “Tigo” brand name, we may not be able to successfully retain and attract subscribers. Our reputation may be harmed if any of the risks described in this “Risk Factors” section materialize. Any damage to our reputation or to the value associated with our “Tigo” brand name could have a material adverse effect on our business, financial condition, results of operations and prospects.
A significant part of our revenue is derived from products and services marketed under our “Tigo” brand name. We rely upon a combination of trademark and copyright laws, database protections and contractual arrangements, where appropriate, to establish and protect our intellectual property rights. We may be required to bring claims against third parties in order to protect our intellectual property rights, and we may not succeed in protecting such rights. As a result, we may not be able to use intellectual property that is material to the operation of our business. The diversion of our management’s time and resources along with potentially significant expenses that could be involved could materially adversely affect our business,
27 financial condition, results of operations and prospects. In addition, any lawsuits concerning intellectual property, regardless of their outcome, could have a material adverse effect on our business, financial condition and results of operations.
Risks relating to the markets in which we operate Some of the countries in which we operate have a history of political instability and any current or future instability may negatively affect our revenues or ability to conduct business. We offer mobile telephone services and cable television services in 15 markets in Latin America and Africa. Many of the countries in which we operate are considered to be emerging economies and can therefore be subject to greater political and economic risk than developed countries. The governments of these 15 countries differ widely with respect to type of government, constitution, and stability and many of these countries lack mature legal and regulatory systems. Some of the countries in which we operate suffer from political instability, civil unrest, or war- like actions by anti-government insurgent groups. These problems may continue or worsen, potentially resulting in significant social unrest or civil war. For example, there was social unrest in DRC surrounding the 2011 election which saw the re-election of President Joseph Kabila amid accusations of corruption and incompetence in the electoral proceedings. In November 2012, members of the rebel group March 23 Movement (M23) in DRC seized the city of Goma and threatened the entire country. The rebels have since pulled out of Goma, but remain a threat. As we do not have operations in the eastern part of the country, our operations have not been affected by the rebel activity. There was also political and civil tension in Senegal before the February 2012 election when incumbent President Wade amended the constitution to allow him to run for a third term. Additionally, unrest in northern Chad flares up sporadically, following an initial rebellion in 1998. Any political instability or hostilities in the markets in which we operate can hinder economic growth and reduce discretionary consumer spending on our services, especially VAS, and may result in damage to our networks or prevent us from selling our products and services. We face a number of risks as a result of such political instability, ranging from the risk of network disruption, sometimes resulting from government requests to shut down our network in areas experiencing hostilities, as well as forced and illegal abuse of our network by political forces. We also face the risk that we may have to evacuate some or all of our key staff from certain countries, in which case there is no guarantee that we would be able to continue to operate our business as previously conducted in such countries. Any of these events would adversely affect our revenues or results of operations.
The countries in which we operate have political regimes that may not view foreign business interests favorably and may attempt to expropriate all or part of our local assets or impose controls on our operations. The governments of the jurisdictions in which we operate may, at times, attempt to nationalize telecommunications operations or take other action that is unfavorable to foreign business interests. For example, in 2008 the Bolivian government nationalized the telecommunications company Entel, which had been privatized under previous presidential regimes. Other such actions might take place in our sector in connection with government decisions to regain more control over national economies or industries considered to be of strategic national importance in the countries in which we operate. In Tanzania, for example, a comprehensive regulatory framework for electronic and postal communication was adopted in 2010 which requires that 35% of a telecommunications company’s shares must be owned by local shareholders and requires the Tanzanian government to implement regulations requiring telecommunications companies to list their shares on the Dar-es-Salaam Stock Exchange. These regulations are not yet effective and may not apply to our company, but may potentially require us to offer shares of our Tanzanian subsidiary to the public. We are also exposed to risks that governments of the countries in which we operate may impose measures to lower tariffs offered to customers and improve the offer and availability of mobile
28 telephone and other telecommunications services in isolated rural areas via universal service obligations, or increase taxes on private foreign owned businesses such as ours, to increase government revenues. Measures like these may have the effect of increasing our network operation or rollout costs and reducing the profitability of our operations and threaten the return on investment.
Most of the countries in which we operate have underdeveloped economies with low GDP per capita and therefore any increased inflationary pressures and downturns could significantly impact our revenues. Consumption of mobile telephone services in the markets in which we operate is driven by a country’s GDP, the level of consumer discretionary income, and consumers’ willingness to accept potential price increases. Most of these economies have large populations living on a paycheck- to-paycheck basis and primarily spending income on basic items such as food, housing and clothing, with less income to spend on discretionary items like mobile telephone services. Downturns in the economies of any particular country or region in which we operate may adversely affect demand for our services, which would negatively impact our revenues. Discretionary income available for our services can be impacted by a country’s general inflation rate, with food price inflation having a particularly significant impact. Some of these countries have historically experienced high inflation rates, although in recent years, inflation rates in all countries where we operate have been no higher than 15.5% in 2011 and 2012 and were, on average, lower than 8%. Periods of significant inflation in any of our markets could adversely affect our costs and financial condition as well as the purchasing power for telecommunications services by our less affluent customers. Deterioration in the economic situation could cause subscribers to have less discretionary income, thus affecting their spending on our services. The loss of subscribers following a significant economic downturn could result in loss of a significant amount of expected revenue. As we incur costs based on our expectations of future revenue, our failure to accurately predict revenues could adversely affect our business, financial condition, results of operations and business prospects.
Lower foreign aid and lower remittances from developed countries because of a deteriorating economic environment could adversely affect our profitability. Many people in the countries in which we operate receive significant inflows of funds from relatives and friends who work abroad in more developed countries. A significant deterioration in the developed country economies resulting in job losses or reduced wages for those individuals could impact the ability of those abroad to continue remitting funds. Lower remittances would reduce disposable incomes of many of our customers which would negatively impact our revenues. Deterioration in more developed economies could also put pressure on the amount of foreign aid provided to the developing countries in which we operate and could increase local governments’ needs to generate revenue through taxation and thereby reduce the ability of consumers to buy our products and services.
Many of the countries where we operate lack infrastructure or have infrastructure in very poor condition and, particularly in Africa, have an insufficient supply of electricity. With the exception of Mauritius and Colombia, the countries in which we operate often lack modern infrastructure or have infrastructure in poor or very poor condition, including in particular roads and power networks. The lack of suitable infrastructure is particularly acute in countries recovering from civil wars, such as DRC and Rwanda, and in countries suffering from civil war-like events, such as Chad. In general, the rural areas in each of the countries in which we operate often lack even the most basic infrastructure, as any development tends to be concentrated in urban areas. We must often build our cell sites without the benefit of roads and other infrastructure, which increases our network development and maintenance costs. The electricity supply is insufficient in certain of the African countries in which we operate due to underdevelopment of electricity sectors compared to the pace of economic growth in such
29 countries. In certain countries, we must rely on diesel-powered generators or solar panels to power our radio sites and some of our towers have solar back-up power or hybrid deep cycle backup batteries. In Chad, as of March 31, 2013, almost 100% of our sites were powered by diesel-powered generators. In Senegal, we took steps in 2011 to alleviate constraints associated with power shortages by deploying secondary back-up diesel generators and deep cycle batteries in areas with the most volatile power supplies. These measures increase our costs and impact the profitability of our African operations, although the impact is mitigated, to some extent, by the sale of our towers in Ghana, DRC and Tanzania, as further discussed under “Our Business— Operations—Africa—Ghana,” “Our Business—Operations—Africa—DRC,” “Our Business— Operations—Africa—Tanzania” and “Major Shareholders and Related Party Transactions— Related Party Transactions—Millicom Group—Helios Towers and American Towers.”
Unpredictable tax systems give rise to significant uncertainties and risks that could complicate our tax planning and business decisions. The tax systems in the markets in which we operate are unpredictable, which gives rise to significant uncertainties and complicates our tax planning and business decisions. The tax authorities in the markets in which we operate are often arbitrary in their interpretation of tax laws, as well as in their enforcement and tax collection activities. Many of our operating companies are often forced to negotiate their tax bills with tax inspectors who may assess additional taxes. We are currently addressing tax disputes with the local tax authorities in several jurisdictions, including disputes over allowed foreign, third-party fees and expenses in Tanzania, disagreements over revenue, turnover and construction fees in DRC, a dispute over sales tax on internet services in Costa Rica and a dispute over stamp tax on the payment of dividends in Guatemala, as further described under “Our Business—Litigation and Legal Proceedings.” Any additional tax liability, as well as any unforeseen changes in applicable tax laws or changes in the tax authorities’ interpretations of local laws or the respective double tax treaties in effect with the countries in which we operate could have a material adverse effect on our future results of operations and cash flows, especially if competitive pricing pressure prevents us from passing these taxes on to our customers. For example, the Colombian government imposed a rain tax in Colombia in 2011, which was a one-off net worth tax of 1-1.4%, subject to a 25% surcharge for taxpayers worth more than $1.5 million, in response to floods in the country. As a result of the structural and regulatory uncertainty and outstanding potential liabilities, we may be required to accrue substantial amounts for contingent tax liabilities. Such amounts may not be sufficient to meet any liability we may ultimately face, or we may identify tax contingencies for which we have not recorded an accrual. Local authorities in some countries in which we operate are entitled to freeze our bank accounts until amounts due (or provisional amounts) have been paid, which could have a material adverse effect on our financial condition.
Developing legal systems in the countries in which we operate create a number of uncertainties for our businesses. The nature of much of the legislation in emerging markets, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of emerging markets legal systems in ways that may not always coincide with market developments, place the enforceability and, possibly, the constitutionality of, laws and regulations in doubt and result in ambiguities, inconsistencies and anomalies. The legislation often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. All of these weaknesses could affect our ability to enforce our rights under our licenses and under our contracts, or to defend ourselves against claims by others. Further, the legal systems in many of the emerging market countries in which we operate are less developed than those in more established markets, which creates uncertainties with respect to many of the legal and business decisions that we make. Such uncertainties include, among others, potential for negative changes in laws, gaps and inconsistencies between the laws and regulatory structure, difficulties in enforcement, broad regulatory authority held by telecommunications regulators, and inconsistency in the judicial interpretation of legislation in similar cases due to an
30 under-developed judicial system. For example, in 2008 the government of Senegal challenged the validity of our license when we refused to pay additional amounts for the license that we held validly and did not expire until 2018. We have recently settled this dispute and agreed to extend the term of the license, which now includes 3G service, to 2028 (as further discussed under “Our Business—Litigation and Legal Proceedings—Senegal”). In addition, in DRC, we are one of several operators being sued by a company claiming that we are improperly using frequencies which were previously granted to that company, a claim we believe is without merit but which could result in a suspension of our use of these frequencies until the dispute is resolved or could ultimately result in the imposition of substantial fines. We may not always have access to efficient avenues for appeal and may have to accept the decisions imposed upon us. This could adversely affect our business and our revenues. For more information concerning our material legal proceedings and the aggregate amount of claim against us, see “Our Business—Litigation and Legal Proceedings.”
Fluctuations or devaluations in local currencies in the markets in which we operate, as well as our ability to convert these local currencies into U.S. dollars to make payments on the Notes, could materially adversely affect our business, financial condition and results of operations.
A significant amount of our costs, expenditures and liabilities are denominated in U.S. dollars, including capital expenditures and borrowings. In the markets in which we operate, we collect revenues from our subscribers and from other telecommunications operators for interconnect charges in local currencies, and there may be limits to our ability to convert these local currencies into U.S. dollars. We hold part of our readily available cash in U.S. dollars and Euros in order to manage against the risk of local currency devaluation. However, local currency exchange rate fluctuations in relation to the U.S. dollar may have an adverse effect on our earnings, assets and cash flows when translating local currency into U.S. dollars. For each of our operations that report their results in a currency other than the U.S. dollar, a decrease in the value of that currency against the U.S. dollar reduces our profits while also reducing our assets and liabilities. To the extent that our operations retain earnings or distribute dividends in local currencies, the amount of U.S. dollars ultimately received by MIC S.A. is affected by fluctuations in exchange rates against the U.S. dollar. In addition, exchange rates impact the Millicom Group’s earnings, assets and cash flows as many of our operating subsidiaries have U.S. dollar denominated debt, due to unavailability of, or lack of commercially acceptable long-term financing in local currencies.
Due to lack of available instruments in many of the countries or currencies in which we operate we are not able to hedge against foreign currency exposures. The Millicom Group had a net exchange gain of $2 million in fiscal 2012 compared to a net exchange loss of $26 million in fiscal 2011. At the operational level we seek to reduce our foreign exchange exposure through a policy of matching, as far as possible, cash inflows and outflows. Where possible and where financially viable, we borrow in local currency to hedge against local currency exchange risks. Our ability to reduce our foreign currency exchange exposure may be limited by lack of long-term financing in local currency. As such, there is a risk that we may not be able to finance local capital expenditure needs or reduce our foreign exchange exposure by borrowing in local currency. For more information about the market risks we are exposed to as a result of foreign currency exchange rate fluctuations, please see the section of this offering memorandum entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Quantitative and Qualitative Disclosures About Market Risk.”
Most of our operations generate revenue in the local currency of the country in which they operate. The governments of the countries in which our operations are located may impose foreign exchange controls that could restrict our ability to receive funds from the operations.
As substantially all our revenues are generated by our local operations, MIC S.A. is reliant on its subsidiaries’ ability to transfer funds to it. Although foreign exchange controls exist in some of the countries in which our companies operate, none of these controls significantly restricts the ability of our operating companies to pay interest, dividends, technical service fees, and royalty
31 fees or repay loans by exporting cash, instruments of credit or securities in foreign currencies. However, foreign exchange controls may be strengthened, or introduced in the countries where we operate, which could restrict MIC S.A.’s ability to receive funds from those operations. In addition, in some countries it may be difficult to convert local currency into foreign currency due to limited liquidity in foreign exchange markets. For example, all transfers of funds outside the Central Africa Economic and Monetary Community (CEMAC), which includes Chad and DRC, or the West Africa Economic and Monetary Union (WAEMU), which includes Senegal, including interest, dividends, technical service fees and royalty fees, or repayment of loans by exporting cash, instruments of credit or securities, must be declared and are subject to special control for statistical purposes. These and any similar controls enacted in the future may cause delays in accumulating significant amounts of foreign currency, and cause exchange risk, which could have an adverse effect on our results of operations.
Rapid growth and expansion may make it difficult to obtain adequate managerial and operational resources and could restrict our ability to successfully expand our operations.
Our operating results depend, in significant part, upon the continued contributions of key senior management and technical personnel. Management of growth will require, among other things:
• stringent control of network build-out and other costs;
• excellence in sales, marketing and distribution;
• continued innovative product development and deployment;
• continued development of financial and management controls and information technology systems;
• implementation and operation of adequate and effective internal controls;
• hiring and training of new personnel; and
• coordination among our logistical, technical, accounting, legal and finance personnel.
Our success will depend on our ability to continue to attract, develop, motivate and retain qualified personnel. Certain of our key employees possess substantial knowledge of our business and operations. We cannot assure you that we will be successful in retaining their services or that we would be successful in hiring and training suitable replacements without undue costs or delays. Competition for personnel in our markets is intense due to scarcity of qualified individuals, particularly in Africa. In many cases in Africa, we must use higher cost expatriate personnel due to lack of local technical expertise. We put a high priority on training and developing local expertise in-house but it may take time for them to develop capacity, and retaining qualified staff can be challenging as well. Furthermore, integration of new management would require additional time and resources, which could adversely affect our ability to implement our business strategy. We also need increasingly new competencies for the new businesses and services we launch, including media for Entertainment and banking for MFS. Our failure to successfully manage our growth and personnel needs would have a material negative effect on our business and results of operations.
Risks relating to the Issuer and the Millicom Group
MIC S.A. is a holding company, and as a result, it is dependent on cash flow from its operating subsidiaries to service its indebtedness, which may be limited by local law.
MIC S.A. is a holding company and its sole assets consist of shares in its subsidiaries and cash in its bank accounts.
As a holding company, MIC S.A. has no revenue generating operations of its own, and therefore its cash flow and ability to service its indebtedness will depend primarily on the operating performance and financial condition of its operating subsidiaries and its receipt of funds from
32 such subsidiaries in the form of dividends or otherwise. There are legal limits on dividends that some of MIC S.A.’s subsidiaries are permitted to pay. Further, some of the Millicom Group’s indebtedness imposes restrictions on dividends and other restricted payments. For example, Millicom Tchad’s financing facility with IFC, which is described under “Description of Other Indebtedness—Indebtedness by Operation—Chad,” prohibits all dividends and other restricted payments unless Millicom Tchad meets a debt incurrence ratio test. MIC S.A.’s operating subsidiaries may not generate income and cash flow sufficient to enable MIC S.A. to fund its payment obligations on the Notes, because its ability to provide funds will depend, to some extent, on general economic, financial, competitive, market and other factors, many of which are beyond its control.
Certain of our operations have arrangements with MIC S.A. for essential support and services which might not always be on an arm’s-length basis. Certain of the Millicom Group’s operating companies have entered into support services agreements with MIC S.A. under which the Millicom Group provides the operating companies with financing and increased bargaining power with its suppliers, as well as certain technical and management services, such as business support services (including human resources support and legal, IT and marketing services) and advisory services related to the construction, installation, operation, management and maintenance of its networks. Some of these services are on terms more favorable than those that could be obtained from independent third parties and which substantially benefit our operations and would be detrimental to our future operations and growth if they were to be discontinued. For more information regarding related party transactions within the Millicom Group, see “Major Shareholders and Related Party Transactions—Related Party Transactions.” Additionally, under trademark license agreements, our operations in Honduras, El Salvador, Bolivia, DRC, Ghana, Senegal and Tanzania pay a trademark license fee of up to 5% of their monthly net sales or monthly revenue to MIC S.A. for a license to use the Tigo trademark and/or Millicom name. For more information, see “Description of the Notes—Certain Covenants— Transactions with Affiliates.” These licenses are non-transferable and continue for an indefinite period unless terminated pursuant to the terms of the agreement. If the Millicom Group is unable to continue providing such services to its operations on a timely basis and at a level that meets its needs, or if the Millicom Group terminates these trademark license agreements, these operations may be disrupted and our business, financial condition and results of operations could be materially adversely affected. These payments may also reduce the available cash to make payments on the Notes.
Certain insiders own significant amounts of MIC S.A.‘s shares, giving them substantial management influence that may not align with the interests of the Noteholders. As of March 31, 2013, Investment AB Kinnevik, MIC S.A.‘s largest shareholder, owned 37,835,438 shares in MIC S.A., representing approximately 37% of the voting shares on that date, and the Stenbeck Family (who control Kinnevik) owned an additional 874,542 shares. Kinnevik and its affiliates, having a significant ownership in MIC S.A., have and could exert significant influence over the strategic, operating and financial policies of the Millicom Group. Their interests may potentially conflict with the Millicom Group’s interests and/or your interests as Noteholders.
MIC S.A. has terminated the registration of its common shares under the Exchange Act and will no longer file reports with the SEC. MIC S.A. has terminated the registration of its common shares under the Exchange Act, and MIC S.A. will no longer be subject to the disclosure requirements of the Exchange Act and will not file annual reports on Form 20-F and furnish reports on Form 6-K. As a result, the Millicom Group will no longer be subject to any corporate governance, financial reporting practices and policies or similar compliance procedures required of a publicly traded company in the United States. MIC S.A. will continue to be subject to corporate governance, financial reporting practices and
33 policies or similar procedures required of a publicly traded company on the NASDAQ OMX Stockholm, Sweden, and MIC S.A. has announced its intention to voluntarily continue to comply with many of the disclosure and corporate governance rules that applied to the Millicom Group as an Exchange Act reporting company under the Exchange Act; however, MIC S.A. may discontinue its voluntary compliance at any time and MIC S.A.’s disclosure and corporate governance regime may not resemble other Exchange Act reporting companies.
The Issuer is incorporated in Luxembourg, and Luxembourg law differs from U.S. law and may afford less protection to holders of the Notes.
Holders of the Notes may have more difficulty protecting their interests than would security holders of a company incorporated in a jurisdiction of the United States. The Issuer is incorporated under and subject to Luxembourg laws. Luxembourg laws may differ in some material respects from laws generally applicable to U.S. corporations and security holders, including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, security holder lawsuits and indemnification of directors.
Under Luxembourg law, the duties of directors of a company are in principle owed to the company only. Security holders of Luxembourg companies generally do not have rights to take action against directors or officers of the company. Directors or officers of a Luxembourg company must, in exercising their powers and performing their duties, act in good faith and in the interests of the company as a whole and must exercise due care, skill and diligence. Directors have a duty to disclose any personal interest in any contract or arrangement with the company in case such interest would constitute a conflict of interest. If a director of a Luxembourg company is found to have breached his or her duties to that company, he or she may be held personally liable to the company in respect of that breach of duty. A director may, in addition, be jointly and severally liable with other directors implicated in the same breach of duty.
Risks relating to the Notes
The Notes will be structurally subordinated to all indebtedness of the Millicom Group’s subsidiaries and will be effectively subordinated to any of the Issuer’s existing and future obligations that are secured by assets or property that do not secure the Notes.
Because none of the Millicom Group’s subsidiaries will guarantee the Notes, none of the Millicom Group’s subsidiaries will have any obligation, contingent or otherwise, to pay amounts due under the Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or otherwise. The Notes will be structurally subordinated to all indebtedness and other obligations of all of the Millicom Group’s subsidiaries, such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any subsidiary, all of the subsidiary’s creditors would be entitled to payment in full out of such subsidiary’s assets before the Issuer would be entitled to any payment. Additionally, the Notes will not be secured by any of the Issuer’s assets. Though the Indenture includes a covenant limiting the Millicom Group’s ability to create or suffer to exist liens, this limitation is subject to significant exceptions. Any of the Millicom Group’s future indebtedness that is secured by the its assets will be effectively senior to the Issuer’s obligations under the Notes to the extent of the value of the property and assets securing such obligations. In the event of an insolvency, any right of the holders of the Notes to participate in the assets securing the Millicom Group’s other indebtedness will be subject to the prior claims of its secured creditors. As of March 31, 2013, on an “as adjusted” basis after giving effect to the issuance of the Notes and the application of the net proceeds as described under “Use of Proceeds”, the Issuer’s subsidiaries would have had $2,319 million of third-party debt and $861 million of trade payables and other liabilities outstanding.
34 We may incur substantially more debt in the future, which may make it difficult for us to service our debt, including the Notes, and impair our ability to operate our businesses.
We may incur substantial additional debt in the future. Although the Indenture, and certain of our outstanding debt instruments contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Under the Indenture, in addition to specified permitted indebtedness, we will be able to incur additional indebtedness so long as on a pro forma basis our net leverage ratio (as defined in the Indenture) does not exceed 2.5 to 1.0. The Indenture permits us to incur future debt that may have substantially the same covenants as, or covenants that are more restrictive than, those of the Indenture. In addition, the Indenture and our credit facilities and bonds will not prevent us from incurring obligations that do not constitute indebtedness under those agreements. The incurrence of additional debt could, among other things, require us to dedicate a substantial portion of our cash flow to payments on our debt, thus reducing availability of cash to fund organic growth or corporate purposes, increase our vulnerability to a downturn in our business or general economic conditions, or restrict us from pursuing strategic acquisitions or exploiting certain business opportunities.
The restrictive covenants in the Indenture could adversely impact our financial and operating flexibility and subject us to other risks.
The Indenture and certain of our credit facilities and bonds contain, or will contain, restrictive covenants that limit our ability and the ability of certain of our subsidiaries to, among other things:
• incur or guarantee additional indebtedness;
• make certain asset sales;
• create or permit to exist certain liens; and
• consolidate, merge or sell all or substantially all of our assets.
These limitations are subject to a number of important qualifications and exceptions. Complying with the restrictions contained in some of these covenants may require we meet certain ratios and tests in order to undertake particular transactions. If we fail to comply with these covenants, it could constitute a default under the Indenture, and the principal and accrued interest on the outstanding indebtedness may become due and payable. We cannot assure you that the operating and financial restrictions in the Indenture will not adversely affect our ability to finance our future operations or capital needs, or engage in other business activities that may be in our interest, or react to adverse market developments.
We may not be able to raise the funds necessary to finance the change of control offer required by the Indenture that governs the Notes if a Change of Control occurs.
Upon the occurrence of certain Change of Control events, together with a ratings decline as described in “Description of the Notes—Change of Control,” the Issuer must offer to buy back the Notes for a price equal to 101% of the principal amount of the Notes, plus any accrued and unpaid interest to the date of repurchase. The Issuer may not have sufficient funds available to make any required repurchases of the Notes upon a Change of Control. If a Change of Control is triggered and we fail to make any required prepayment, this could lead to an event of default, and could trigger cross default/cross acceleration provisions under certain of our other debt agreements. In such event, our obligations under one or more of these agreements could become immediately due and payable, which would have a material adverse effect on our business, financial condition and results of operations.
35 Luxembourg insolvency laws may not be as favorable as insolvency laws in other jurisdictions.
The Issuer is incorporated and has its registered office in Luxembourg. Accordingly, insolvency proceedings with respect to the Issuer may proceed under, and be governed by, Luxembourg insolvency laws, which may not be as favorable to investors’ interests as those of jurisdictions with which investors may be familiar and may limit the ability of Noteholders to enforce the terms of the Notes. Certain insolvency law issues in respect of the Notes are summarized under “Certain Insolvency Considerations.”
Enforcing your rights as a holder of the Notes in Luxembourg may prove difficult.
The Notes will be issued by MIC S.A., which is a public limited liability company (société anonyme) incorporated under the laws of Luxembourg. Your rights under the Notes will be subject to Luxembourg insolvency and administrative laws, and there can be no assurance that you will be able to effectively enforce your rights in such bankruptcy, insolvency or similar proceedings. In addition, Luxembourg bankruptcy, insolvency, administrative and other comparable laws may be materially different from, or in conflict with, the comparable laws in the jurisdictions in which MIC S.A.’s subsidiaries are incorporated or are located, including in the areas of rights of creditors, priority of government entities and other third-party and related-party creditors, ability to obtain post-bankruptcy filing loans or to pay interest and the duration of proceedings. The laws of these countries may not be as favorable to your interests as the laws of jurisdictions with which you are familiar. The application of these laws, or any conflict among them, could call into question whether and how these countries’ laws should apply. Such issues may adversely affect your ability to enforce your rights under the Notes or limit any amounts that you may receive. See “Certain Insolvency Considerations.”
Your ability to enforce civil liabilities under U.S. securities laws may be limited.
The Issuer is a Luxembourg company, and most of its directors and executive officers are residents of countries other than the United States. Most of the assets of the Issuer and the assets of most of its directors and executive officers are located outside the United States. As a result, it may not be possible for investors in our securities to effect service of process within the United States upon such persons or entities or to enforce in U.S. courts or outside the United States judgments obtained against such persons or entities. In addition, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions located outside the United States, liabilities predicated upon the civil liability provisions of U.S. securities laws.
The Notes will initially be held in book-entry form, and therefore you must rely on the procedures of the relevant clearing system to exercise any rights and remedies.
The Notes will initially only be issued in global certificated form and held through the common depositary for Euroclear or Clearstream or the custodian for the Depository Trust Company (“DTC”).
Interests in the global notes will trade in book-entry form only, and the Notes in definitive registered form (“Definitive Registered Notes”) will be issued in exchange for book-entry interests only in very limited circumstances. Owners of book-entry interests will not be considered owners of the Notes. So long as the Notes are held in global form, the common depositary for Euroclear and Clearstream or the custodian for DTC, as applicable, (or their respective nominees) will be considered the sole holders of the global notes representing the Notes. Payments of principal, interest and other amounts owing on or in respect of the global notes representing the Notes will be made to Citibank, N.A., London Branch, as Principal Paying Agent, which will make payments to Euroclear, Clearstream and DTC. Thereafter, these payments will be credited to participants’ accounts that hold book-entry interests in the global notes representing the Notes and credited by such participants to indirect participants. After payment to the common depositary for Euroclear or Clearstream or the custodian for DTC, we will have no responsibility
36 or liability for the payment of interest, principal or other amounts to the owners of book-entry interests. Accordingly, if you own a book-entry interest, you must rely on the procedures of Euroclear, Clearstream or DTC, and if you are not a participant in Euroclear, Clearstream or DTC, on the procedures of the participant through which you own your interest, to exercise any rights and obligations of a holder of the Notes under the Indenture.
Unlike the holders of the Notes themselves, owners of book-entry interests will not have the direct right to act upon our solicitations for consents, requests for waivers or other actions from holders of the Notes. Instead, if you own a book-entry interest, you will be permitted to act only to the extent you have received appropriate proxies to do so from Euroclear, Clearstream or DTC. The procedures implemented for the granting of such proxies may not be sufficient to enable you to vote on a timely basis.
Similarly, upon the occurrence of an event of default under the Indenture, unless and until Definitive Registered Notes are issued in respect of all book-entry interests, if you own a book- entry interest, you will be restricted to acting through Euroclear, Clearstream or DTC. The procedures to be implemented through Euroclear, Clearstream or DTC may not be adequate to ensure the timely exercise of rights under the Notes. Please see “Book-Entry, Delivery and Form.”
An active trading market may not develop for the Notes, which may hinder your ability to liquidate your investment.
We cannot assure you as to the liquidity of any market that may develop for the Notes, the ability of holders of the Notes to sell them or the price at which the holders of the Notes may be able to sell. The liquidity for any market for the Notes will depend on the number of holders of the Notes, prevailing interest rates, the market for similar securities and other factors, including general economic conditions and our own financial condition, performance and prospects, as well as recommendations by securities analysts. Historically, the market for non-investment grade debt, such as the Notes, has been subject to disruptions that have caused substantial price volatility. We cannot assure you that if a market for the Notes were to develop, such a market would not be subject to similar disruptions. We have been informed by the Initial Purchasers that they intend to make a market for the Notes after the offering is completed. However, the Initial Purchasers are not obligated to do so and may cease their market-making activity at any time without notice. In addition, such market-making activity will be subject to limitations imposed by the Securities Act and other applicable laws and regulations. As a result, we cannot assure you that an active trading market for the Notes will develop or, if one does develop, that it will be maintained. If an active trading market does not develop or cannot be maintained, this could have an adverse effect on the liquidity and the trading price of the Notes. Market fluctuations, as well as economic conditions, could adversely affect the market price of the Notes. If a market for the Notes does develop, we also cannot assure you that you will be able to sell your Notes, if issued, at a particular time or that the prices that you receive when you sell will be favorable.
Although application has been made for the Notes to be listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF market, the Issuer cannot assure you that the Notes will become or remain listed. Although no assurance is made as to the liquidity of the Notes as a result of admission to trading on the Euro MTF, failure to be approved for listing or the delisting of the Notes, as applicable, from the Official List of the Luxembourg Stock Exchange may have a material effect on a holder’s ability to resell the Notes in the secondary market.
The Notes may not be freely transferred.
The Notes have not been and will not be registered under the Securities Act or any U.S. state securities laws. The Notes may not be offered or sold except pursuant to an exemption from, or a transaction not subject to the registration requirements of the Securities Act and applicable state securities laws, or pursuant to an effective registration statement. Furthermore, we have not registered the Notes under any other country’s securities laws. It is your obligation to ensure that
37 your offers and sales of the Notes within the United States and other countries comply with applicable securities laws. See “Transfer Restrictions” and “Plan of Distribution—Selling Restrictions.”
The Notes may be issued with OID for U.S. federal income tax purposes.
The Notes may be issued with OID for U.S. federal income tax purposes. If the stated principal amount of the Notes exceeds their “issue price” by an amount that is equal to or greater than the statutory de minimis amount, the Notes will be treated as issued with OID for U.S. federal income tax purposes in an amount equal to such difference. If the Notes are issued with OID for U.S. federal income tax purposes, U.S. investors in the Notes will generally be required to include OID in their gross income as it accrues in advance of the receipt of cash payments to which such income is attributable using the constant yield method. See “Tax Considerations—Certain U.S. Federal Income Tax Consequences for U.S. Holders.”
38 Use of proceeds We expect that the net proceeds of the issuance of the Notes, after deducting commissions, fees and expenses, will be approximately $485 million.
MIC S.A. intends to pushdown, through related party loans or financial intermediaries, the net proceeds of this offering to its operating subsidiaries in Chad, DRC, Ghana, Senegal and Tanzania. The net proceeds will be used to refinance approximately $465 million of local indebtedness, as further discussed under “Description of Other Indebtedness—Indebtedness by Operation,” and for capital expenditures and general corporate purposes. We intend to complete this refinancing as soon as reasonably practical, and in any case, within 90 days following the Issue Date.
39 Capitalization The following table presents the Millicom Group’s consolidated capitalization (i) as of March 31, 2013 and (ii) as adjusted to give effect, as of March 31, 2013, to this offering and the application of the net proceeds therefrom as described under “Use of Proceeds.” The consolidated capitalization presented below does not reflect movements in cash, indebtedness incurred or any repayment of such indebtedness, in each case, after March 31, 2013. We derived actual amounts as of March 31, 2013 from the Millicom Group’s unaudited consolidated interim financial statements and the accompanying notes thereto included elsewhere in this offering memorandum. The following table is qualified in its entirety by, and should be read in conjunction with, such financial statements, “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Except as otherwise disclosed in “Description of Other Indebtedness—Indebtedness by Operation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dividends,” there has been no material change in the Millicom Group’s consolidated capitalization since March 31, 2013.
As of March 31, 2013 Actual Adjustments As adjusted(1) (U.S. dollars in millions, unaudited) Cash and cash equivalents(2) ...... 1,137 20 1,157 Liabilities: Notes offered hereby ...... – 500 500 Debt and financing ...... 3,303 (465) 2,838 Total debt ...... 3,303 35 3,338 Total equity ...... 2,462 – 2,462 Total capitalization ...... 5,765 35 5,800
(1) ‘As adjusted’ reflects the issuance of the Notes, the payment of fees and expenses in connection with this offering, and the expected repayment in full of the indebtedness described under “Use of Proceeds.”
(2) Does not include $48 million held as restricted cash for the MFS business.
40 Selected historical financial and other data The following tables present summary selected historical financial data for the Millicom Group. The income statements set forth below for the years ended December 31, 2010, 2011 and 2012 and the statement of financial position data set forth below as of December 31, 2010, 2011 and 2012 are derived from the Millicom Group’s annual audited consolidated financial statements included elsewhere in this offering memorandum. The income statements for the three-month periods ended March 31, 2012 and 2013 and the statement of financial position data as of March 31, 2013 are derived from the Millicom Group’s unaudited interim condensed consolidated financial statements that are included elsewhere in this offering memorandum.
The Millicom Group’s consolidated financial statements for the years ended December 31, 2009, 2010 and 2011 included in this offering memorandum have been audited by PricewaterhouseCoopers, Société coopérative (formerly PricewaterhouseCoopers S.à r.l.) independent auditors (réviseur d’enterprises agréé), and the Millicom Group’s consolidated financial statements for the year ended December 31, 2012 included in this offering memorandum have been audited by Ernst & Young S.A. independent auditors (cabinet de révision agréé), as stated in their respective report appearing herein. The Millicom Group’s unaudited interim condensed consolidated financial statements for the three months ended March 31, 2013 included in this offering memorandum have been reviewed by Ernst & Young S.A. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth herein.
The Millicom Group’s summary consolidated financial information for the twelve months ended March 31, 2013 has been derived by adding the Millicom Group’s summary consolidated financial information for the year ended December 31, 2012 to the Millicom Group’s summary consolidated financial information for the three months ended March 31, 2013 and subtracting the Millicom Group’s summary consolidated financial information for the three months ended March 31, 2012. The Millicom Group’s summary consolidated financial information for the twelve months ended March 31, 2013 has been prepared for illustrative purposes only and is not necessarily representative of the Millicom Group’s results for any future period or the Millicom Group’s financial condition at any such date. Such compilation has not been audited.
You should read this summary financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Millicom Group consolidated financial statements and accompanying notes included in this offering memorandum. The historical results are not necessarily indicative of the Millicom Group’s future results of operations or financial condition.
41 Summary consolidated income statements for the years ended December 31, 2010, 2011 and 2012, the three-month periods ended March 31, 2012 and 2013 and the twelve-month period ended March 31, 2013
Three months Twelve months Year ended December 31, ended March 31, ended March 31, 2010 (as restated)(*) 2011 2012 2012 2013 2013 (unaudited) (U.S. dollars in millions, except per share data) Revenues ...... 3,920 4,530 4,814 1,168 1,246 4,892 Cost of sales ...... (1,330) (1,565) (1,737) (421) (468) (1,784) Gross profit ...... 2,590 2,965 3,077 747 778 3,108 Sales and marketing ...... (737) (817) (914) (211) (246) (949) General and administrative expenses ...... (739) (839) (956) (224) (257) (989) Other operating expenses ...... (75) (96) (122) (22) (40) (140) Other operating income ...... 3 44 19 5 3 17 Operating profit ...... 1,042 1,257 1,104 295 238 1,047 Interest expense ...... (215) (187) (220) (47) (66) (239) Interest and other financial income ...... 15 15 14 4 3 13 Revaluation of previously held interests ...... 1,060 – – – – – Other non operating (expenses) income, net ...... (62) (4) 22 (52) 42 116 (Loss) profit from associates ..... (2) (10) (23) – (6) (29) Profit before tax from continuing operations ...... 1,838 1,071 897 200 211 908 Credit (charge) for taxes ...... (227) 19 (393) (91) (68) (370) Profit from the period from continuing operations ...... 1,611 1,090 504 109 143 538 Profit from the period from discontinued operations, net oftax...... 12 39 – – – – Net profit for the period ...... 1,623 1,129 504 109 143 538
(*) Restated to recognize the liability for the put option provided to our local partner in Honduras for its 33% stake in our Honduras operation and the related change in the value of the liability from July 1, 2010 to December 31, 2010, as discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Effects of Restatement.”
42 Summary consolidated statements of financial position as of December 31, 2010, December 31, 2011, December 31, 2012 and March 31, 2013
December 31, March 31, 2010 (as restated)(1) 2011 2012 2013 (U.S. dollars in millions) (unaudited) Assets Current assets: Cash and cash equivalents(2) .... 1,023 861 1,174 1,137 Other current assets ...... 627 853 904 1,020 Total current assets ...... 1,650 1,714 2,078 2,157 Non-current assets: Intangible assets, net ...... 2,282 2,170 2,419 2,459 Property, plant and equipment, net...... 2,768 2,865 3,108 3,020 Other non-current assets ...... 110 467 585 561 Total non-current assets ...... 5,160 5,502 6,112 6,040 Assets held for sale(3) ...... 185 66 21 19 Total assets ...... 6,995 7,282 8,211 8,216 Liabilities and equity Current liabilities: Debt and financing ...... 555 621 693 760 Put option liability(4) ...... 769 745 730 678 Other current liabilities ...... 1,130 1,323 1,570 1,481 Total current liabilities ...... 2,454 2,689 2,993 2,919 Non-current liabilities: Debt and financing ...... 1,797 1,817 2,566 2,535 Other non-current liabilities .... 294 321 311 296 Total non-current liabilities ...... 2,091 2,138 2,877 2,831 Liabilities directly associated with assets held for sale ...... 61 9 5 4 Total liabilities ...... 4,605 4,836 5,875 5,754 Parent’s equity interests ...... 2,344 2,255 2,024 2,199 Non-controlling equity interests ...... 46 191 312 263 Total shareholders’ equity ...... 2,390 2,446 2,336 2,462 Total equity and liabilities ...... 6,995 7,282 8,211 8,216
(1) Restated to recognize the liability for the put option provided to our local partner in Honduras for its 33% stake in our Honduras operation and the related change in the value of the liability from July 1, 2010 to December 31, 2010, as discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Effects of Restatement.”
(2) Cash and cash equivalents excludes the following amounts of restricted cash for our MFS business: $20 million (fiscal 2011), $43 million (fiscal 2012) and $48 million (March 31, 2013).
(3) Assets held for sale represents discontinued operations and towers sold but not yet transferred to the tower companies and not part of the sale-leaseback arrangement.
(4) Put option liability represents the redemption price of the Honduras put option discussed in note 1 above. For details of the valuation of the redemption price, see note 28 to the Millicom Group’s annual consolidated financial statements included elsewhere in this offering memorandum.
43 Summary of operating data for the years ended December 31, 2010, 2011 and 2012 and the three months ended March 31, 2013
Three months Year ended December 31, ended March 31, 2010 2011 2012 2013 Operating Data(1) (unaudited) Total Customers: Prepaid ...... 36,123,812 40,098,896 43,906,742 44,005,282 Postpaid ...... 2,465,768 2,986,194 3,321,958 3,398,847 Monthly Churn: Prepaid ...... 5.7% 5.1% 4.9% 4.7% Postpaid ...... 2.1% 2.4% 2.6% 2.8% ARPU: Central America ...... $ 11.11 $ 11.89 $ 11.24 $ 10.54 South America ...... $ 11.94 $ 13.13 $ 12.81 $ 12.74 Africa ...... $ 5.58 $ 5.07 $ 4.43 $ 4.19 (1) Operating data excludes discontinued operations.
44 Management’s discussion and analysis of financial condition and results of operations The following discussion of the Millicom Group’s financial condition and results of operations should be read in conjunction with the Millicom Group’s audited financial statements for fiscal 2010, 2011 and 2012, and the notes thereto, and the Millicom Group’s unaudited financial statements for the three months ended March 31, 2012 and 2013, and the notes thereto, included elsewhere in this offering memorandum.
The following discussion contains forward-looking statements that involve risks and uncertainties. The Millicom Group’s actual results may differ materially from those discussed in forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.”
References in this section to “we,” “our,” “ours,” “us” or similar terms refer to MIC S.A. together with its consolidated subsidiaries.
Overview
The Millicom Group is one of the leading mobile service, cable and broadband operators in each of the countries where it operates, with approximately 47 million mobile customers as of March 31, 2013, of which 93% received services from the Millicom Group on a prepaid basis. In our Latin American cable business, we provided services to 776,124 homes as of March 31, 2013, representing 1,055,797 RGUs and a 35.4% penetration rate of homes passed. The Millicom Group’s operations offer a comprehensive range of high-quality mobile communications services, branded under the “Tigo” name, across 2G and 3G networks in their markets. The Millicom Group develops targeted, affordable rate plans, and leverages its robust network assets, extensive distribution channels and strong customer service to attract and retain its customers. To grow its leading market share and enhance its profitability, the Millicom Group intends to continue to introduce innovative VAS that meet the evolving needs of its customers. The Millicom Group believes its focus on availability, affordability, customer service and innovation has resulted in Tigo becoming one of the most widely recognized and well-respected brands in the countries where it operates.
Recent developments Proposed business combination in Colombia
On February 5, 2013, we announced that we are engaged in exclusive negotiations with EPM for a potential combination of its and our telecom businesses in Colombia. EPM is the largest shareholder of UNE EPM Telecom, which provides cable TV and fixed telephone services across the region encompassing Medellín, Colombia’s second largest city. UNE EPM Telecom and Millicom Colombia already jointly own our Colombian operating company, Colombia Móvil S.A. E.S.P., in which Millicom Colombia owns 50% plus one share, UNE EMP Telecom owns 25% and Empresa de Telecomunicaciones de Bogotá owns 25% minus one share. UNE EPM Telecom has recently started offering mobile services, in part through a roaming agreement with Colombia Móvil S.A. E.S.P. The market dynamics for fixed and mobile integration create a potential to offer the highest quality services to our customers, especially digital services.
We are evaluating a potential combination of Millicom Colombia and UNE EPM to a newly created entity in a merger of equals to create one of the largest integrated telecommunication operators in Colombia. Any transaction would be subject to regulatory approval, and we do not anticipate that the Millicom Group’s consolidated Net Debt to adjusted EBITDA ratio would increase by more than 0.5x adjusted EBITDA following the successful completion of this transaction. Discussions are on-going, which we anticipate concluding by the end of June of 2013.
45 Acquisitions
Cablevisión Paraguay acquisition
In October 2012, the Millicom Group acquired substantially all of the assets and business of Cablevisión S.A. in Paraguay from Grupo Clarín S.A. at a purchase price of $172 million. Cablevisión Paraguay is the leading provider of cable pay-TV services in Paraguay. As of March 31, 2013, the coverage area of Cablevisión Paraguay’s HFC and UFC network included approximately 449,000 homes passed and Cablevisión Paraguay had approximately 134,000 cable TV customers, with 18% of these customers subscribing to fixed broadband internet services. Cablevisión Paraguay does not provide satellite TV service. Cablevisión Paraguay has exclusive rights to broadcast Paraguay’s soccer championship games.
This acquisition is consistent with our strategy to accelerate the adoption of fixed broadband services in Paraguay, where attractive mobile-based services have been offered since 1992. Since our acquisition of Amnet in 2008, our cable revenues have grown on average 12% per year, reinforcing our growth profile in South America. The offering of high-speed internet access is expected to further leverage the Tigo brand in Paraguay and contribute to further growth.
We believe the acquisition is consistent with our prudent approach to external growth and is a fair reflection of the attractive growth potential of the business. The impact of the transaction on 2012 financials was limited. We have assumed management control of Cablevisión Paraguay, have consolidated the operation’s results from October 1, 2012 and report the results for Cablevisión Paraguay as part of the South America operating segment.
Rocket Internet agreement
In August 2012, we entered into an agreement with Rocket Internet GmbH to jointly develop franchises in the online sector in Latin America and Africa. On August 29, 2012, we acquired for €85 million, through two reserved capital increases, a 20% stake in two Rocket Internet subsidiaries: Latin America Internet Holding and Africa Internet Holding. These subsidiaries develop and offer services through franchises operating in the largest markets in Latin America and Africa in four categories, namely e-Commerce (such as “Kanui,” an online shopping website that sells sporting goods in Brazil), Marketplaces (such as “Airu,” an online marketplace for buying and selling creative products, such as art and handicrafts, in Brazil), and Subscription (such as “YepDoc,” a medical and dental appointment scheduling website in Brazil). We intend to use our existing mobile infrastructure to expand the services we offer into these new categories. Latin America Internet Holding and Africa Internet Holding were fully consolidated from September 1, 2012.
As of March 31, 2013, Latin America Internet Holding and Africa Internet Holding control five operating businesses. Management expects ongoing losses in these businesses for some period of time due to the start-up nature of the businesses. Both holdings are required by the terms of our agreements with them to launch a number of new businesses in Latin America and Africa over the next four years. We expect to extend similar services to our existing markets, generating both additional revenues and cost synergies. In 2012, Latin America Internet Holding and Africa Internet Holding launched a number of new services, including Hellofood, an online food ordering and delivery website, where existing services were expanded to a number of new countries, including Ghana and Senegal; and EasyTaxi, a taxi ordering mobile app. During the first three months of 2013, Hellofood was launched in Venezuela, Brazil and Argentina and EasyTaxi became available in Venezuela, Chile, Argentina and Peru. During the first three months of 2013, Latin America Internet Holding and Africa Internet Holding also launched Jumia, an e-commerce retailer that sells a wide range of goods at low cost to customers in Nigeria, Egypt, Kenya and Morocco; Kaymu, a combination online marketplace, auction website and classifieds website in Nigeria; and Vamido, an online real estate portal in Nigeria. During the first three months of 2013, it became possible to pay for food ordered through Hellofood in Ghana with Tigo Cash. In addition, we are working on having Hellofood and EasyTaxi apps pre-installed on mobile phones that we sell in Colombia.
46 We have been granted options to increase our stakes in Latin America Internet Holding and Africa Internet Holding up to 50% without management rights over 24 months through September 14, 2014 and a final option to acquire at fair market value the remaining 50% of these two holdings with full management rights by no later than September 14, 2016. The total consideration to be paid to acquire the first 50% will be €340 million in three installments. The first installment of €85 million has been paid through two reserved capital increases, and the next payment is expected to be made in September 2013. On March 5, 2013, the Millicom Group committed to exercise the option to increase its ownership stakes in Latin America Internet Holding and Africa Internet Holding from 20% to 35%, which will require an €85 million cash injection in the second or third quarter of 2013.
The agreement with Rocket Internet is expected to allow the Millicom Group to diversify its product offering in emerging markets throughout Latin America and Africa by adding e-commerce and online services to the affordable mobile telephone services it already offers in those markets.
Western Union agreements
In April 2011, we signed an agreement with Western Union, a global payment services provider, to introduce cross-border mobile money transfers in Latin America. The first cross-border money transfer service under this agreement was launched in Paraguay under the Giros Tigo brand (Tigo Cash). This service allows our customers in Paraguay to receive money from other countries using their mobile phones. In September 2011, we signed agreements with Western Union for the provision of cross-border mobile money transfers in Guatemala and El Salvador.
We intend to roll out this service over time in other markets in Latin America. The agreement with Western Union is expected to allow millions of our customers to benefit from Western Union’s extensive network of approximately 510,000 agent locations across 200 countries and territories.
The specific services to be offered under the Western Union agreement are expected to vary by country, but over time, our customers in most of our Latin American markets are expected to be able to receive money from Western Union customers directly into their mobile accounts and cash out transactions at any of our locations that offer the Giros Tigo facility. Western Union offers its mobile money transfer service in Bangladesh, Canada, Kenya, Madagascar, Malaysia, the Philippines, Tanzania and the United States. We offer in-market money transfers in Paraguay, El Salvador, Guatemala, Honduras, Tanzania, Ghana, Rwanda and Chad and intend to extend our offering to more services and into more markets over time.
In August 2012, our Rwandan operation entered into a non-exclusive representation agreement with Western Union Network (France) SAS under which it agreed to offer Western Union branded mobile money transfer services (limited to international remittances) in Rwanda. We are entitled to receive base compensation of 20% of the fees charged to customers for money transfer service transactions, as well as additional compensation for providing ancillary services (such as home delivery funds, telephone notification and other such services). Western Union is entitled to the balance of all compensation and other revenues received for the service. The initial term of the agreement is two years with automatic renewal for additional one-year terms. We expect to launch Western Union services in Rwanda in 2013.
Our operations in Ghana and Tanzania also entered into non-exclusive representation agreements with Western Union Network (France) SAS in 2012, under which they agreed to offer Western Union branded mobile money transfer services (limited to international remittances) in Ghana and Tanzania, respectively. The agreements are for an initial two-year term, which the parties may agree to extend to a five-year initial term, after which the agreements will renew automatically each year until terminated by either party. We are entitled to receive base compensation of 20% of the fees charged to the sender or the recipient in Ghana or Tanzania, as applicable, for money transfer service transactions, as well as receiving fees for providing
47 ancillary services. Western Union is entitled to the balance of all compensation and other revenues received for the service. At this time, neither Ghana nor Tanzania have obtained regulatory approval to launch the Western Union services.
3G license acquisition in DRC
Our DRC operation is the only operator in the country operating solely on GSM frequencies. On June 7, 2012, our DRC operation entered into an agreement to acquire the 900 MHz frequencies of Supercell, another mobile operator active in eastern DRC. Supercell alleged that another mobile operator, Congo Chine Telecom (CCT), which is owned by France Telecom-Orange, had misappropriated the three spectrum blocks and these frequencies and has brought a regulatory action with the telecommunications regulatory authority seeking to recognize Supercell as the proper license holder and force CCT to cease using its frequencies. Supercell also commenced a court action against CCT seeking damages and compensation for misappropriation of Supercell’s licensed frequencies.
As required by DRC telecommunications law, Supercell returned its frequencies to the regulator, allowing the regulator to issue the frequencies to Oasis, which it did by order on June 19, 2012. In the same order, the regulator also extended the duration of Oasis’s license to December 2024 (which aligned with the duration of Supercell’s license). In consideration for this a extension, Oasis paid $16.25 million to the regulator in license amendment fees and $15 million to Supercell. However, since part of the frequencies covered by Supercell’s license were still occupied by Orange, Oasis only paid $10 million to Supercell, with the remaining $5 million placed in an escrow bank account under Oasis’s control until the transferred frequencies were available for Oasis’s use. A clear system of regular tests and controls of those frequencies was agreed upon with Supercell, but no specific time limit was set in connection with the final release of the escrow account.
Since June 2012, we have been working closely with Orange and the regulator to provide Oasis with the full benefit of the newly assigned frequencies. On September 6, 2012, Supercell demanded the release of the $5 million (plus interest) held in escrow. Supercell has, however, assisted our efforts to develop, with the regulator and the telecommunications ministry, a workable spectrum allocation plan that is acceptable for all mobile operators. In February 2012, we released half of the escrow amount to Supercell. When we have established a 3G network in DRC to utilize this new 3G license, which we intend to launch by mid-2013, these additional frequencies will improve our competitive position in DRC and allow us to further invest in infrastructure development in DRC.
Senegal license
In July 1998, Sentel, our Senegalese operation, was awarded a 20-year concession to operate a nationwide network. The concession is renewable every five years after the expiration of the original concession in 2018, subject to approval by the Senegalese authorities and provided Sentel has complied with the terms of the concession. At the time the concession was granted, the Senegalese government had announced certain amendments to the concession; however, none were implemented. Since 2000, when a new regime came to power, the government repeatedly publicly questioned the status and validity of Sentel’s concession. In August 2002, the Millicom Group and the government agreed to negotiate in good faith an amendment of Sentel’s 1998 concession. In 2008, the government again questioned the status and validity of Sentel’s concession, prompting Sentel to initiate arbitration proceedings with the International Center for the Settlement of Investment Disputes (ICSID) against the Republic of Senegal under provisions of the Sentel license and international law. Sentel sought compensation for the purported expropriation of the Senegal license and monetary damages for breach of the license. On the same day, the Republic of Senegal initiated court proceedings against Sentel and the Millicom Group and sought court approval for the revocation of Sentel’s license and sought damages against Sentel and the Millicom Group. In November 2010, the Senegalese government withdrew its case from the Senegalese courts, and a hearing at ICSID occurred in December 2011.
48 In October 2012, we amicably settled the dispute over the validity of our license and withdrew the international arbitration proceedings. On November 27, 2012, ICSID issued an arbitral award to validate the settlement agreement, under which the validity of the license is recognized by both parties. In addition, the settlement agreement granted us a 3G license, an alignment of the license terms with those of other operators, additional spectrum and a 10-year extension of the license to 2028. We paid $103 million to the government for these additional license rights and spectrum.
Organizational restructuring
In 2012, we structured our business around five organizational categories—Communication, Information, Entertainment, Solutions and MFS. On September 1, 2012, we added a sixth category, Online, following our agreement with Rocket Internet, as discussed above under “— Acquisitions—Rocket Internet Agreement.” In 2013, we further restructured our business into four organizational categories—Mobile, Cable and Digital Media, MFS and Online. The mobile activities of business in the Communication, Information, Entertainment and Solutions categories is now contained in “Mobile” and the fixed-line, cable and broadband activities of our business are now contained in “Cable and Digital Media.” This new organizational structure is designed to support our strategic goals to accelerate the development of new products and categories, deepen our consumer understanding skills and bring innovation to our go-to-market strategies, while continuing to focus on increasing efficiency. For further discussion of our categories see “Our Business—Overview—Organizational Restructuring.”
License tender in Myanmar
On April 11, 2013, Myanmar’s Ministry of Communications, Posts and Telegraph (MCPT) informed the Millicom Group that it was one of 12 bidders selected from a field of 91 applicants to advance to the third and final bidding round for two nationwide telecommunications licenses. Final applications are due by June 3, 2013, with winners scheduled to be announced by June 27, 2013. With approximately 1.3 million mobile subscribers at the end of October 2012, Myanmar’s reported mobile penetration rate was approximately 7%, serviced by Myanmar’s two incumbent operators.
Acquisition of spectrum
In December 2012, our Colombian operation renewed its license for 40 MHz of spectrum in the 1900 MHz band for another 10 years (until February 2023), for which it paid approximately $52.4 million to the Colombian government in January 2013, with the remaining consideration to be determined by the Arbitrage Court (Tribunal de Arbitramiento) by mid-2014, as further described under “Our Business—Litigation and Legal Proceedings—Colombia.” In addition, our Bolivian operation was recently awarded 2x10MHz of spectrum in the 1900MHz band, for which it paid $15 million. On May 9, 2013, we confirmed our participation in a 4G license tender in Colombia as part of a consortium of other mobile operators.
Termination of Exchange Act reporting
MIC S.A. has terminated its registration under the Exchange Act and its reporting obligations ended on October 12, 2012. As of January 11, 2013, the termination of MIC S.A.’s reporting and disclosure obligations under the Exchange Act became fully effective. However, MIC S.A. has announced its intention to voluntarily continue to comply with many of the corporate governance and disclosure requirements of the Exchange Act. Additionally, MIC S.A. maintains its listing on the NASDAQ OMX Stockholm and remains subject to its listing rules and reporting requirements, as well as remaining subject to the Swedish Code of Corporate Governance. MIC S.A. intends to continue to provide the same high level of investor disclosure that it has provided in the past.
49 New tower construction in Tanzania
In March 2013, the Tanzania Universal Communication Services Access Fund (the “UCAF”) announced that MIC Tanzania, among other telecom operators, had won a tender to construct towers in 19 under-served rural wards in order to improve the provision of basic call services. The expected capital expenditure for the project is approximately $3.1 million, of which approximately $1.4 million will be subsidized by the UCAF. Under the arrangement, MIC Tanzania agrees to provide a performance bond of 5% of the subsidy amount before starting the project, which is due to commence in the second quarter of 2013. The UCAF, into which all telecom operators in Tanzania contribute a percentage of their revenues, works to improve accessibility and participation in the provision of communication services, with a view of promoting social economic development of rural and urban underserved areas. The initiative resulted from a study which found that more than 2,000 villages across Tanzania lacked access to mobile telecom services because economic, topographic and demographic factors hindered investment.
Key factors affecting the Millicom Group’s business
Our performance and results of operations have been and will continue to be affected by a number of factors, including external factors. Certain of these key factors that have had, or may have, an effect on the results of our operations are set forth below.
Customers
ARPU and Churn
Three months Year ended December 31, ended March 31, 2010 2011 2012 2013 (unaudited) Monthly ARPU(1) (U.S. dollars) ...... 9.10 9.40 9.60 8.50 Monthly Churn(2) (%) Prepaid ...... 5.7% 5.1% 4.9% 4.7% Postpaid ...... 2.1% 2.4% 2.6% 2.8% Total monthly churn(3) ...... 5.2% 4.9% 4.5% 4.5%
(1) Average monthly revenue per customer, calculated based on historical exchange rates for the applicable periods indicated in the Millicom Group’s annual consolidated financial statements. (2) Churn is a measure of our mobile customers only. (3) Our total monthly churn is individually calculated by reference to our aggregate monthly churn figures for prepaid and postpaid customers.
We generate revenue mainly from fees associated with the communication, entertainment, data, information and financial services we provide to our customers, such as monthly subscription fees, airtime and data usage fees, roaming fees, interconnect fees, connection fees, broadband internet, fixed-line telephone, VoIP, data transmission, mobile money transfer and related financial services, cable television, sale of content and other services and equipment sales. We generally seek to increase our revenues through the growth of our customer base and through the introduction of new products and VAS. Our results of operations are therefore dependent on our customer base and the number of services that each customer uses, which we measure using ARPU.
The number of customers we have is dependent upon the number of new customers we obtain and the number of customers that terminate our services, or churn. Therefore, we seek to grow revenues in maturing markets by developing and selling additional products and services through which we can gain a greater share of customers’ disposable income, increase loyalty and reduce churn. VAS as a percentage of the Millicom Group’s total revenue was 23.0% in fiscal 2010, 26.6% in fiscal 2011, 30.8% in fiscal 2012 and 33.5% in the three-month period ended March 31, 2013. Our primary retention activity, however, is the day-to-day maintenance of brand value and high quality customer service that we offer to our customers.
50 Pricing pressure
The markets in which we operate are competitive in nature, and we expect that competition will continue to remain high. Emerging markets mobile telecommunications operators compete for customers principally on the basis of price, services offered, advertising and brand image, quality and reliability of service and coverage area. Price competition is significant on voice and SMS services, which still represent the vast majority of the Millicom Group’s revenues (together they represented 74% of the Millicom Group’s revenues in 2011, 68% in 2012 and 63% in the three-month period ended March 31, 2013), but they are largely commoditized, as the ability to differentiate these services among operators is limited and penetration is high. Competition has resulted in pricing pressure, reduced margins and profitability, increased customer churn and the loss of revenue and market share, especially in competitive markets like Ghana and Tanzania where we face strong, well- funded competitors. Pricing pressure has resulted in a decline in ARPU in some of our markets; however, this has been offset by an increase in our number of customers. We are currently implementing various pricing initiatives in the African markets that are experiencing negative growth, which resulted in a 65% increase in VAS products and services in fiscal 2012, compared to fiscal 2011.
Mobile customers
Our mobile customer numbers for the years ended December 31, 2010, 2011 and 2012 and the three-month periods ended March 31, 2012 and 2013 were as follows:
Three months Year ended December 31, ended March 31, 2010 2011 2012 2012 2013 (unaudited) Central America ...... 13,484,996 14,626,434 15,596,793 15,058,562 15,833,786 South America ...... 10,139,252 11,154,612 12,716,193 11,531,054 12,760,399 Africa ...... 14,965,332 17,304,044 18,915,714 17,208,542 18,809,944 Total ...... 38,589,580 43,085,090 47,228,700 43,798,158 47,404,129
As of March 31, 2013, our worldwide total mobile customer base increased by 8% to 47 million from 44 million as of March 31, 2012. Prepaid customers accounted for 93%, or 44 million, of the total mobile customers.
Our mobile attributable customer base (which is based on our percentage of ownership in each operation, rather than 100%) increased to 44 million customers as of March 31, 2013 from 40 million as of March 31, 2012, an increase of 11%.
Our mobile RGUs are divided into Voice/SMS RGUs, Data RGUs and Other VAS RGUs. The total number of RGUs per mobile customer was 1.73 RGUs per mobile customer during the first, second and third quarters of 2012, 1.71 RGUs per mobile customer during the fourth quarter of 2012, 1.73 RGUs per mobile customer during fiscal 2012 and 1.67 RGUs per mobile customer during the first quarter of 2013.
In Central America, the Millicom Group added approximately 94,000 net new customers in the first three months of 2013, bringing the total as of March 31, 2013 to approximately 16 million customers (a 5% increase year-on-year). We continue to focus on attracting higher quality customers in these more penetrated markets and set subsidy levels that support and attract migration from voice to data. For the three months ended March 31, 2013 compared to the three months ended March 31, 2012, Guatemala grew its mobile customer base by 13% year-on-year, while Honduras increased by 0.4%. As of March 31, 2013, we had more than 2.2 million data users across Central America.
In South America, total mobile customers increased by 11% year-on-year to approximately 13 million as of March 31, 2013, with Colombia, Paraguay and Bolivia showing increases of 19%, 6% and 1%, respectively. As of March 31, 2013, we had more than 2.2 million data users across South America.
51 In Africa, customers increased by 9% year-on-year. Net new customers decreased by approximately 57,000 in the first three months of 2013, bringing the total as of March 31, 2013 to approximately 19 million. Revenue continues to be impacted by market price reductions that were introduced in the second half of 2011, and we have yet to see full elasticity in the markets of Ghana, DRC and Senegal despite reduction in tariffs and introduction of flat tariffs in Ghana. Nevertheless, the Millicom Group maintained its market share across the region. The two best performing markets in terms of year-on-year customer growth were DRC and Rwanda, which grew by 27% and 25% year-on-year, respectively. In Senegal, our customer base grew by 7% in Tanzania, our customer base increased by 10%, in Mauritius, our customer base grew by 6% and in Chad our customer base increased by 3%.
We are investing to accelerate growth and strengthen our position in the longer term. We value sustainable revenue growth over net customer additions, and we are focusing on data and VAS customers from whom, on average, we generate a higher ARPU than 2G voice only customers. We believe that in more developed markets this has a stronger correlation with future growth than customer numbers.
We have developed a number of non-traditional distribution channels in our operations to expand our market share and reduce our operating costs. Continued improvements in our distribution network also helped drive customer growth and make our products more accessible to customers, for example, by providing easy access to our goods and services through points of sale, direct sales forces, pre and post paid offerings and simple activation processes. We are further improving the volume and variety of products and services we provide to our customers, the way in which these products and services are offered, as well as the accessibility and availability of our products and services by using innovative distribution channels and techniques. For example, in Tanzania, we have introduced trade marketing supervisors and a monitoring tool to oversee brand visibility at our points of sale and at temporary sites operated by freelancers. In Senegal, we have introduced kiosks for direct sales in strategic locations, and throughout our African markets, we have significantly increased our street-level presence and visibility through larger direct sales forces and the use of motorbike taxis selling ePIN reloads.
Cable customers
Our cable business passes 2.2 million homes in Latin America, and we provided services to 776,124 homes as of March 31, 2013, representing 1,055,797 RGUs and a 35.4% penetration rate of homes passed. We offer our cable customers a full consolidated suite of services, including cable television, internet and mobile services. Our cable television services are generally the first point of entry into our customers’ homes, which allows us to increase our penetration by offering internet and mobile services, as well, creating stronger brand affinity. Our aim is to increase our customer take-up of services by investing in network upgrades so that they are bidirectional (allowing both uploads and downloads over a communication line) and both broadband internet and cable TV can be accommodated.
Total homes passed and RGUs for our Central American cable businesses (excluding Paraguay) for the years ended December 31, 2011 and 2012 and the three-month periods ended March 31, 2012 and 2013 were as follows:
Three months Year ended December 31, ended March 31, 2011 2012 Growth 2012 2013 Growth (unaudited) Homes passed (in thousands) ...... 1,373 1,682 23% 1,596 1,743 9% RGUs (in thousands) ...... 721 862 19% 800 874 9%
New products and services
Innovation continues to be a major focus of the Millicom Group as we seek to continue growing revenues in maturing markets by developing additional products and services through which we
52 can gain a greater share of customers’ disposable income. During the three months ended March 31, 2013, VAS as a percentage of the Millicom Group’s total revenue increased to 33.5%, compared to 29.4% during the three months ended March 31, 2012. We expect innovation to be a key driver of growth in the years ahead, mainly with 3G in the short to medium term, and as we expand and adapt MFS to the local markets in which we operate, we expect MFS to make a substantial contribution to growth.
Capital expenditure during the year ended December 31, 2012 resulted in improvements in the quality of our networks and increased capacity and coverage, which attracted additional customers. We are also investing approximately $300 million in our IT systems (billing platforms, CRM and ERP systems) in 2012 and 2013, and we invested in 3G capability in Africa during 2012. In fiscal 2012, we invested $1,120 million in capital expenditure, a meaningful increase over fiscal 2011, including for additional spectrum and the extension of our license in DRC to 2024. We are accelerating our capital expenditure programs by anticipating investments earlier in the year to support strong growth in our Information category and increasingly focusing on opportunities in which we see the most attractive returns on invested capital.
Effect of exchange rate fluctuations
Exchange rates for currencies of the countries in which our companies operate fluctuate in relation to the U.S. dollar and such fluctuations may have a material adverse effect on our earnings, assets or cash flows when translating local currency into our U.S. dollar reporting currency. For each operation which reports its results in a currency other than the U.S. dollar, a decrease in the value of that currency against the U.S. dollar reduces our profits as well as our assets, our liabilities, and our future dividends. To the extent that our operations retain earnings or distribute dividends in local currencies, the amount of U.S. dollars we receive is affected by exchange rate fluctuations of those currencies against the U.S. dollar. In addition, exchange rates impact the Millicom Group’s earnings and cash flows due to U.S. dollar denominated debt held at the local operational level where local currency borrowing facilities are either not available or cannot be obtained under commercially acceptable terms. We generally do not hedge our foreign currency exposure since there are few available instruments in the countries where we operate. In the three months ended March 31, 2013, we had net exchange losses of $11 million.
Investments, acquisitions and divestitures
There were no significant acquisitions during the three-month period ended March 31, 2013. During 2012, the Millicom Group engaged in two significant acquisitions, which are described above under “—Recent Developments—Acquisitions.” In addition, during 2012, we invested in various cable businesses for a total consideration of $16 million, and during 2011, we invested in various businesses for a total consideration of $9 million.
In January 2010, the Millicom Group’s operation in Ghana signed a sale and purchase agreement, as well as a lease-back agreement in June 2010, for most of its cell sites. The agreement marked the Millicom Group’s first outsourcing of passive infrastructure and is consistent with the Millicom Group’s strategy of improving both our capital and operating efficiency by focusing on our core activities. The Ghana agreement was followed by similar arrangements in Tanzania and DRC in December 2010 and in Colombia in July 2011. Together with the lease-back agreements, the Millicom Group’s operations in Ghana, DRC, Tanzania and Colombia entered into “build-to-suit” agreements to accommodate the Millicom Group’s growth and to enable the construction of additional equipment and towers. Most of the tower transfers under these agreements have been completed, with the remaining towers expected to be transferred during 2013. The carrying value of the portion of the remaining towers that will not be leased back and any related liabilities have been classified respectively as assets held for sale and liabilities directly associated with assets held for sale. (See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.”)
53 In July and December 2011, Colombia Móvil signed a sale and purchase agreement and lease- back agreement, respectively, with American Tower International, Inc., a subsidiary of American Towers, to transfer most of its tower sites. By April 2, 2013, approximately 68% of the towers under this agreement had been transferred and the remaining towers are expected to be transferred by mid-2013. As a result of the agreements, Colombia Móvil will receive $182 million of cash. The Millicom Group has an approximate 40% equity interest in American Towers. We have provided our local partners with a call option giving them the opportunity to acquire up to half of our shareholding. The option expires in July 2013. The carrying value of the portion of the remaining towers that will not be leased back and any related liabilities have been classified respectively as assets held for sale and liabilities directly associated with assets held for sale. (See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.”)
On July 1, 2010, the Millicom Group reached agreement with its local partner in Honduras whereby the Millicom Group’s local partner granted the Millicom Group an unconditional call option for the succeeding five years for its 33% stake in Telefonica Celular S.A. de C.V. (Celtel), the Millicom Group’s Honduran subsidiary, and the Millicom Group granted a put option for the same duration to the local partner in the event of a change of control of the Millicom Group. As a result of this agreement, the Millicom Group has the right to control Celtel, which has been fully consolidated into the Millicom Group financial statements from July 1, 2010. Prior to entering into the agreement, the results of the Honduras operations were proportionately consolidated, because the Millicom Group was dependent on the consent of its local partner for strategic decisions related to its Honduran operation, as the shareholders agreement required a vote of 75% of the shares to authorize and approve Celtel’s significant financial and operating policies.
We recorded a liability representing the redemption value of the put option of $769 million as of December 31, 2010 and a non-operating expense of $32 million, representing the change in carrying value of the put option liability between July 1, 2010 and December 31, 2010. The redemption price of the put option is based on a multiple of the EBITDA of Celtel. The multiple is based on a change of control transaction multiple of the Millicom Group. Management estimated the change of control transaction multiple of the Millicom Group from a trading multiple of MIC S.A.‘s common shares and adding a control premium (based upon comparable transactions from the industry).
In addition, the Millicom Group acquired a further 6% of Navega Honduras. As a result of this transaction, the Millicom Group has the right to control Navega Honduras and from August 20, 2010 Navega Honduras has been fully consolidated into the Millicom Group financial statements. Previously, the Honduras operations were proportionately consolidated.
The Millicom Group revalued at fair value its previously held 66.7% interest in Celtel and 60.7% in Navega Honduras, recognizing a gain of $1,060 million. The fair values of Celtel and Navega Honduras were determined based on a discounted cash flow calculation.
On August 20, 2010, to facilitate the integration of its various business lines and to create synergies, the Millicom Group entered into agreements with its partners in Honduras and Guatemala to align ownership of its Amnet and Navega businesses. As a result, the Millicom Group sold 45% of its Amnet operations in Guatemala to its partner in Guatemala and retained a 55% equity interest. From this date, Amnet Guatemala has been accounted for as a joint venture and proportionately consolidated into the Millicom Group financial statements. Previously, the results of Amnet Guatemala were fully consolidated. There was no significant impact on profit and loss from the disposal.
In January 2012, the Millicom Group increased its ownership interest in Navega El Salvador from 55% to 100%.
On March 9, 2011 the Millicom Group completed the sale of its Asian business segment with the sale of its Laotian operations to VimpelCom Ltd. and received proceeds (net of transaction costs and taxes) from the sale of $53 million, realizing a gain on sale of $37 million.
54 Effects of restatement
Due to a misstatement in MIC S.A.‘s previously issued financial statements for the year ended December 31, 2010, and for the quarterly periods ended on September 30, 2010 to September 30, 2011, MIC S.A. restated its financial statements for the periods then ended. The restated financial statements as of and for the year ended December 31, 2010 and as of and for the quarterly periods ended September 30, 2010 to September 30, 2011, correct the accounting treatment for the Millicom Group’s July 2010 acquisition of a controlling interest in Celtel, its mobile phone operation in Honduras, as discussed above under “—Key Factors Affecting the Millicom Group’s Business—Acquisitions and Divestitures.” The restatement was made to recognize a liability and corresponding reserve for the put option provided to our local partner who holds a non- controlling interest in our Honduran operation.
Following our reassessment of the Honduras put option’s accounting treatment, we determined that, as the put option could be exercised under certain change of control events which could be outside of our control, the put option meets the criteria under IAS 32 for recognition as a liability and corresponding equity reserve. Therefore, we retroactively recorded a liability for the put option as of July 1, 2010 in the amount of $737 million. As of December 31, 2010, the carrying value of the put option amounted to $769 million and as of September 30, 2011, the carrying value of the put option amounted to $718 million, representing the put option’s redemption value on those dates. We also recognized a non-operating expense of $32 million, reflecting the change in value of the put option liability, for the period between July 1, 2010 to December 31, 2010, and non-operating income of $51 million, reflecting the change in value of the put option liability, for the period between December 31, 2010 and September 30, 2011.
The adjustments necessary to correct the errors, which are described in more detail in Note 4 to the Millicom Group’s annual consolidated financial statements and Note 3 to the Millicom Group’s unaudited interim condensed consolidated financial statements, have no effect on reported assets or cash flows. Operating results
We finalized the sale of our operation in Laos during 2011. Accordingly, this operation has been classified as a discontinued operation in the Millicom Group’s 2011 consolidated financial statements. The discussion below focuses on results from continuing operations.
55 Three months ended March 31, 2012 and 2013
The following table sets forth certain income statements items for the periods indicated:
Impact on Three months ended comparative results March 31, for period Amount of Percent 2012 2013 variation change (U.S. dollars in millions, except percentages) Revenues ...... 1,168 1,246 78 7% Cost of sales ...... (421) (468) (47) 11% Gross profit ...... 747 778 31 4% Sales and marketing ...... (211) (246) (35) 17% General and administrative expenses ...... (224) (257) (33) 15% Other operating expenses ...... (22) (40) (18) 82% Other operating income ...... 5 3 (2) (40)% Operating profit ...... 295 238 (57) (19)% Interest expense ...... (47) (66) (19) 40% Interest and other financial income ...... 4 3 (1) (25)% Other non operating expenses, net ...... (52) 42 94 (181)% Loss from associates ...... 0 (6) (6) – Profit before tax from continuing operations ...... 200 211 11 6% Credit (charge) for taxes ...... (91) (68) 23 (25)% Profit for the year from continuing operations ...... 109 143 34 31% Profit from discontinued operations, net of tax ...... 0 0 0 – Non-controlling interests ...... (14) 2 16 (114)% Net profit for the period attributable to equity holders ...... 95 145 50 53%
Total revenues increased by 7% for the three-month period ended March 31, 2013 to $1,246 million from $1,168 million for three-month period ended March 31, 2012. Excluding the effect of the movement in currencies and the Cablevisión acquisition, revenues increased by 8.3% period-on-period. Growth in revenue is impacted by growth in the number of customers and increasingly, the type and number of VAS purchased by customers.
March 31, March 31, Mobile Customers (thousands) 2012 2013 Growth Central America ...... 15,059 15,834 5% South America ...... 11,531 12,760 11% Africa ...... 17,209 18,810 9% Total ...... 43,798 47,404 8%
As of March 31, 2013, our worldwide total mobile customer base increased by 8% to 47 million from 44 million as of March 31, 2012. Prepaid customers accounted for 93%, or 44 million of the total mobile customers. Our mobile attributable customer base increased by 11% to 44 million customers as of March 31, 2013 from 40 million customers as of March 31, 2012.
56 Revenue by operating segment
Revenue for the three months ended March 31, 2012 and 2013 by operating segment was as follows:
Three months ended March 31, 2012 2013 Growth (U.S. dollars in millions, unaudited) Central America ...... 474 467 (1)% South America ...... 455 540 19% Africa ...... 239 239 0% Total ...... 1,168 1,246 7%
We derive our revenues mainly from the provision of communication, entertainment, solutions and information services such as monthly subscription fees, airtime usage fees, roaming fees, interconnect fees, connection fees, broadband internet, fixed line telephony, VoIP, data transmission, cable television and other services and equipment sales.
Central America
Revenue decreased by 1% for the three-month period ended March 31, 2013 to $467 million from $474 million for three-month period ended March 31, 2012. We retained the number one position in all three of our mobile markets in Central America during this period, although our market share declined in each market during the period. In El Salvador, this decline was the result of aggressive price competition by two of our competitors in the wake of their failed merger and subsequent efforts to regain market share. In Honduras, the decline in market share is attributable to aggressive promotions by our competitors in response to their significant decline in market share in prior periods. In Guatemala, our market share remained stable. Competition and price pressure on voice was intense through this period in all of our markets, but was especially acute in Central America. Despite the difficult economic environment in Central America, our cable business demonstrated good growth while maintaining a healthy margin, reflecting the attractive opportunities in cable broadband and television services. In our cable business, we have significantly increased the speed offered to our cable broadband customers, with 63.6% of our cable broadband customers enjoying speeds in excess of 1Mbps as of March 31, 2013, compared to 43.3% as of March 31, 2012.
Mobile ARPU for Central America for the three-month period ended March 31, 2013 was $10.00, down 7.4% from $10.80 for the same period in 2012, which was partially attributable to a two cent, or 34%, decrease in mobile termination rates in Honduras in the first quarter of 2013. To address the decline in ARPU in Central America, we are focusing on migrating customers from voice products to data products and smartphones, in particular through bundling offers across product lines. Throughout 2012, our customers demonstrated an increased appetite for promotions and price-driven offers as they sought to optimize use of their disposable income, which continued through the first quarter of 2013.
South America
Revenue grew by 19% for the three-month period ended March 31, 2013 to $540 million from $455 million for three-month period ended March 31, 2012. Our market share increased in Colombia and Paraguay and decreased moderately in Bolivia as a result of aggressive tariff offers from our competition. There were no new mobile entrants in our South American markets during the period. During the first quarter of 2013, mobile termination rates were cut by 17% to four cents in Colombia, which was offset by the addition of 240,000 mobile subscribers.
Mobile ARPU for South America for the three-month period ended March 31, 2013 was $11.70, down 3.3% from $12.10 for the three-month period ended March 31, 2012. ARPU in
57 South America would have been flat from period-to-period if not for interconnection rate cuts in Paraguay and Bolivia, which reflects our success in up-selling and cross-selling more services to existing customers and attracting new high value customer segments.
Africa
Revenue remained flat for the three-month period ended March 31, 2013 at $239 million from the same amount for three-month period ended March 31, 2012. We retained our market share positions in Africa despite strong competition during the period and new competitors entering the markets in DRC, Ghana and Rwanda. In Ghana, a crowded market with seven operators, our market share declined, while in Rwanda, where new competitors entered with aggressive pricing and offers, our market share increased. In DRC, we also gained market share despite a new market entrant (Africell).
ARPU for Africa for the three-month period ended March 31, 2013 was $0.50 lower than in the three-month period ended March 31, 2012 due to market price pressures. During the first quarter of 2013, mobile termination rates were cut by 25% to six cents in DRC and by 70% to two cents in Tanzania.
We continued to focus on retaining the right balance between growth and profitability in Rwanda. In Ghana and Senegal, the situation remained challenging, but we have taken action in terms of pricing in Ghana and, following the license confirmation in Senegal, made further investments in our network.
Revenue by business category
Our total revenue grew by 7% during the three-month period ended March 31, 2013 as compared with the three-month period ended March 31, 2012, from $1,168 million to $1,246 million. This growth was attributable to our business categories as follows:
Contribution Category to Growth Mobile ...... 18% Cable and Digital Media ...... 32% MFS...... 13% Online ...... 14% Others* ...... 23% * Others includes nonrecurring revenue, such as terminal and equipment sales, inbound roaming and miscellaneous revenue.
Mobile
Mobile revenue was $1,030 million for the three-month period ended March 31, 2013, a $14 million or 1.4% increase from $1,016 million for the three-month period ended March 31, 2012. Mobile communications RGUs (voice and SMS users) increased by 329,000 during the first quarter of 2013, and mobile information RGUs (mobile data customers) increased by 788,000 during the first quarter of 2013, reaching 7,135,000 or 15.1% of our total mobile customer base. The first quarter of 2013 was our strongest quarter ever for mobile information net additions.
ARPU from mobile data customers was $7.90 for the three-month period ended March 31, 2013, decreasing by 2% from the three-month period ended March 31, 2012, primarily due to the introduction of new mobile data customers in all regions. In Ghana, for example, we significantly increased our mobile data customers, which we believe holds the key for future performance and market position. ARPU from mobile entertainment and solutions products remained fairly stable at approximately $1. The number of users was negatively impacted by our decision to stop automatic renewal of subscriptions to services such as CRBT or SMS-based alerts. During the three-month period ended March 31, 2013, mobile revenue for our solutions products increased by 34% compared to the three-month period ended March 31, 2012.
58 Cable and Digital Media
Cable and Digital Media revenue was $107 million the three-month period ended March 31, 2013 (including the consolidation of Cablevisión in Paraguay), a $25 million or 30% increase from $82 million for the three-month period ended March 31, 2012. In the first three months of 2013, we added 10,000 new residential cable customers, representing 6,000 new pay-TV connections and 5,000 new broadband connections. Residential cable ARPU grew by 1.7% during the three-month period ended March 31, 2013 to $30.20 per home connected as compared with $29.90 per home connected during the three-month period ended March 31, 2012. Cablevisión Paraguay was rebranded to Tigo during the fourth quarter of 2012, and in the first quarter of 2013, growth accelerated significantly. In the first quarter of 2013, our cable and broadband business in Paraguay generated $22 million in revenue.
As of March 31, 2013, in our Latin American broadband business, we had approximately 245,000 fixed broadband RGUs, and the fixed broadband penetration rate in our pay-TV customer base was 36.0%.
MFS
MFS revenue increased significantly during the three-month period ended March 31, 2013 as compared with the three-month period ended March 31, 2012, to $16 million from $6 million, respectively, with 12% of our mobile customer base using MFS in the countries where we offer MFS. As of March 31, 2013, 40% of our customer base were active MFS users in Tanzania, 26% in Paraguay and Rwanda, 5% in El Salvador, and 3% in Ghana and Honduras.
Our MFS RGUs increased by approximately 416,000 in the first quarter, with Africa again leading penetration growth. ARPU for MFS users increased compared with the three-month period ended March 31, 2012 despite dilution coming from new users added.
Online
During the three-month period ended March 31, 2013, the Online category generated revenue of $11 million. Both Kanui and Tricae are continuing to perform strongly. Jumia in Nigeria has also performed very well. The market for products contained in our Online category is impacted by seasonality. As a result, revenues in these markets tend to more robust revenues in the fourth quarter during the festive season and softer in the first quarter.
Others
Other drivers of revenue growth during the period were attributable to foreign exchange adjustments and other revenue sources ($18 million), such as interconnection revenue from roaming agreements and telephone and equipment sales.
Cost of sales
Cost of sales increased by 11% for the three-month period ended March 31, 2013 to $468 million from $421 million for the three-month period ended March 31, 2012. Our cost of sales primarily represents interconnection costs, roaming costs, leased lines to connect the switches and main base stations, cost of handsets and terminals, and the depreciation of network equipment. Interconnection and roaming costs are directly correlated to network usage and grow as customer volume, and therefore revenues, increase. Interconnection and roaming costs increased in line with our overall revenue growth described above. The cost of leased lines increased as we continued to expand our networks and depreciation increased due to the higher capital expenditures on our networks.
Gross profit margin slightly decreased to 62% for the three-month period ended March 31, 2013 from 64% for the three-month period ended March 31, 2012. Our gross margin percentage is primarily driven by pricing, interconnect taxes, subsidy levels and the mix of revenues generated
59 from voice, services and data traffic exclusively within our networks and those between our networks and other networks. Calls made exclusively within our networks have a higher gross margin, as we do not incur interconnect charges to access other networks. Gross margins on MFS are lower than on communication services, as we incentivize our distribution network to increase sales.
Sales and marketing
Sales and marketing expenses increased by 17% for the three-month period ended March 31, 2013 to $246 million from $211 million for the three-month period ended March 31, 2012. Sales and marketing costs consists primarily of commissions to dealers for obtaining customers on our behalf and selling prepaid reloads, handset subsidies, general advertising and promotion costs for tigo®, point of sales materials for the retail outlets, and staff costs. As a percentage of revenues, sales and marketing expenses increased to 20% for the three-month period ended March 31, 2013 from 18% for three-month period ended March 31, 2012. Sales and marketing costs are impacted by the expansion of the distribution network and launch of innovative products and services, which require higher spending on awareness point of sales materials as well as subsidy levels. As prices of 3G-enabled handsets and smartphones continue to decline, with a 50% reduction for some entry-level units, these handsets become more affordable to our customers, allowing greater access to data services while reducing the extent to which we need to provide handset subsidies.
General and administrative expenses
General and administrative expenses increased by 15% for the three-month period ended March 31, 2013 to $257 million from $224 million for the three-month period ended March 31, 2012. This increase is primarily attributable to increases in phone subsidies, expansion of our networks, and increases in the products and services offered in our mobile operations, which requires an increase in staffing levels to accommodate growth, as well as higher depreciation of fixed assets (other than network equipment) and increased legal fees and consultancy fees. As a percentage of revenues, general and administrative expenses slightly increased to 21% for the three-month period ended March 31, 2013 from 19% for the three-month period ended March 31, 2012.
We continue to seek ways to reduce our overall general and administrative cost base by identifying synergies to reduce our support costs, such as sharing information, human resources, best practices and technologies amongst the operating companies. We also look to centralize negotiations of our financings and of our supply contracts for network equipment and handsets.
Other operating expenses
Other operating expenses increased by 82% for the three-month period ended March 31, 2013 to $40 million from $22 million for the three-month period ended March 31, 2012. The costs related to the corporate staff and other group support functions has increased, as well as costs related to oversight and support of the significant growth in the operating companies. Our central costs have increased as we strengthened our skills and competencies and with consultancy fees during the organizational change.
Other operating income
Other operating income decreased to $3 million for the three-month period ended March 31, 2013 from $5 million for the three-month period ended March 31, 2012.
60 Operating profit
Operating profit for the three months ended March 31, 2012 and 2013 by segment was as follows:
Operating profit
March 31, March 31, 2012 2013 Growth (U.S. dollars in millions, unaudited) Central America ...... 160 148 (8)% South America ...... 127 119 (6)% Africa ...... 35 16 (54)% Unallocated ...... (27) (45) 67% Total ...... 295 238 (19)%
Operating profit margin
March 31, March 31, Change 2012 2013 in% pts Central America ...... 34% 32% (2)% South America ...... 28% 22% (6)% Africa ...... 15% 7% (8)% Total ...... 25% 19% (6)%
Our operating profitability depends on our ability to continue growing revenues while controlling costs and capital expenditures. Additional regulatory taxes and tariffs negatively impact our operating profitability. Our operating profit declined by 19% over the period as we increased operating investments in data and MFS, which was partially offset by higher returns on capital invested in entertainment and solutions services, which are less capital intensive than voice services.
In Central America, our operating profit margin decreased to 32% for the three-month period ended March 31, 2013 from 34% for the three-month period ended March 31, 2012, as we increased subsidies to support data growth and a shift in revenue mix resulting from less international incoming traffic and increased new services.
In South America, despite a 6% operating profit margin decrease during the period, we continued to invest in handset subsidies to drive data further growth.
In Africa, our operating profit margin decreased to 7% for the three-month period ended March 31, 2013 from 15% for the three-month period ended March 31, 2012, as we defended our market positions through the use of selective promotions and new product development and invested in mobile data services.
Interest expense
The cost of financing before tax, which includes finance leases on towers sold and leased back, during the three-month period ended March 31, 2013 was higher than in the three-month period ended March 31, 2012. The main driver was the increase in financial expenses due to a higher gross debt level, which was $825 million more than in the previous period, as we financed a number of acquisitions with debt during the period.
Interest and other income
Interest and other income decreased to $3 million for the three-month period ended March 31, 2013 from $4 million for the three-month period ended March 31, 2012.
61 Other non-operating income, net
We recorded $42 million of other non-operating net income for the three-month period ended March 31, 2013 compared with $52 million of other non-operating net expense for the three- month period ended March 31, 2012. Other non-operating income consisted of $52 million of non-operating income during the three-month period ended March 31, 2013 related to the change in carrying value of the Honduras put option liability, as compared with an expense of $64 million during the three-month period ended March 31, 2012, and $10 million of expense related to exchange reevaluation and gains in the three-month period ended March 31, 2013, as compared with net income of $3 million in the three-month period ended March 31, 2012.
Charge for taxes
The net tax charge for the three-month period ended March 31, 2013 decreased to $68 million from $91 million for the three-month period ended March 31, 2012. This decrease in current tax charge is in line with the contraction of our profit before tax (excluding non-operating income). In addition, deferred tax profit increased as some African operations increased their deferred tax assets. Our effective tax rate, excluding these deferred tax assets changes, decreased to 26.5% for the three-month period ended March 31, 2013 compared with 26.8% for the three-month period ended March 31, 2012. Our effective tax rate was impacted by the tax situation in Guatemala, where our operations are taxed on revenues rather than profit before tax. In addition, we have a transfer pricing policy whereby we charge both royalties on revenues as well as management fees and business support services to most of our operating companies. As our operating companies grow, management fees and brand fees charged to the operating companies generally increase, and as our profit before tax increases, the impact of the net corporate expenses and interest on our effective tax rate is expected to decline.
Net profit for the period attributable to equity holders
Net profit for the three-month period ended March 31, 2013 was $145 million compared to net profit of $95 million for the three-month period ended March 31, 2012. Profit from continuing operations increased to $143 million for the three-month period ended March 31, 2013 from $109 million for the three-month period ended March 31, 2012 for the reasons stated above.
62 Years ended December 31, 2011 and 2012 The following table sets forth certain income statement items for the periods indicated:
Impact on Comparative Year ended December 31, Results for Period Amount of Percentage 2011 2012 Variation Change (U.S. dollars in thousands, except percentages) Revenues ...... 4,529,597 4,813,895 284,298 6% Cost of sales ...... (1,564,401) (1,737,290) (172,889) 11% Gross profit ...... 2,965,196 3,076,605 111,409 4% Sales and marketing ...... (816,715) (914,071) (97,356) 12% General and administrative expenses ...... (839,423) (955,922) (116,499) 14% Other operating expenses ...... (95,737) (122,269) (26,532) 28% Other operating income ...... 43,700 19,257 (24,443) (56)% Operating profit ...... 1,257,021 1,103,600 (153,421) (12)% Interest expense ...... (186,523) (219,873) (33,350) 18% Interest and other financial income ...... 14,576 13,863 (713) (5)% Other non operating (expenses) income, net . . . (4,290) 21,767 26,057 (607)% (Loss) profit from associates ...... (9,591) (22,862) (13,271) 138% Profit before tax from continuing operations .. 1,071,193 896,495 (174,698) (16)% Credit (charge) for taxes ...... 18,347 (392,908) (411,255) 2,242% Profit for the year from continuing operations ...... 1,089,540 503,587 (585,953) (54)% Profit for the year from discontinued operations, net of tax ...... 39,465 0 (39,465) (100)% Non-controlling interests ...... (204,490) 4,718 209,208 (102)% Net profit for the year attributable to equity holders ...... 924,515 508,305 416,210 (45)%
Total revenues increased by 6% for the year ended December 31, 2012 to $4,814 million from $4,530 million for the year ended December 31, 2011. Excluding the effect of the movement in currencies and the Cablevisión acquisition, revenues increased by 8% year-on-year. The growth in revenue is due to growth in the number of customers, the quantity and mix of products and increases in the services taken by our customers, as well as foreign exchange movements.
Revenue Revenue for the years ended December 31, 2011 and 2012 by operating segment was as follows:
Year ended December 31, 2011 2012 Growth (U.S. dollars in thousands) Central America ...... 1,842,166 1,900,963 3% South America ...... 1,706,139 1,939,185 14% Africa ...... 981,292 973,747 (1)% Total 4,529,597 4,813,895 6%
Central America Revenue increased by 3% in 2012 to $1,901 million from $1,842 million for the year ended December 31, 2011, reflecting an increase in net customer additions and strong growth in products and services in our Information and Solutions categories. Growth in our Communications category was lower due to pricing pressure in El Salvador, although strong regional performance in the Information and Solutions categories contributed to the overall positive growth. As of December 31, 2012, we had approximately 2.2 million data users across the region.
63 As of December 31, 2012, our cable and broadband business in Central America had approximately 862,000 RGUs, an increase of approximately 19% year-on-year. Broadband customer growth continued to be strong.
South America
Revenue increased by 14% in 2012 to $1,939 million, from $1,706 million for the year ended December 31, 2011, primarily as a result of a 14% increase in our customer base during the period and successful upselling and cross-selling of our VAS products and services to our existing customers, resulting in an increase in VAS contributions to revenue from 32% for the year ended December 31, 2011 to 35% for the year ended December 31, 2012.
We now have approximately 2.2 million data users in South America. Growth is partly attributable to our packaging and targeted bundling of services to suit our customer segments. New regulations in Bolivia, which increase the regulatory burden on users of fixed-line and mobile services by requiring them to register their numbers, negatively impacted revenue for the Entertainment category in 2012. Our data users in South America now represent 21.5% of our regional customer base and approximately 17% of the Millicom Group’s revenue was generated in the Information and Solutions category.
Africa
Revenue slightly decreased by 1% in 2012 to $974 million from $981 million for the year ended December 31, 2011, which reflects the negative impact of the strengthening of the U.S. dollar against many of the currencies in our African markets. However, this was partially offset by the buoyancy of our revenues in the Entertainment category in the African market as we launched several new music products in 2012. Growth in Tanzania and Rwanda continued to be strong, despite an increasingly competitive operating environment. ARPU for Africa for the year ended December 31, 2012 decreased from the year ended December 31, 2011, mainly due to pricing pressure across our African markets. Subscribers increased by 8% year-on-year.
Cost of sales
Cost of sales increased by 11% for the year ended December 31, 2012 to $1,737 million from $1,564 million for the year ended December 31, 2011, driven by increases in the cost of leased lines as we continued to expand our networks and depreciation due to continuing capital expenditures on our networks and investment in new products and services.
Gross profit margin
Gross profit margin slightly decreased from 66% for the year ended December 31, 2011 to 64% for the year ended December 31, 2012. Gross profit margin was affected mostly by pricing pressure in Africa and the mix of revenue generated from different categories.
Sales and marketing
Sales and marketing expenses increased by 12% for the year ended December 31, 2012 to $914 million from $817 million for the year ended December 31, 2011, reflecting increased sales and handset subsidiaries, as well as investments in product marketing and upselling of our non-voice services. Sales and marketing costs consisted mainly of commissions to dealers for obtaining customers on our behalf and selling prepaid reloads, general advertising and promotional costs for Tigo-branded point of sales materials for the retail outlets, staff costs and handset subsidies. Handset subsidies increased in 2012 due to continued investment in data-related services and expanding the number of our customers who have access to data and other value-added services that are available only on smartphones. As a percentage of revenues, sales and marketing expenses were stabilized at 19% for the years ended December 31, 2012 and 2011.
64 General and administrative expenses
General and administrative expenses increased by 14% for the year ended December 31, 2012 to $956 million from $839 million for the year ended December 31, 2011. This increase is mainly explained by our continued investment in supporting new categories and expansion and upgrade of our networks. This increase also includes an increase in staffing levels to accommodate growth and higher depreciation of fixed assets other than network equipment. As a percentage of revenues, general and administrative expenses increased slightly to 20% for the year ended December 31, 2012 from 19% for the year ended December 31, 2011.
Other operating expenses
Other operating expenses increased by 28% for the year ended December 31, 2012 to $122 million from $96 million for the year ended December 31, 2011. We include in other operating expenses the operating costs of our management offices in Luxembourg, Miami and Dubai. Costs related to the corporate staff and other group support functions have increased, and oversight and support necessary to the continued growth of the operating companies are expected to contribute to an increase in other operating expenses.
Other operating income
Other operating income decreased by 56% for the year ended December 31, 2012 to $19 million from $44 million for the year ended December 31, 2011. This decrease was due to lower levels of activity in the transfer and lease of towers during fiscal 2012 as compared to fiscal 2011.
Operating profit
Operating profit and operating profit margin for the year ended December 31, 2011 and 2012 by segment was as follows:
Operating profit
Year ended December 31, 2011 2012 Growth/Decline (U.S. dollars in thousands, unaudited) Central America ...... 649,159 638,613 (2)% South America ...... 504,822 490,612 (3)% Africa ...... 216,865 122,578 (43)% Unallocated(1) ...... (113,825) (148,203) 30% Total ...... 1,257,021 1,103,600 (12)%
(1) Unallocated operating profit primarily consists of operating costs attributable to our management offices in Luxembourg, Miami and Dubai.
Operating profit margin
Year ended December 31, Percentage 2011 2012 Change (unaudited) Central America ...... 35% 34% (1) South America ...... 30% 25% (5) Africa ...... 22% 13% (9) Total ...... 28% 23% (5)
In Central America, the operating profit margin declined from 35% for the year ended December 31, 2011 to 34% for the year ended December 31, 2012, as we increased smartphone subsidies to support data growth, and due to a shift in revenue mix with less incoming international traffic
65 and increased VAS. In South America, the operating profit margin declined from 30% for the year ended December 31, 2011 to 25% for the year ended December 31, 2012, due to increased investments in handset subsidies and an adjustment to the accounting treatment of a local tax in Colombia. In Africa, the operating profit margin declined from 22% for the year ended December 31, 2011 to 13% for the year ended December 31, 2012, mainly as a result of pricing pressure in certain African markets.
Interest expense
Interest expense for the year ended December 31, 2012 increased by 18% to $220 million, from $187 million for the year ended December 31, 2011. This increase was mainly due to an increased level of financing, including a $180 million bond issuance in Bolivia (as further discussed under “Description of Other Indebtedness—Indebtedness by Operation—Bolivia”) and tower lease- backs, which were slightly offset by an overall reduction of interest rates in the first nine months of 2012 compared to the same period in 2011.
Interest and other financial income
Interest income for the year ended December 31, 2012 remained stable at $14 million compared to $15 million for the year ended December 31, 2011.
Other non operating expenses, net
Other non operating income, net, for the year ended December 31, 2012 amounted to $22 million, compared to other non operating expenses, net, of $4 million for the year ended December 31, 2011. The amount for the year ended December 31, 2012 comprised $15 million of non operating income related to the change in carrying value of the put option granted to our partner in Honduras as well as exchange revaluation and gains which resulted in non operating income of $5 million. The amount for the year ended December 31, 2011 comprised $24 million of non operating income related to the change in carrying value of the put option granted to our partner in Honduras as well as exchange revaluation and losses which resulted in non operating expenses of $28 million.
Credit (charge) for taxes
The net tax charge for the year ended December 31, 2012 increased to $393 million from a tax credit of $18 million for the year ended December 31, 2011. During 2011, a non-cash tax credit of $308 million was recorded from activation of the net deferred tax assets of our Colombian operation relating to expected utilization of tax loss carry-forwards until 2015 and other timing differences related mainly to property, plant and equipment and intangible assets. Effective January 1, 2013, a new corporate income tax rate of 25% was introduced in Colombia, compared to the previous rate of 33%. As a consequence of this rate change, the deferred tax asset was written down by $38.5 million in 2012. The remaining increase in tax is related to various local tax rate increases and increased provision following tax reassessments by local authorities. The Millicom Group’s effective tax rate, excluding those swings in deferred tax in Colombia and one- off tax provisions, remained stable at 26.5% in 2011 and 2012.
Net profit for the year attributable to equity holders of the Millicom Group
The net profit for the year ended December 31, 2012 was $508 million compared to a net profit of $925 million for the year ended December 31, 2011, a decline of 45%. The change is largely due to tax pressures, exchange losses and the non-cash impact of the change in value of the put option liability related to our Honduran operation. Profit from continuing operations decreased to $504 million for the year ended December 31, 2012 from $1,090 million for the year ended December 31, 2011 a decline of 54%. The profit from discontinued operations for the year ended December 31, 2012 was nil, compared to a profit of $39 million for the year ended December 31, 2011, reflecting the $37 million gain on sale of our Laos operation. On September 16, 2009, the
66 Millicom Group announced that it had signed an agreement for the sale of its 74.1% holding in Millicom Holding Laos B.V. to VimpelCom Ltd. On March 9, 2011, the Millicom Group completed the transaction and received proceeds (net of transaction costs and taxes) from the sale of $53 million, realizing a gain on sale of $37 million. From that date, the Laos operation is no longer included in the Millicom Group’s consolidated financial statements.
Years ended December 31, 2010 and 2011
The following table sets forth certain income statement items for the periods indicated:
Impact on comparative Year ended December 31, results for period 2010(1) Amount of Percentage (as restated) 2011 variation change (U.S. dollars in thousands, except percentages) Revenues ...... 3,920,249 4,529,597 609,348 16% Cost of sales ...... (1,330,308) (1,564,401) (234,093) 18% Gross profit ...... 2,589,941 2,965,196 375,255 14% Sales and marketing ...... (737,691) (816,715) (79,024) 11% General and administrative expenses ...... (738,779) (839,423) (100,644) 14% Other operating expenses ...... (74,933) (95,737) (20,804) 28% Other operating income ...... 3,192 43,700 40,508 1269% Operating profit ...... 1,041,730 1,257,021 215,291 21% Interest expense ...... (214,810) (186,523) 28,287 (13)% Interest and other financial income ...... 14,748 14,576 (172) (1)% Revaluation of previously held ...... interests ...... 1,060,014 – (1,060,014) (100)% Other non operating expenses, net ...... (61,658) (4,290) 57,368 (93)% Loss (profit) from associates ...... (1,817) (9,591) (7,774) 428% Profit before tax from continuing operations ...... 1,838,207 1,071,193 (767,014) (42)% Credit (charge) for taxes ...... (227,096) 18,347 245,443 (108)% Profit for the year from continuing operations ...... 1,611,111 1,089,540 (521,571) (32)% Profit for the year from discontinued operations, net of tax ...... 11,857 39,465 27,608 233% Non-controlling interests ...... (2,691) (204,490) (201,799) 7499% Net profit for the year attributable to equity holders ...... 1,620,277 924,515 (695,762) 43%
(1) Restated to recognize the liability for the put option provided to our local partner in Honduras with respect to its 33.3% non- controlling interest in our Honduras operation and the related change in the carrying value of the liability from July 1, 2010 to December 31, 2010, and for the quarterly periods ended September 30, 2010 to September 30, 2011, (as further described below under “—Revaluation of Previously Held Interests”).
Total revenues increased by 16% for the year ended December 31, 2011 to $4,530 million from $3,920 million for the year ended December 31, 2010. Excluding the effect of the movement in currencies, revenues increased by 10% year-on-year. Growth in revenue was impacted by a 12% growth in the number of customers and the type (i.e., higher-value VAS) and number of VAS purchased by our customers.
67 Revenue
Revenues for the years ended December 31, 2010 and 2011 by operating segment were as follows:
Year ended December 31, 2010 2011 Growth (U.S. dollars in thousands) Central America* ...... 1,641,441 1,842,166 12% South America ...... 1,373,877 1,706,139 24% Africa ...... 904,931 981,292 8% Total ...... 3,920,249 4,529,597 16%
* During 2011 we integrated our cable and mobile operations in Central America to generate synergies. As a consequence we now report both cable and mobile operations together in the Central America segment. We have restated the segment data from 2010 to reflect the reclassification of the former cable segment.
Central America
Revenue increased by 12% in 2011 to $1,842 million from $1,641 million for the year ended December 31, 2010. The increase in revenue is largely attributable to the 12% increase in customers in 2011. ARPU for Central America in dollar terms was $11.89, an increase of 7% from $11.11 in 2010.
South America
Revenue grew by 24% in 2011 to $1,706 million from $1,374 million for the year ended December 31, 2010. The increase in revenue is largely attributable to the 24% increase in customers in 2011. ARPU for South America in dollar terms was $13.13, an increase of 10% from $11.94 in 2010, reflecting our ongoing focus on mobile data and other VAS. The continued aggressive marketing of 3G services across the region and of Paquetigos (bundles of minutes, SMS and internet sold for use within a certain period of time) in Colombia and Paraguay helped to increase ARPU.
Africa
Revenue grew by 8% in 2011 to $981 million from $905 million for the year ended December 31, 2010. ARPU for Africa in dollar terms was $5.07, a decrease of 9% from $5.58 in 2010, due to market price pressures. However, our customer base increased by 16% from 15 million for the year ended December 31, 2010 to 17 million for the year ended December 31, 2011, which led to an overall increase in revenue despite a decline in ARPU. We recorded strong performance in Chad, Rwanda, Mauritius and Tanzania. In Rwanda, our market share exceeded one third of the market as of December 31, 2011. In DRC, we experienced difficult trading conditions in the third quarter of 2011, as economic activity was negatively impacted during the election period. In Ghana and Senegal, the competitive situation remained challenging, but during the period, we implemented pricing initiatives, which helped to manage the pricing pressure in these markets.
Cost of sales
Cost of sales increased by 18% for the year ended December 31, 2011 to $1,564 million from $1,330 million for the year ended December 31, 2010. Our costs of sales are primarily related to interconnection costs, roaming costs, leased lines to connect the switches and main base stations, handsets and terminals, and the depreciation of network equipment. The interconnection and roaming costs are directly related to revenues and increased proportionally as a result of the 16% growth in revenues described above. The cost of leased lines increased as we continued to expand our networks and depreciation increased due to the higher capital expenditures on our networks.
68 Gross profit margin
Gross profit margin slightly decreased from 66% for the year ended December 31, 2010 to 65% for the year ended December 31, 2011.
Sales and marketing
Sales and marketing expenses increased by 11% for the year ended December 31, 2011 to $817 million from $738 million for the year ended December 31, 2010. Sales and marketing costs consisted mainly of commissions to dealers for obtaining customers on our behalf and selling prepaid reloads, handset subsidies, general advertising and promotion costs for Tigo-branded products and services, point of sales materials for the retail outlets, and staff costs. These costs contributed to increased sales and a corresponding increase in revenue. As a percentage of revenues, sales and marketing expenses slightly decreased from 19% for the year ended December 31, 2010 to 18% for the year ended December 31, 2011.
General and administrative expenses
General and administrative expenses increased by 14% for the year ended December 31, 2011 to $839 million from $739 million for the year ended December 31, 2010. This increase was mainly a result of costs related to our network expansion, as well as additional offerings of products and services in our mobile operations, including an increase in staffing levels to accommodate the Millicom Group’s growth and higher depreciation of fixed assets other than network equipment. The costs of stock compensation were reduced compared with 2010, when actual results exceeded expectations for our 2008 Long-Term Incentive Plan. In addition, there was an increase in legal and other costs during the year as a result of our delisting from NASDAQ (as further described under “Listing and General Information—Legal Information—MIC S.A.”), the license dispute in Senegal (as further described under “Our Business—Litigation and Legal Proceedings— Senegal”), the disposal of our operation in Laos (as further discussed below under “—Net Profit for the Year Attributable to Equity Holders of the Millicom Group”) and compliance work. As a percentage of revenues, general and administrative expenses remained stable at 19% for both the years ended December 31, 2010 and 2011.
Other operating expenses
Other operating expenses increased by 28% for the year ended December 31, 2011 to $96 million from $75 million for the year ended December 31, 2010. The costs related to the corporate staff and other group support functions has increased, and the necessity to oversee and support the significant growth in the operating companies is expected to contribute to increases in other operating expenses.
Other operating income
Other operating income increased substantially, to $44 million for the year ended December 31, 2011 from $3 million for the year ended December 31, 2010 mainly as a result of recognition of gain on the sale of towers. In addition, income of $7 million was recorded, representing a portion of $15 million received for the sale of exclusivity rights to tower monetization projects (tower sales and lease-backs) in Africa.
69 Operating profit
Operating profit and operating profit margin for the years ended December 31, 2010 and 2011 by segment was as follows:
Operating profit
2010 2011 Growth (U.S. dollars in thousands) Central America(1) ...... 638,598 649,159 2% South America ...... 361,969 504,822 39% Africa ...... 147,737 216,865 47% Unallocated(2) ...... (106,574) (113,825) 7% Total ...... 1,041,730 1,257,021 21%
Operating profit margin
Percentage 2010 2011 Change Central America(1) ...... 39% 35% (4)% South America ...... 26% 30% 4% Africa ...... 16% 22% 6% Total ...... 27% 28% 1% (1) During 2011 we integrated our cable and mobile operations in Central America to generate synergies. As a consequence we now report both cable and mobile operations together in the Central America segment. We have restated the segment data from 2010 to reflect the reclassification of the former cable segment. (2) Unallocated operating profit primarily consists of operating costs attributable to our management offices in Luxembourg.
Operating margins in Central America decreased from 39% for the year ended December 31, 2010 to 35% for the year ended December 31, 2011, as we increased handset subsidies to support data growth and experienced a shift in revenue mix with less international incoming traffic, which generates higher revenue, offset by increased VAS.
In South America, despite a decline in EBITDA margin in 2011 we continued to invest in handset subsidies to drive data growth further and operating profit margin increased by 4% over 2010. Also contributing to the increase was a decline in depreciation and gains on disposal of assets, including the sale and lease-back of towers in Colombia (while we had a loss in 2010).
In Africa, with the launch of 3G services in Rwanda, Ghana, Tanzania and a strong uptake in VAS, we were able to increase the operating margin of the African segment from 16% for the year ended December 31, 2010, to 22% for the year ended December 31, 2011.
Interest expense
Interest expense for the year ended December 31, 2011 decreased by 13% to $187 million, from $215 million for the year ended December 31, 2010. On December 1, 2010, the Millicom Group redeemed its 10% senior notes as part of its strategy to move debt to operational levels. An early redemption penalty on the 10% senior notes and costs of raising finance in El Salvador in 2010 contributed to the higher interest expense in 2010.
Interest and other financial income
Interest and other income for the year ended December 31, 2011 remained stable at $15 million compared to the year ended December 31, 2010.
Revaluation of previously held interests
On July 1, 2010, the Millicom Group reached an agreement with its local partner in Honduras whereby the Millicom Group’s local partner granted the Millicom Group an unconditional call
70 option for the succeeding five years for its 33% stake in Telefonica Celular S.A. de C.V. (Celtel), the Millicom Group’s Honduran subsidiary, and the Millicom Group granted a put option for the same duration to the local partner in the event of a change of control of the Millicom Group. As a result of this agreement, the Millicom Group has the right to control Celtel, which has been fully consolidated into the Millicom Group financial statements from July 1, 2010. In 2011, the Millicom Group reassessed its accounting treatment for the put option and restated its 2010 financial statements with initial recognition of a $737 million liability for the put option and a corresponding equity reserve, subsequently measured at $769 million at December 31, 2010 and $745 million at December 31, 2011.
In addition, the Millicom Group acquired a further 6% of Navega S.A. DE CV in Honduras. As a result of these transactions, the Millicom Group has the right to control Navega Honduras. A gain of $1,060 million was recognized on revaluation of the Millicom Group’s previously held interests in Celtel and Navega Honduras in 2010. On March 13, 2009, the Millicom Group’s joint venture in Guatemala completed the acquisition of the remaining 55% interest in Navega.com S.A. As a result, the Millicom Group revalued at fair value its previously held 45% interest in Navega (held by the Millicom Group’s joint venture in Guatemala) and its previously held 49% interest in Navega Honduras, a subsidiary of Navega (held by the Millicom Group’s joint venture in Honduras), recognizing a gain of $32 million in 2009.
Other non operating expenses, net
Other non operating expenses was a net expense of $4 million for the year ended December 31, 2011, which included $24 million of non operating income related to the change in carrying value of the Honduras put option liability during 2011, compared with a restated non operating expense of $62 million for the year ended December 31, 2010, which included $32 million of non operating expense related to the change in carrying value of the Honduras put option liability between July 1, 2010 and December 31, 2010. Most of the remaining expenses relate to exchange losses and fair value adjustments on hedges, which represented $29 million for the year ended December 31, 2011 compared to an expense of $30 million for the year ended December 31, 2010.
Credit (charge) for taxes
The net tax credit for the year ended December 31, 2011 increased to $18 million from a tax charge of $227 million for the year ended December 31, 2010. A non-cash tax credit of $308 million was recorded from activation of net deferred tax assets of our Colombian operation relating to expected utilization of tax loss carry-forwards until 2015 and other timing differences related mainly to property, plant and equipment and intangible assets.
As a consequence, the Millicom Group’s effective tax rate, excluding the gain on the revaluation of previously held interests in 2010, decreased significantly from 28% in 2010 to (2%) in 2011. This decrease was due to the recognition of previously unrecorded tax losses of $308 million in Colombia, which impacted the tax rate by 29 points.
Net profit for the year attributable to equity holders of the Millicom Group
The net profit for the year ended December 31, 2011 was $925 million compared to a restated net profit of $1,620 million for the year ended December 31, 2010. Profit from continuing operations decreased from $1,611 million as restated for the year ended December 31, 2010 to $1,090 million for the year ended December 31, 2011 for the reasons stated above. The profit from discontinued operations for the year ended December 31, 2011 was $39 million, comprising the operating profit and net gain on disposal of the operation in Laos, compared to a profit from discontinued operations of $12 million for the year ended December 31, 2010. On September 16, 2009, the Millicom Group announced that it had signed an agreement for the sale of its 74.1% holding in Millicom Holding Laos B.V. to VimpelCom Ltd. On March 9, 2011, the Millicom Group
71 completed the transaction and received proceeds (net of transaction costs and taxes) from the sale of $53 million, realizing a gain on sale of $37 million. From that date, the Laos operation is no longer included in the Millicom Group’s consolidated financial statements.
Liquidity and capital resources
Overview
The Millicom Group manages its financing structure and cash flow requirements based on its overall strategy and objectives, deploying financial and other resources related to those objectives.
The Millicom Group is in a position to control its sources of funds to finance corporate level costs, dividend payments to shareholders, and share buy-back programs. Sources of funds are cash from operations, internal and external financing as well as cash inflows from sales of operations. Funding decisions are made based upon a number of internal and external factors, including required amounts and timing of outflows, internal and external availability of funds, cost of financing and other strategic objectives.
As of December 31, 2012 and March 31, 2013, $184 million and $353 million, respectively, of the Millicom Group’s cash and cash equivalents balance was at the holding company level, compared to $205 million and $419 million as of December, 31, 2011 and March 31, 2012, respectively. In addition, the Millicom Group had $105 million and $97 million as of December 31, 2012 and March 31, 2013, respectively, of cash held in Latin America Internet Holding and Africa Internet Holding, which are fully consolidated. In 2012, the Millicom Group also established a notional cash pool starting with a few of the Millicom Group companies and had a further $155 million and $146 million as of December 31, 2012 and March 31, 2013, respectively, in a Luxembourg- based cash pool arrangement.
If funds at the foreign operating subsidiary level are repatriated, taxes on each type of repatriation and each country would need to be accrued and paid, where applicable.
We believe that our funding and working capital are sufficient for our present requirements. Further discussion of financial related risks including liquidity is provided in Note 34 of the Millicom Group’s annual consolidated financial statements included elsewhere in this offering memorandum.
As of March 31, 2013, the Millicom Group’s total consolidated outstanding debt and other financing was $3,303 million, compared to $2,478 million as of March 31, 2012. As of December 31, 2012, the Millicom Group’s total consolidated outstanding debt and other financing was $3,259 million, compared to $2,438 million as of December 31, 2011. These amounts represent the consolidated debt of our subsidiaries and joint ventures. The amount of debt and other financing held by MIC S.A. was $304 million as of March 31, 2013.
We seek to finance the costs of developing and expanding mobile operations mainly at the operating level on a country-by-country basis. Historically, the Millicom Group initially finances its operations through equity contributions, shareholder loans and, in some cases, third party financing. In many of our operations, we have now replaced equity and shareholder loans with third party financing, which, after initial stages of an operating company’s development, is non- recourse to other members of the Millicom Group whenever possible. Sources of financing at the operating company level have included vendor financing provided by equipment suppliers, project financing from commercial banks and lending from international agencies such as the International Finance Corporation, PROPARCO, FMO, EKN and the Overseas Private Investment Corporation bank credit. A description of our external financing can be found under “Description of Other Indebtedness—Indebtedness by Operation.”
We seek to obtain financing in local currency to limit the impact of currency fluctuations, although this is not always possible due either to absence of long-term credit facilities or lack of commercially acceptable facilities.
72 Cash upstreaming
Progressive improvement in operating and financial performance of our operations has enabled us to upstream surplus cash on an on-going basis through a combination of dividends, royalties, business support services, technical service fees and shareholder loan repayments. For the three months ended March 31, 2013, we upstreamed $254 million from 5 of the 15 countries in which we operate, compared with approximately $258 million during the three months ended March 31, 2012. We used this upstreamed cash to fund costs associated with our corporate headquarters.
For the year ended December 31, 2012, we upstreamed $858 million from 8 of the 15 countries in which we operate. Together with previously upstreamed cash, this cash was used to partly fund payment of $541 million of dividends, to fund purchase of $190 million of shares in a share buy- back program, with the remainder intended to be used for further investment and distributions to shareholders or for external growth, if appropriate. For the year ended December 31, 2011, we upstreamed $912 million from 11 of the 15 countries in which we operate. In 2010, we upstreamed $819 million from 8 of 14 main countries in which we operate.
Contingent assets
If and when there is late delivery by suppliers of network equipment in various operations, the Millicom Group is entitled to compensation. This compensation is in the form of discount vouchers on future purchases of network equipment.
Cash flows
The following table summarizes the Millicom Group’s consolidated cash flows for the periods indicated.
Three months Year ended December 31, ended March 31, 2010 (as restated)(1) 2011 2012 2012 2013 (unaudited) (U.S. dollars in millions) Net cash provided by operating activities ...... 1,372 1,611 1,585 375 270 Net cash used by investing activities ...... (528) (692) (1,110) (130) (396) Net cash (used) provided by financing activities ...... (1,335) (1,107) (164) (22) 88 Net increase (decrease) in cash and cash equivalents ...... (488) (162) 313 229 (37) Free Cash Flow ...... 786 981 699 243 (61)
(1) Restated to recognize the liability for the put option provided to our local partner in Honduras for its 33% stake in our Honduras operation and the related change in the value of the liability from July 1, 2010 to December 31, 2010, and for the quarterly periods ended September 30, 2010 to September 30, 2011, as discussed above under “—Effects of Restatement.”
73 Reconciliation of the Millicom Group’s operating profit to Free Cash Flow Year ended Three months December 31, ended March 31, 2010 2011 2012 2012 2013 (U.S. dollars in millions, unaudited) Operating profit ...... 1,042 1,257 1,104 295 238 Depreciation and amortization ...... 677 739 811 196 209 Net loss (gain) on disposal and impairment of assets ...... 16 (22) 6 (1) 2 Share-based compensation ...... 31 17 22 5 5 Changes in working capital ...... 1 15 84 (38) (79) Interest paid ...... (171) (141) (169) (48) (55) Interest received ...... 15 14 11 4 2 Taxes paid ...... (239) (268) (284) (38) (52) Purchase of intangible assets and license renewals ...... (26) (57) (159) (20) (134) Purchase of property, plant and equipment ...... (597) (700) (842) (182) (197) Proceeds from the sale of property, plant and equipment ...... 37 127 115 70 – Free Cash Flow ...... 786 981 699 243 (61)
Three months ended March 31, 2012 and 2013 For the three-month period ended March 31, 2013, cash provided by operating activities was $270 million, compared to $375 million for the three-month period ended March 31, 2012. The decrease is mainly due to reduced profit before tax (excluding other non-operating income) and decreased working capital due, in part, to timing changes in trade receivables and delayed interconnect revenue payments from other mobile operators during the three-month period ended March 31, 2013. Cash used by investing activities was $396 million for the three-month period ended March 31, 2013, compared to $130 million for the three-month period ended March 31, 2012. During the three-month period ended March 31, 2013, we used $134 million to purchase intangible assets and licenses (which includes $70 million in spectrum in South America and a $23 million license renewal payment in Senegal), as compared to $20 million spent in the three-month period ended March 31, 2012. We had no proceeds from sale of property, plant and equipment during the three-month period ended March 31, 2013, as compared with proceeds of $70 million in the three-month period ended March 31, 2012, from tower sales in connection with our sale and lease-back agreements. In addition, we pledged a deposit to secure a spectrum allocation tender application and advanced $16 million to Helios Tower DRC under the financing facility described under “Major Shareholders and Related Party Transactions—Related Party Transactions—Helios Towers and American Towers—DRC.” Cash provided by financing activities was $88 million for the three-month period ended March 31, 2013, compared to cash used of $22 million for the three-month period ended March 31, 2012. In the three-month period ended March 31, 2013, we repaid debt in the amount of $102 million, as compared with a debt repayment of $187 million for the three-month period ended March 31, 2012, while raising funds in the amount of $190 million for the three-month period ended March 31, 2013, through new financing, as compared with fundraising of $165 million during the three-month period ended March 31, 2012. The net cash outflow for the three-month period ended March 31, 2013 was $37 million compared to an inflow of $229 million for the three-month period ended March 31, 2012. Our closing cash and cash equivalents balance was $1,137 million as of March 31, 2013, compared to $1,090 million as of March 31, 2012.
Years ended December 31, 2011 and 2012 For the year ended December 31, 2012, cash provided by operating activities was $1,585 million, compared to $1,611 million for the year ended December 31, 2011. The decrease is mainly due to reduced profitability and increased interest payments despite improvements in working capital.
74 Cash used by investing activities was $1,110 million for the year ended December 31, 2012, compared to $692 million for the year ended December 31, 2011. In the year ended December 31, 2012, the Millicom Group used $172 million for investments in associates and to acquire subsidiaries, compared to $20 million in the year ended December 31, 2011. The Millicom Group also used $159 million and $842 million to purchase intangible assets and license renewals and property, plant and equipment, respectively, compared to $56 million and $700 million in the year ended December 31, 2011.
Cash used for financing activities was $164 million for the year ended December 31, 2012, compared to $1,107 million for the year ended December 31, 2011. In the year ended December 31, 2012, we returned $190 million to shareholders under a share buy-back program, $541 million in dividend distributions (extraordinary dividend of $3.00 per share and ordinary dividend of $2.40 per share) and repaid debt of $923 million while raising funds of $1,545 million through new financing.
As a result of the cash flow movements described above, the net cash inflow for the year ended December 31, 2012 was $313 million compared to an outflow of $162 million for the year ended December 31, 2011. The Millicom Group had closing cash and cash equivalents balances of $1,174 million as of December 31, 2012 compared to $861 million as of December 31, 2011.
Years ended December 31, 2010 and 2011
For the year ended December 31, 2011, cash provided by operating activities was $1,611 million, compared to $1,372 million for the year ended December 31, 2010. The increase is mainly due to growth in profitability and tower sales.
Cash used by investing activities was $672 million for the year ended December 31, 2011, compared to $528 million for the year ended December 31, 2010. In the year ended December 31, 2011 the Millicom Group used $20 million for investments in associates and to acquire subsidiaries, compared to a use of $5 million for the year ended December 31, 2010. The Millicom Group also used $700 million to purchase property, plant and equipment compared to $597 million for the same period in 2010.
Cash used by financing activities was $1,107 million for the year ended December 31, 2011, compared to $1,335 million for the year ended December 31, 2010. In the year ended December 31, 2011, we returned $498 million to shareholders under a share buy-back program, $494 million in dividend distributions (extraordinary dividend of $3.00 per share and ordinary dividend of $1.80 per share) and repaid debt of $792 million while raising funds of $703 million through new financing and $1 million through the issuance of shares.
The net cash inflow provided by discontinued operations was $53 million for the year ended December 31, 2011 mainly related to the net proceeds from the sale of our operations in Laos, compared to nil in 2010.
As a result of the cash flow movements described above, the net cash outflow for the year ended December 31, 2011 was $142 million compared to an outflow of $488 million for the year ended December 31, 2010, due to larger cash proceeds from operations and reduced amounts of financing activities. As a consequence, the Millicom Group had closing cash and cash equivalents balances of $881 million as of December 31, 2011 compared to $1,023 million as of December 31, 2010.
75 Contractual obligations
A description of the Millicom Group’s material indebtedness can be found in “Description of Other Indebtedness” elsewhere in this offering memorandum. As of December 31, 2012, the Millicom Group’s consolidated contractual commitments were as follows:
Payments due: Between 1-5 Within 1 year years After 5 years Total (U.S. dollars in millions) Long-term debt(1) ...... 693 1,566 1,000 3,259 Put option(2) ...... 730 – – 730 Future interest commitments ...... 211 558 47 816 Finance lease obligations(3) ...... 45 187 280 512 Operating lease obligations(4) ...... 82 187 130 399 Capital expenditure(5) ...... 334 33 – 367 Total ...... 2,095 2,531 1,457 6,083
(1) Including interest, after unamortizing financing fees. (2) Represents the redemption value of the Millicom Honduras put option, as further discussed above under “—Effects of Restatement.” (3) Finance leases mainly comprise leased towers in Ghana, Tanzania, DRC and Colombia under 12-year leases, as further discussed under “Description of Other Indebtedness—Indebtedness by Operation,” and other non-material lease agreements relating to leased company vehicles. (4) Operating leases comprise mainly agreements containing commitments relating to land and buildings, including towers sold and leased back, which reflect market conditions in the countries in which these leases are made. (5) Capital expenditure comprises obligations to purchase network equipment, land and buildings and other fixed assets, as well as the Millicom Group’s support commitment of its Colombian operations through loans and warranties. The maximum commitment is $264 million and remains until the Millicom Group’s support equals the support provided by Colombia Móvil S.A.‘s founding shareholders.
Commitments to purchase network equipment within one year
As of March 31, 2013, we had commitments with a number of suppliers to purchase network equipment, land and buildings and other fixed assets with a value of $331 million, of which $297 million was due within one year and $34 million was due in more than one year. As of December 31, 2012, we had commitments with a number of suppliers to purchase network equipment, land and buildings and other fixed assets with a value of $367 million, of which $334 million was due within one year and $33 million was due within more than one year. We expect to meet these commitments from our current cash balance and from cash generated from our operations.
Capital expenditures
The Millicom Group’s capital expenditure on property, plant and equipment, licenses and other intangibles by operating segment (including discontinued operations) for the years ended December 31, 2010, 2011 and 2012 and the three-month periods ended March 31, 2012 and 2013 was as follows:
Three months Year ended December 31, ended March 31, 2010 2011 2012 2012 2013 (unaudited) (U.S. dollars in millions) Central America* ...... 208 222 296 51 46 South America ...... 244 324 373 69 115 Africa ...... 278 297 431 42 31 Unallocated items and discontinued operations ...... 17 6 21 10 1 Total ...... 747 849 1,120 172 193 * During 2011, we integrated our cable and mobile operations in Central America to generate synergies. As a consequence we now report both cable and mobile operations together in the Central American segment. We have restated the segment data from 2009 and 2010 to reflect the reclassification of the former cable segment.
76 Capital expenditure during the three-month period ended March 31, 2013 included $70 million spent on spectrum in South America, as well as improvements in the quality of our networks and increased capacity and coverage. Capital expenditure in 2012 included $103 million to acquire license rights in Senegal, $46 million invested in spectrum and a 3G license in DRC, $111 million in IT projects and over $200 million to improve 3G coverage in Africa and capacity in Latin America, as well as improvements in the quality of our networks and increased capacity and coverage. In 2011, capital expenditure resulted in acquisition of additional spectrum and improvements in the quality of our networks and increased capacity and coverage. In 2010, we incurred capital expenditures related to our new operation in Rwanda and the roll out of the Tigo brand across the rest of our African operations in 2010, which involved marketing expenses related to replacing local brands with the Tigo brand.
Dividends As of December 31, 2012, $126 million of the Millicom Group’s retained profits represented statutory reserves and were undistributable to MIC S.A.’s owners, compared to $94 million as of December 31, 2011. In December 2012, MIC S.A. paid a gross dividend of $3 per share, which represented an aggregate dividend of approximately $300 million. On February 12, 2013, MIC S.A. announced that it will propose for approval at the next general meeting of shareholders a dividend distribution of $2.64 per share to be paid out of the Millicom Group’s 2012 profits.
Quantitative and qualitative disclosures about market risk Exposure to interest rate, foreign currency, non-repatriation, liquidity and credit risks arise in the normal course of our business. We analyze each risk individually and on an interconnected basis and implement strategies to manage the economic impact on our performance in line with our financial risk management policy. Our strategies may include the use of derivatives, but our policy prohibits the use of derivatives in speculative trading.
Interest rate risk Interest rate risk generally arises on borrowings. Borrowings issued at floating rates expose us to cash flow interest rate risk and borrowings issued at fixed rates expose us to fair value interest rate risk. To manage risk, we maintain a combination of fixed and floating rate debt with the goal of equally distributing the debt between the two. We monitor borrowings against this target, applying a dynamic interest rate hedging approach. The purpose of our policy is to achieve a balance between cost of funding and volatility of financial results, while taking into account market conditions and our overall business strategy. As of December 31, 2012, approximately 55% of our borrowings were at a fixed rate of interest or variable rates had been swapped for fixed rates under interest rate swaps, compared to approximately 51% as of December 31, 2011. In January 2010, we entered into an interest rate swap to hedge the interest rate risk of floating rate debt in Tanzania, DRC and Ghana. The swap was issued for a nominal amount of $100 million, with maturity in January 2013. During the three-month period ended September 30, 2012, the Tanzania and Ghana hedges were assessed as ineffective and, as the value of these hedges was not expected to change significantly between September 30, 2012 and their expiration in January 2013, the corresponding cash flow was recycled to the income statement. The effective portion of the fair value change of the DRC swap continues to be recorded as cash flow hedge reserve movement within other comprehensive income. In October 2010, we entered into separate interest rate swaps to hedge the interest rate risks of floating rate debts in Honduras and Costa Rica. The swap in Honduras was issued for a nominal amount of $30 million, with maturity in 2015, and in Costa Rica for a nominal amount of $105 million with maturity in 2017. In 2012, we entered into cross-currency swaps to hedge interest rate and currency risks of floating rate debt (SEK/$US). These swaps were issued for an aggregate amount of approximately $300 million with maturity in October 2017.
77 A one hundred basis point fall or rise in market interest rates for all currencies in which we had borrowings on December 31, 2012, would increase or reduce profit before tax from continuing operations for the year by $16 million, as compared with $12 million on December 31, 2011.
Foreign currency risk
We are exposed to foreign exchange risk arising from various currency exposures where we operate. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. We seek to reduce our foreign currency exposure by matching, as far as possible, assets and liabilities denominated in foreign currencies. We may borrow in U.S. dollars where it is commercially more advantageous for joint ventures and subsidiaries to incur debt obligations in U.S. dollars or where U.S. dollar denominated borrowing is the only funding source available to a joint venture or subsidiary.
Non-repatriation risk
Most of our operations receive the bulk of their revenues in local currency. We derive most of our revenue from funds generated by our local operations and therefore rely on their ability to transfer funds to us.
Although there are foreign exchange controls in some of the countries where we operate, none of these countries significantly restrict the ability of our operations to pay interest, dividends, technical service fees or royalties or to repay loans by exporting cash, instruments of credit or securities in foreign currencies; however, existing foreign exchange controls may be strengthened, or foreign exchange controls may be introduced in countries that do not currently impose them, in which case our ability to receive funds from our operations in those countries will be restricted, which could impact our ability to pay dividends to our shareholders.
In some countries, it may be difficult to convert large amounts of local currency into foreign currency because of limited foreign exchange markets, which can cause both delays in accumulating significant amounts of foreign currency and exchange risk.
Credit and counterparty risk
Financial instruments that may subject us to credit risk are primarily cash and cash equivalents, pledged deposits, letters of credit, trade receivables, amounts due from joint venture partners, supplier advances and other current assets and derivatives. Counterparties to agreements relating to our cash and cash equivalents, pledged deposits and letters of credit are significant financial institutions with investment grade ratings. We do not believe there are significant risks of non-performance by these counterparties and have taken steps to diversify our banking partners.
A large portion of turnover comprises prepaid airtime. We follow risk control procedures for non-prepaid customers, including assessing their credit and financial position.
Accounts receivable are mainly derived from balances due from other telecom operators. The credit risk of these operators is limited as regulations ensure that licenses are normally only issued to creditworthy companies. We maintain a provision for impairment of trade receivables based on expected collectability. There is no significant concentration of credit risk with respect to trade receivables, because we have a large number of internationally dispersed customers.
Liquidity risk
In terms of liquidity risk, we have incurred significant indebtedness but we also have significant cash balances. We evaluate our ability to meet obligations on an ongoing basis using a liquidity planning tool that considers the operating net cash flows generated from our operations and the future cash needs for borrowing and interest payments and capital and operating expenditures required in maintaining and developing local business.
78 We manage our liquidity risk by using bank overdrafts, bank loans, vendor financing, Export Credit Agencies and Development Finance Institutions (DFI) loans, bonds and finance leases. We believe there is sufficient liquidity available in our markets to meet ongoing liquidity needs. We are also able to arrange offshore funding by using Export Credit Agency guarantees and DFIs that have been established specifically to finance development in our markets. We are seeking to diversify our financing, with our financing sources for fiscal 2012 represented by commercial banks at approximately 38% of our gross financing, bonds at 38%, DFIs at 8%, partners at 8%, financial leases at 7% and our supplier financing at 1%.
Critical accounting policies
The consolidated financial statements as of December 31, 2012 are prepared in accordance with consolidation and accounting policies consistent with those of previous financial years.
In preparing the consolidated financial statements, management needs to make assumptions, estimates and judgments, which are often subjective and may be affected by changing circumstances or changes in its analysis. Material changes in these assumptions, estimates and judgments have the potential to materially alter our results of operations. We have identified below those of our accounting policies that we believe could potentially produce materially different results if we were to change our underlying assumptions, estimates and judgments. For a detailed discussion of these and other accounting policies, see Note 2 of the Millicom Group’s 2012 consolidated financial statements.
Basis of consolidation
Entities over which we have control are fully consolidated. Entities over which we have joint control are consolidated using the proportional method that combines our proportional share of assets, liabilities, income and expenses. The definition of control is the power to govern the financial and operating policies of an entity so as to obtain benefits from it, and is based on criteria such as the ability to vote at shareholder and board of director level. The method of consolidation for each entity is based on management’s assessments as to whether they have full or joint control.
Functional and presentation currencies
Items included in the financial statements of each of the Millicom Group’s entities are measured using the currency of the primary economic environment in which the entity operates, which we refer to as the functional currency. The functional currency of each subsidiary, joint venture and associate reflects the economic substance of the underlying events and circumstances of these entities. The Millicom Group is located in Luxembourg and its subsidiaries, joint ventures and associates operate in countries with different currencies. The Millicom Group’s consolidated financial statements are presented in U.S. dollars, which we refer to as the presentation currency. The functional currency of the Millicom Group is the U.S. dollar because of the significant influence of the U.S. dollar on its operations.
Goodwill
Goodwill represents the excess of cost of an acquisition over the Millicom Group’s share in the fair value of identifiable assets less liabilities and contingent liabilities of the acquired subsidiary, joint venture or associate at the date of the transaction. If the fair value of identifiable assets, liabilities or contingent liabilities or the cost of the acquisition can only be determined provisionally, then the Millicom Group initially accounts for goodwill using provisional values. Within 12 months of the acquisition date, the Millicom Group then recognizes any adjustments to the provisional values once the fair value of the identifiable assets, liabilities and contingent liabilities and the cost of the acquisition have been finally determined. Adjustments to provisional fair values are made as if the adjusted fair values had been recognized from the
79 acquisition date. Goodwill on acquisition of subsidiaries and joint ventures is included in “intangible assets, net.” Goodwill on acquisition of associates is included in “investments in associates.” Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment losses on goodwill are not reversed. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Millicom Group’s cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Millicom Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated: • represents the lowest level within the Millicom Group at which the goodwill is monitored for internal management purposes; and • is not larger than an operating segment. Impairment is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed and the portion of the cash-generating unit retained.
Trademarks and customer bases Trademarks and customer bases are recognized as intangible assets only when acquired in business combinations or in transactions increasing ownership in joint ventures. Cost represents fair value as of the date of acquisition. Trademarks and customer bases have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of the trademarks and customer bases over their estimated useful lives. The estimated useful life for trademarks and customer bases are based on the specifications of the market in which they exist. Trademarks and customer bases are recorded under the caption “intangible assets, net.”
Impairment of non-financial assets At each reporting date the Millicom Group assesses whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Millicom Group makes an estimate of the asset’s recoverable amount. The Millicom Group determines the recoverable amount based on the higher of its fair value less cost to sell and its value in use, and is determined on an individual asset basis, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Where no comparable market information is available, the fair value less cost to sell is determined based on the estimated future cash flows discounted to their present value using a discount rate that reflects current market conditions of the time value of money and the risk specific to the asset. In addition to the evaluation of possible impairment, the foregoing analysis also evaluates the appropriateness of the expected useful lives of the assets. Impairment losses of continuing operations are recognized in the consolidated income statement in those expense categories consistent with the function of the impaired asset.
80 An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. Other than for goodwill, a previously recognized impairment loss is reversed if there has been a change in the estimate used to determine the asset’s recoverable amount since the last impairment loss was recognized. If so, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such a reversal is recognized in profit or loss. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Where no comparable market information is available, management bases its view on recoverability primarily on cash flow forecasts. In addition to the evaluation of possible impairment to the assets, carrying value, the foregoing analysis also evaluates the appropriateness of the expected useful lives of the assets.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. If maturing more than 12 months after the end of the reporting period these are classified within non-current assets. Otherwise they are included in current assets. Loans and receivables are carried at amortized cost using the effective interest method. Gains and losses are recognized in the income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process.
Financial instruments at fair value through profit or loss Financial instruments at fair value through profit or loss are financial instruments held for trading. Their fair value is determined by reference to quoted market prices at the statement of financial position date. Where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions, reference to the current market value of a substantially similar instrument, discounted cash flow analysis and option pricing models. A financial instrument is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.
Financial instruments that contain obligations to purchase own equity instruments Contracts that contain obligations for the Millicom Group to purchase its own equity instruments for cash or other financial assets are initially recorded as financial liabilities based on the present value of the redemption amounts with a corresponding reserve in equity. Subsequently, the carrying value of the liability is remeasured at the present value of the redemption amount with changes in carrying value recorded in other non-operating (expenses) income, net. If the contracts expire without delivery, the carrying amounts of the financial liabilities are reclassified to equity.
Non-current assets (or disposal groups) held for sale and related liabilities Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value (less costs to sell if their carrying amount is expected to be recovered principally through a sale transaction rather than through continuing use). The liabilities of disposal groups are classified as “Liabilities directly associated with assets held for sale.”
Borrowings and transaction costs Borrowings are initially recognized at fair value, net of directly attributable transaction costs. After initial recognition borrowings are subsequently measured at amortized cost using the
81 effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on acquisition and any fees or costs that are an integral part of the effective interest rate. Any difference between the initial amount and the maturity amount is recognized in the consolidated income statement over the period of the borrowing.
Borrowings are classified as current liabilities unless the Millicom Group has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date.
Provisions
Provisions are recognized when the Millicom Group has a present obligation (legal or constructive) as a result of a past event, if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Millicom Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense.
Revenue recognition
Revenue comprises the fair value of consideration received or receivable for the sale of goods and services, net of value-added tax, rebates and discounts and after eliminating sales within the Millicom Group.
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Millicom Group and the revenue can be reliably measured recurring revenues consist of monthly subscription fees, airtime usage fees, interconnection fees, roaming fees and fees from other telecommunications services, such as data services, SMS and other VAS. Recurring revenues are recognized on an accrual basis, i.e., as the related services are rendered. Unbilled revenues for airtime usage and subscription fees resulting from services provided from the billing cycle date to the end of each month are estimated and recorded.
Subscription products and services are deferred and amortized over the estimated life of the customer relationship. Related costs are also deferred, to the extent of the revenues deferred, and amortized over the estimated life of the customer relationship. The estimated life of the customer relationship is calculated based on the percentage of historical disconnections for the same type of customer.
Where customers purchase a specified amount of airtime in advance, revenues are recognized as credit is used. Unutilized airtime is carried in the statement of financial position and is included in deferred revenue within “other current liabilities.”
Revenues from value-added content services such as video messaging, ringtones, games, etc., are recognized net of payments to the providers of these services when the providers are responsible for the content and for determining the price paid by the customer and, as such, the Millicom Group is considered to be acting in substance as an agent only. Where the Millicom Group is responsible for the content and determines the price paid by the customer the revenue is recognized gross.
Revenues from the sale of handsets and accessories on a stand-alone basis without multiple deliverables are recognized when the significant risks and rewards of ownership of handsets and accessories have been passed to the buyer.
Revenue arrangements with multiple deliverables (“bundled offers,” such as equipment and services sold together) are divided into separate units of accounting if the deliverables in the
82 arrangement meet certain criteria. The arrangement consideration is then allocated among the separate units of accounting based on their relative fair values or using the residual method. Revenue is then recognized separately for each unit of accounting.
Share-based compensation
Up until May 2006, share options were granted to MIC S.A.‘s directors, management and key employees. The fair value of the equity instruments granted in exchange for the services received was recognized as an expense over the vesting periods which ended in 2010. The total amount to be expensed over the vesting period was determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example profitability and sales growth targets). Non-market vesting conditions were included in assumptions about the number of options that were expected to vest. At each statement of financial position date, the Millicom Group revised its estimate of the number of options that were expected to vest. It recognized the impact of the revision of original estimates in the consolidated income statement, with a corresponding adjustment to equity. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.
Subsequent to May 2006, share awards have been granted to MIC S.A.‘s directors, management and key employees.
The cost of these equity transactions was recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions were fulfilled, ending on the date on which the relevant employee becomes fully entitled to the award (the vesting date). The cumulative expense recognized for equity settled transactions at each reporting date until the vesting date reflect the extent to which the vesting period has expired and the Millicom Group’s best estimate of the number of equity instruments that will ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditioned upon a market condition. Such awards are treated as vesting irrespective of whether or not the market conditions are satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity settled award are modified, as a minimum an expense is recognized as if the terms had not been modified. In addition, an expense is recognized for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.
Deferred tax
Deferred income tax is provided using the liability method and calculated from temporary differences at the statement of financial position date between the tax base of assets and liabilities and their carrying amount for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting, nor taxable, profit or loss.
Deferred income tax assets are recognized for all deductible temporary differences and carry- forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference and the carry-forward of unused tax credits and unused tax losses can be utilized, except where the deferred tax assets relate to deductible temporary differences from initial recognition of an asset or liability in a transaction that is not a business combination, and, at the time of the transaction, affects neither accounting, nor taxable, profit or loss.
The carrying amount of deferred income tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable
83 profit will be available to utilize the deferred income tax asset. Unrecognized deferred income tax assets are reassessed at each statement of financial position date and are recognized to the extent it is probable that future taxable profit will enable the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rate expected to apply in the year when the assets are realized or liabilities settled, based on tax rates and tax laws that have been enacted or substantively enacted at the statement of financial position date. Income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated income statement. Deferred tax assets and deferred tax liabilities are offset where legally enforceable set off rights exist and the deferred taxes relate to the same taxable entity and the same taxation authority.
Discontinued operations
Revenues and expenses associated with discontinued operations are presented in a separate line on the consolidated income statement. Comparative figures in the consolidated income statement representing the discontinued operations are also reclassified to a separate line. Discontinued operations are those with identifiable operations and cash flows (for both operating and management purposes) and represent a major line of business or geographic unit which has been disposed of, or is available for sale.
84 Our markets and our industry Telecommunications in Latin America
Latin America is the world’s third largest mobile market by connections. Between 2007 and 2011, the number of mobile connections in Latin America increased by 65% to 632 million, driven by increased accessibility and affordability. Revenue growth decreased in 2012, however, due to slower economic growth in the region and high wireless penetration rates. Mobile penetration rates in Latin America reached 106% by 2011, up from 44% in 2005. Most mobile subscriptions in Latin America are prepaid, accounting for 82% of connections in 2011, though in some countries this percentage is significantly lower. In Costa Rica, for example, prepaid services accounted for only 50% of subscribers in 2011.
2G coverage across the region is well established, with population coverage in the five most populous countries exceeding 90% (including in Colombia, where 94% of the population is covered). 3G coverage is increasing across the region as operators invest in infrastructure, while some operators are already looking to evolve to 4G networks.
In 2010, the mobile industry contributed $82 billion to GDP in Latin America, representing 1.7% of the total output of the region. Mobile phone markets are competitive, with over half of the markets having four or more operators. Intensifying competition has seen a decrease in ARPU across the region of 22% on average between 2007 and 2011 as a result of operators offering promotions and discount packages to undercut their rivals and attract customers. In response to intensifying competition, operators are increasingly focusing on providing innovative and attractive VAS to retain customers.
Our cable and digital media business consists of fixed telephone, fixed broadband and pay TV services. Latin America is the world’s fourth largest cable market by subscriptions. Between 2011 and 2012, the number of fixed broadband subscriptions increased by 14.4% to 51.3 million and the number of pay TV subscriptions increased by 15.6% to 55.8 million. As of the end of 2011, our cable infrastructure had passed approximately 1.4 million homes across Central America, which increased by 22% to approximately 1.7 million as of the end of 2012. The cable and digital media markets in which we operate are comprised of competitors employing diverse technologies, such as DSL, cable broadband and WiMAX broadband internet services.
Central America
Costa Rica
(unaudited) Population ...... 5million(1) GDP real growth ...... 4.8%(2) GDP per capita (PPP)(3) ...... $ 12,600(2) Penetration ...... 36.6%(4)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Broadband penetration rate as of September 2012, according to TeleGeography.
Costa Rica was a Spanish colony from the 16th century until 1821, when Costa Rica became one of several Central American provinces that jointly declared their independence from Spain. Two years later it joined the United Provinces of Central America, but this federation disintegrated in 1838, at which time Costa Rica proclaimed its sovereignty and independence. Since the late 19th century, only two brief periods of violence have marred the country’s democratic development. In 1949, Costa Rica dissolved its armed forces. Although it still maintains a large agricultural sector, Costa Rica has expanded its economy to include strong technology and tourism industries. The standard of living is relatively high, and land ownership is widespread.
85 Economy
Prior to the global economic crisis, Costa Rica enjoyed stable economic growth. The economy contracted 1.3% in 2009, but resumed growth at about 4.5% per year in 2010-2012. While the traditional agricultural exports of bananas, coffee, sugar, and beef are still the backbone of commodity export trade, a variety of industrial and specialized agricultural products have broadened export trade in recent years. High value-added goods and services, including microchips, have further bolstered exports. Tourism continues to bring in foreign exchange, as Costa Rica’s impressive biodiversity makes it a key destination for ecotourism. Foreign investors remain attracted by the country’s political stability and relatively high education levels, as well as the fiscal incentives offered in the free-trade zones, which has attracted one of the highest levels of foreign direct investment per capita in Latin America. However, many business impediments remain, such as high levels of bureaucracy, legal uncertainty due to overlapping and at times conflicting responsibilities between agencies, difficulty enforcing contracts, and weak investor protection. Poverty has remained between 15-20% for nearly 20 years, and the strong social safety net that had been put into place by the government has eroded due to increased financial constraints on government expenditures. Unlike the rest of Central America, Costa Rica is not highly dependent on remittances, which represent about 2% of GDP. Immigration from Nicaragua has increasingly become a concern for the government. The estimated 300,000-500,000 Nicaraguans in Costa Rica legally and illegally are an important source of (mostly unskilled) labor but also place heavy demands on the social welfare system. The U.S.-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) entered into force on January 1, 2009, after significant delays within the Costa Rican legislature. CAFTA-DR has increased foreign direct investment in key sectors of the economy, including the insurance and telecommunications sectors, which were recently opened to private investors.
Telecommunications
According to TeleGeography:
Until June 2009, the provision of broadband services in Costa Rica was a de facto monopoly of Radiografica Costarricense (RACSA), the wholly owned ISP arm of utilities provider Grupo ICE. RACSA provided ADSL services over ICE’s public switched telephone network (PSTN), but also had agreements with five cable companies, the largest being Cable Tica and MIC S.A.-owned Amnet, to allow it to use its cable television networks to offer high speed internet access, in return for a 50% share of the revenues. Following ratification of the U.S.-Central American Free Trade Agreement (CAFTA) in 2006 and the enactment of the General Telecommunications Law in mid-2009, the Superintendencia de Telecomunicaciones (Sutel) awarded the first batch of telecoms concessions to: Dodona (which operated under the Amnet banner before being rebranded to Tigo in 2012); Worldcom; and Junta Administrativa del Servicio Electrico de Cartago (which all secured permission to offer broadband internet access). Since these licenses were issued, the number of ISPs has grown from less than ten as of mid-2009 to 57 by the end of November 2012.
From November 2011, RACSA has come into direct competition with its parent company, Grupo ICE, which launched its own broadband services under its “Kolbi” brand at that date. RACSA also competes with Tigo Costa Rica (previously Amnet). Tigo had an estimated 79,400 subscribers at the end of September 2012, and is one of the nation’s few triple play providers, bundling internet, pay-TV and VoIP into a single tariff. Grupo ICE, under its Kolbi brand, offers mobile and fixed telephone as well as broadband and pay-TV services, while cable company Cable Tica offers Internet Protocol television (IPTV), broadband and mobile services via an MVNO deal with ICE Celular.
With an estimated 490,000 broadband users at the end of September 2012, the market has grown rapidly from 410,164 users at the end of 2011, and less than 300,000 at the end of 2010, with quarterly growth between 5% and 10% throughout that period.
86 El Salvador
(unaudited) Population ...... 6million(1) GDP real growth ...... 1.5%(2) GDP per capita (PPP)(3) ...... $ 7,700(2) Penetration ...... 110%(4) Median ARPU ...... $ 9.30(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
El Salvador’s government system is a Democratic Republic. Following deterioration in the country’s democratic institutions in the 1970s, a civil war took place between 1980 and 1992 and ended when the two opposing sides signed a peace accord. The former president, Elías Antonio Saca González, of the right-wing Arena political party, was elected in 2004 for a five-year term. On March 16, 2009, Mauricio Funes Cartegena, of the left-wing FMLN political party, was elected as president for a five-year term.
Economy
Despite being the smallest country geographically in Central America, El Salvador has the third largest economy in the region. Real GDP contracted by 3.1% in 2009 as a result of the global recession, and slowed even further during 2010-2012. El Salvador’s service-oriented economy depends largely on remittances and low-cost textile and agricultural exports. As of November 2010, remittances increased 2.3% compared to the same period in 2009, driven primarily by economic recovery in the United States. The country received approximately $3.64 billion in remittances in 2011, 6.4% more than in 2010. Remittances during the first half of 2012 amounted to approximately $1,944.8 million, a 7.3% increase over the same period in 2011. Remittances accounted for 17% of GDP in 2011, and about a third of all households receive these transfers. El Salvador has promoted an open trade and investment environment, and has embarked on a wave of privatizations extending to telecom, electricity distribution, banking, and pension funds. With the adoption of the U.S. dollar as its currency in 2001, El Salvador lost control over monetary policy. Any counter-cyclical policy response to the downturn must be through fiscal policy, which is constrained by legislative requirements for a two-thirds majority to approve any international financing.
Telecommunications
Telemóvil El Salvador, S.A., a wholly owned subsidiary of the Millicom Group, launched its operations in 1993 and was the only mobile services provider in El Salvador until 1997. In 2012, there were five mobile services providers in El Salvador. Telefónica and Telecom (initially owned by France Telecom) entered the market in 1997 and 1999 as the second and third mobile operator, respectively. Digicel (privately owned) entered the market in 2001 with a GSM network as the fourth operator. Digicel was subsequently acquired by the Caribbean operator with the same name and in 2011 a merger was announced with Claro (América Móvil) of Mexico which acquired France Telecom’s interest in Telecom in 2003. In November 2005, Intelfon (privately owned) entered the market as the fifth mobile operator, offering services based on the iDen push-to-talk technology.
As of December 31, 2012, EI Salvador had approximately 8.9 million mobile subscribers. According to WCIS, approximately 86% of subscribers were prepaid as of the same date.
While the broadband market is comparatively underdeveloped and penetration rates for provision of high speed internet remains low, broadband services are expected to be one of the primary engines of growth in the telecommunications sector in El Salvador over the next several
87 years. CTE Telecom, operating under America Móvil’s Claro brand, is the incumbent broadband service provider in El Salvador. Tigo El Salvador, a wholly-owned subsidiary of MIC S.A., and El Salvador Network (Salnet) (established in 1997), present the only notable competition to Claro. Tigo El Salvador was originally launched in 1998 by Amnet to provide international long-distance services, and expanded into cable TV, broadband and fixed and VoIP telephony. The Millicom Group acquired Amnet in 2008 and integrated it under the Tigo brand. According to TeleGeography, with an estimated 306,000 broadband subscribers at December 31, 2012, the market has grown 33% from an estimated 230,000 subscribers at the end of 2011.
Guatemala (unaudited) Population ...... 14million(1) GDP real growth ...... 3.1%(2) GDP per capita (PPP)(3) ...... $ 5,200(2) Penetration ...... 99%(4) Median ARPU ...... $ 9.00(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Guatemala’s government system is a Constitutional Democratic Republic. In 1996, peace accords were signed which brought an end to a 36-year civil war. Although Guatemala has completed a successful transition from military to civilian government, the military retains considerable political power. In September 2011, Otto Perez Molina of the Patriotic Party was elected as president and took office in January 2012. Mr. Perez’s campaign advocated a hard-line approach to rising criminality in the country.
Economy Guatemala is the most populous of the Central American countries with a GDP per capita roughly one-half that of the average for Latin America and the Caribbean. The agricultural sector accounts for 13% of GDP and 38% of the labor force. Key agricultural exports include coffee, sugar and bananas. Economic growth fell in 2009 as export demand from other Central American markets and the United States fell and foreign investment slowed amid the global recession, but the economy recovered gradually from 2010 to 2012. The 1996 peace accords, which ended the civil war, removed a major obstacle to foreign investment, and Guatemala has since pursued important reforms and macroeconomic stabilization. The Central American Free Trade Agreement (CAFTA) entered into force in July 2006 spurring increased investment and diversification of exports, with the largest increases in ethanol and non-traditional agricultural exports. While CAFTA has helped improve the investment climate, concerns over security, the lack of skilled workers and poor infrastructure continue to hamper foreign direct investment. The distribution of income remains highly unequal with the richest decile comprising over 51% of Guatemala’s overall consumption. More than half of the population is below the national poverty line and 13% lives in extreme poverty. Poverty among indigenous groups, which make up 38% of the population, averages 73% and extreme poverty rises to 28%. Nearly one-half of children under five are chronically malnourished, one of the highest malnutrition rates in the world. Given Guatemala’s large expatriate community in the United States, it is the top remittance recipient in Central America, with inflows serving as a primary source of foreign income equivalent to nearly two-fifths of exports.
Telecommunications Comunicaciones Celulares, S.A. (Comcel), in which the Millicom Group has a 55% equity interest, was the first mobile operator in Guatemala when it launched commercial operations in 1990. The
88 operation enjoyed a sole provider position until 1999 when Telefónica and Telgua (owned by América Móvil) entered the market. In 2000, U.S. company BellSouth entered the market as the fourth operator and Telefónica of Spain acquired BellSouth’s operations in 2004. In March 2003, two additional mobile licenses were granted. One license was granted to Electrónica Industrial, S.A., which sold the usufruct of the spectrum to Comcel and Intelfon in November 2006. The other license was granted to Digicel Guatemala S.A., which was purchased in 2009 by Comcel, after Digicel failed to obtain an interconnection agreement with any other operators.
As of December 31, 2012, Guatemala had approximately 16.2 million mobile subscribers. According to WCIS, approximately 91% of subscribers were prepaid as of the same date.
Attempts to develop a fixed line internet network in Guatemala date back to the early 1990s, but restrictive guidelines imposed by the incumbent fixed line operator on internet service providers stifled the growth and limited access to services. With an estimated 2.5 million private consumers accessing the internet at internet cafés but only an estimated 410,000 broadband subscribers at June 30, 2012, the broadband market remains underdeveloped. Access to high-speed internet in Guatemala’s urban areas and penetration remains low at approximately 17% as of June 2012. Little independent data is available on the broadband market in Guatemala so subscriber estimates are largely derived from the operators’ statistics.
America Móvil’s Claro (formerly Telgua) leads the fixed line market and recent acquisitions have enabled Claro to expand into cable services and increased the scope of its wireline operations. IBW was formed in 1995 and offers cable TV and broadband services and services to corproate customers with specially tailored broadband business packages. MIC S.A.’s subsidiary, Amnet Guatemala and primarily serves business customers. Since the Millicom Group acquired its stake in Amnet Guatemala (currently 55%) in 2008, the infrastructure and subscriber base have increased significantly.
According to TeleGeography, with an estimated 460,000 broadband subscribers at December 31, 2012, the market has grown 28% from an estimated 360,000 subscribers at the end of 2011.
Honduras
(unaudited) Population ...... 8million(1) GDP real growth ...... 3.8%(2) GDP per capita (PPP)(3) ...... $ 4,600(2) Penetration ...... 80%(4) Median ARPU ...... $ 9.40(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Honduras’s government system is a Democratic Constitutional Republic. Since the regional peace process in the late 1980s, democracy in Honduras has been strengthened. Presidential elections took place in November 2005, with the opposition candidate Manuel Zelaya Rosales of the Partido Liberal party being elected and taking office in January 2006. President Zelaya, a leftist aligned with President Hugo Chávez of Venezuela, was ousted from power by the army in June 2009. The coup was the culmination of a battle that had been simmering for weeks over a referendum that Zelaya hoped would lead to a revision of the country’s constitution. National Congress President Roberto Micheletti, the next person in the presidential line of succession, assumed the presidency following Zelaya’s removal from office to run the country until new elections were held in November 2009, which were won by the National Party candidate Porfirio Lobo Sosa. The next election will be held in 2014.
89 Economy Honduras, the second poorest country in Central America, suffers from extraordinarily unequal distribution of income, as well as high underemployment. While historically dependent on the export of bananas and coffee, Honduras has diversified its export base to include apparel and automobile wire harnessing. Nearly half of Honduras’s economic activity is directly tied to the United States, with exports to the United States equivalent to 30% of GDP and remittances for another 20%. The U.S.-Central America Free Trade Agreement (CAFTA) came into force in 2006 and has helped foster foreign direct investment, but physical and political insecurity may deter potential investors; about 70% of foreign direct investment is from U.S. firms. The economy registered marginally positive economic growth in 2010, insufficient to improve living standards for nearly 65% of the population living in poverty. The current government has displayed a commitment to improving tax collection and cutting expenditures, which enabled Honduras to secure an IMF Precautionary Stand-By agreement in October 2010. The IMF agreement has helped renew multilateral and bilateral donor confidence in Honduras following the political coup in June 2009.
Telecommunications Telefonica Celular S.A. de C.V. (Celtel), in which the Millicom Group has a 66.67% equity interest, launched commercial operations in 1996 as the first mobile operator in Honduras and today operates a GSM and a 3G network. Until late 2003, Celtel enjoyed sole provider status in the mobile market, when Megatel entered the market with a GSM network as the second operator. In the first quarter of 2008, América Móvil (previously Megatel) launched its 3G network. In 2007, a license was issued to Hondutel (the state owned fixed-line incumbent) but its operations have only limited coverage in the country’s five main cities. A fourth license was issued to Digicel Honduras S.A., which launched operations in November 2008 with a GSM network and which was acquired by América Móvil (Claro) in November 2011. As of December 31, 2012, Honduras had approximately 9.3 million mobile subscribers. According to WCIS, approximately 90% of subscribers were prepaid as of the same date. The broadband business began to develop in the late 1990s and today Honduras’s cable operation is one of the major providers of cable modem broadband access. With just over 51,000 broadband subscribers as of December 2012, the broadband market is considerably smaller in Honduras than in other countries in Central America. Honduras has one of the lowest penetration rates in the region at under 5% as of April 2012. Hondutel, the state- owned fixed line operator, has a very limited broadband customer base, but there are plans for significant upgrades to its network as a result of a 2011 investment deal with Laticom International. There are a number of operators competing in the DSL market, but with limited DSL-based infrastructure, cable remains the primary means of broadband internet access. The Millicom Group’s Amnet is the one of the major providers of cable broadband services in Honduras. Other competitors include Multidata, R-Media, a joint venture formed in 2008 by large Honduran TV broadcasters and Grupo Cable Sula. According to TeleGeography, with an estimated 56,800 broadband subscribers at December 31, 2012, the market has grown 4.3% from an estimated 54,450 subscribers at the end of 2011 and over 16% since the end of 2010 from an estimated 48,900 subscribers.
Nicaragua (unaudited) Population ...... 6million(1) GDP real growth ...... 3.7%(2) GDP per capita (PPP)(3) ...... $ 3,300(2) Penetration ...... 8.6%(4)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Broadband penetration rate as of September 2012, according to TeleGeography.
90 The Pacific coast of Nicaragua was settled as a Spanish colony from Panama in the early 16th century. Independence from Spain was declared in 1821 and the country became an independent republic in 1838. Britain occupied the Caribbean Coast in the first half of the 19th century, but gradually ceded control of the region in subsequent decades. Violent opposition to government manipulation and corruption spread to all classes by 1978 and resulted in a short-lived civil war that brought the Marxist Sandinista guerrillas to power in 1979. Nicaraguan aid to leftist rebels in El Salvador caused the United States to sponsor anti-Sandinista contra guerrillas throughout much of the 1980s. After losing free and fair elections in 1990, 1996 and 2001, former Sandinista President Daniel Ortega Saavedra was elected president in 2006 and was reelected in 2011. The 2008 municipal elections were characterized by widespread irregularities. Nicaragua’s infrastructure and economy—hard hit by the earlier civil war and by Hurricane Mitch in 1998—are slowly being rebuilt, but democratic institutions have been weakened under the Ortega administration, including the politicization of institutions, the disappearance of checks and balances and the weakening of accountability mechanisms.
Economy
Nicaragua, the poorest country in Central America and the second poorest country in the northern hemisphere, has widespread underemployment and poverty. The U.S.-Central America Free Trade Agreement (CAFTA) has been in effect since April 2006 and has expanded export opportunities for many agricultural and manufactured goods. Textiles and apparel account for nearly 60% of Nicaragua’s exports, but increases in the minimum wage during the Ortega administration will likely erode its comparative advantage in this industry. Ortega’s promotion of mixed business initiatives, which are owned by the Nicaraguan and Venezuelan state oil firms, together with the weak rule of law, could undermine the investment climate for domestic and international private firms in the near-term. Nicaragua relies on international economic assistance to meet internal- and external-debt financing obligations. Foreign donors have curtailed this funding, however, in response to November 2008 electoral fraud. In early 2004, Nicaragua secured some $4.5 billion in foreign debt reduction under the Heavily Indebted Poor Countries (HIPC) initiative. Managua still struggles with a high public debt burden although it succeeded in reducing that burden substantially in 2011. The economy grew at a rate of about 4% in 2012.
Telecommunications
According to TeleGeography:
Nicaragua has been plagued with poor service quality and high tariffs due to its monopolized market—fixed-line voice services remain under the de facto monopoly of Claro (formerly Enitel)—which, together with extremely low GDP per capita, has acted as a barrier to widespread broadband adoption. Following the sector’s liberalization in 2005, competition in the broadband market has increased noticeably. Telecommunications regulator Instituto Nicaraguense de Telecomunicaciones y Correos (Telecor) indicated that, as of September 2012, 21 operators held licenses to provide internet access services in Nicaragua, up from 19 year-on- year, but down from a peak of 25 at the end of 2006. The companies currently operational are: Alfanumeric, Amnet, BT Nicaragua, Cable Net, Condor Comunicaciones, Corporacion Roberto Teran, Digital Experience, Claro, Nodo Ideay, GBNet, Interconect Sociedad Anonima, IBW, Kauffman Engineering, Navega.com, Newcom, NicaNet, Sistematica Internacional, Movistar, Nicaphone, Union Fenosa Redes and Yota de Nicaragua. The two most recent additions to the sector are BT Nicaragua and Union Fenosa Redes, whose concessions are set to expire on January 30, 2021 and January 30, 2022, respectively.
According to TeleGeography, with an estimated 112,500 broadband subscribers at September, 2012, the market has grown approximately 9.8% from an estimated 102,500 subscribers at the end of 2011.
91 South America
Bolivia
(unaudited) Population ...... 10million(1) GDP real growth ...... 5.0%(2) GDP per capita (PPP)(3) ...... $ 5,000(2) Penetration ...... 70%(4) Median ARPU ...... $ 12.30(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Bolivia’s system of government is a Social Unitarian State. The government has pursued an economic and social reform agenda since the early 1990s. Democratic civilian rule was established in 1982, but leaders have faced difficult problems of deep-seated poverty, social unrest and illegal drug production. In December 2005, Bolivians elected Movement Toward Socialism leader Evo Morales as president by the widest margin of any leader since the restoration of civilian rule in 1982, after he ran on a promise to change the country’s traditional political class and empower the nation’s poor majority. However, since taking office, his controversial strategies have exacerbated racial and economic tensions between the Amerindian populations of the Andean west and the non-indigenous communities of the eastern lowlands. One of these strategies was the “recuperation of the natural resources to the hands of the state”: nationalization of the entire hydrocarbon sector (gas, production, transportation, refining, and storage companies), the main mining companies, and also Entel, the main telecom operator previously privatized in 1997. This nationalization process has been confirmed under the new constitution approved in January 2009. New elections were held in December 2009 and Evo Morales was confirmed as president in January 2010. Morales’s term was originally set to end in 2012, but the new constitution Bolivia enacted in 2009 required fresh elections for national offices to be held. The government has majorities in both the senate and parliament, resulting in increased social stability and smoother enactment of new laws. In October 2011, the country held its first judicial elections to appoint judges to the four highest courts.
Economy
Bolivia is one of the poorest and least developed countries in South America. Following a disastrous economic crisis during the early 1980s, reforms spurred private investment, stimulated economic growth, and cut poverty rates in the 1990s. The period from 2003 to 2005 was characterized by political instability, racial tensions, and violent protests against plans—subsequently abandoned—to export Bolivia’s newly discovered natural gas reserves to large northern hemisphere markets. In 2005, the government passed a controversial hydrocarbons law that imposed significantly higher royalties and required foreign firms then operating under risk-sharing contracts to surrender all production to the state energy company in exchange for a predetermined service fee. After higher prices for mining and hydrocarbons exports produced a fiscal surplus in 2008, the global recession in 2009 slowed growth, but Bolivia recorded the highest growth rate in South America in 2009. During 2010 and 2011, an increase in world commodity prices resulted in large trade surpluses. However, a lack of foreign investment in the key mining and hydrocarbon sectors and higher food prices pose challenges for the Bolivian economy. The country is a major producer of tin and gold, and, although its exports of zinc and silver represent a small percentage of the world market, they account for a significant portion of export earnings. Bolivia also has reserves of antimony, tungsten (wolfram), lead, copper, and lithium.
92 Telecommunications From 1991 to 1996, Telefonica Celular de Bolivia S.A. (Telecel Bolivia), a wholly owned subsidiary of the Millicom Group, was the only mobile operator in Bolivia. Móvil de Entel, the mobile subsidiary of incumbent operator Entel, launched its mobile services in 1996. In 1995, the government of Bolivia privatized Entel by selling a 50.9% stake to Telecom Italia. In May 2008, Entel was renationalized. In 2000, NuevaTel (a joint venture, now 72% owned by Trilogy International Partners of the United States, and 28% by Cooperative of Telecommunications Cochabamba, one of Bolivia’s largest telecommunication cooperatives) entered the market with a GSM network and in 2010 commenced 3G services. Entel and NuevaTel have heavily subsidized GSM services and been the leading operators in terms of customer numbers. As of December 31, 2012, Bolivia had approximately 9.4 million mobile subscribers. According to WCIS, approximately 90% of subscribers were prepaid as of the same date.
Colombia (unaudited) Population ...... 46million(1) GDP real growth ...... 4.3%(2) GDP per capita (PPP)(3) ...... $ 10,700(2) Penetration ...... 104%(4) Median ARPU ...... $ 12.30(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Colombia’s system of government is a Constitutional Republic. The President of Colombia is Juan Manuel Santos, who has been in office since August 2010, succeeding former president Alvaro Uribe, who held the presidential office from August 2002. A 40-year conflict between government forces, anti-government insurgent groups, principally the Revolutionary Armed Forces of Colombia, heavily funded by the drug trade, escalated during the 1990s. The insurgents lack the military or popular support necessary to overthrow the government and violence has been decreasing since 2002, but insurgents continue attacks against civilians and large parts of the countryside are under guerrilla influence or are contested by security forces. Most paramilitary members had demobilized by the end of 2006 in an ongoing peace process, although their commitment to ceasing illicit activity is unclear. The government has stepped up efforts to reassert government control throughout the country and now has a presence in each of the administrative departments. In January 2011, Colombia assumed a non-permanent seat on the UN Security Council for the 2011-2012 term. Colombia’s term ended on December 31, 2012.
Economy Colombia’s consistently sound economic policies and aggressive promotion of free trade agreements in recent years have bolstered its ability to face external shocks. Real GDP has grown more than 4% per year for the past three years, continuing almost a decade of strong economic performance. All three major ratings agencies have upgraded Colombia’s investment grade. Nevertheless, Colombia depends heavily on oil exports, making it vulnerable to a drop in oil prices. Economic development is stymied by inadequate infrastructure, weakened further by recent flooding. Moreover, the unemployment rate of 10.3% in 2012 is still one of Latin America’s highest. The Santos administration’s foreign policy has focused on bolstering Colombia’s commercial ties and boosting investment at home. The U.S.-Colombia Free Trade Agreement (FTA) was ratified by the U.S. Congress in October 2011 and went into effect in May 2012. Colombia has signed or is negotiating FTAs with a number of other countries, including Canada, Chile, Mexico, Switzerland, the EU, Venezuela, South Korea, Turkey, Japan and Israel. Foreign direct investment—notably in the oil sector—reached a record $10 billion in 2008
93 but dropped to $7.2 billion in 2009, before beginning to recover in 2010, and reached a record high of nearly $16 billion in 2012. Colombia is the third largest Latin American exporter of oil to the United States. Inequality, underemployment, and narcotrafficking remain significant challenges, and Colombia’s infrastructure requires major improvements to sustain economic expansion. In late 2010, Colombia experienced its most severe flooding in decades with damages estimated to exceed $6 billion. The rains resumed in 2011 causing further damages to crops and infrastructure as well as killing hundreds of Colombians and displacing millions. In February 2013, strikes and labor protests disrupted two of the country’s largest industries—coal and coffee production.
Telecommunications
Mobile telephone services were introduced in Colombia in 1994. The country was divided into three zones, with two licenses per zone, in band A and B in the 850 MHz frequency band. The Millicom Group operated in the northern zone of Colombia until 2001, when it sold the business to América Móvil. Today there are three mobile companies, with a fourth virtual player Uff, entering in 2010 providing services on Colombia Móvil’s network: Movistar, a subsidiary of the Telefónica group, Comcel, a subsidiary of América Móvil, Avantel, a digital trunking operator (privately owned) and Colombia Móvil, majority owned by the Millicom Group.
The Colombian telecommunications market is very competitive with about 30 fixed local operators, two mobile operators, one mobile personal communications system (PCS), one digital trunking and around 35 long distance operators, which are owned by private and public shareholders.
As of December 31, 2012, Colombia had approximately 48.1 million mobile subscribers. According to WCIS, approximately 80% of subscribers were prepaid as of the same date.
Paraguay
(unaudited) Population ...... 7million(1) GDP real growth ...... -0.5%(2) GDP per capita (PPP)(3) ...... $ 6,100(2) Penetration ...... 98%(4) Median ARPU ...... $ 10.30(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Paraguay’s governmental system is a Constitutional Republic. The 35-year military dictatorship of Alfredo Stroessner was overthrown in 1989 and, despite a marked increase in political infighting in recent years, relatively free and regular presidential elections have been held since then. President Nicanor Duarte Frutos of the Partido Colorado political party oversaw a period of economic recovery and greater stability of public finances after taking office in 2003. Presidential elections in 2008 resulted in the election of Fernando Lugo (a former Roman Catholic bishop allied with the main opposition party, the Liberal Party), who was replaced by Federico Franco following President Lugo’s removal by the legislature in 2012. In April 2013, Paraguay elected President Horacio Cartes of the conservative Colorado Party.
Economy
Landlocked Paraguay has a market economy distinguished by a large informal sector, featuring re-export of imported consumer goods to neighboring countries, as well as the activities of thousands of microenterprises and urban street vendors. A large percentage of the population, especially in rural areas, derives its living from agricultural activity, often on a subsistence basis.
94 Because of the importance of the informal sector, accurate economic measures are difficult to obtain. The economy grew rapidly between 2003 and 2008 as growing world demand for commodities combined with high prices and favorable weather to support Paraguay’s commodity-based export expansion. Paraguay is the sixth largest soy producer in the world. Drought hit in 2008, reducing agricultural exports and slowing the economy even before the onset of the global recession. The economy fell 3.8% in 2009, as lower world demand and commodity prices caused exports to contract. The government reacted by introducing fiscal and monetary stimulus packages. Growth resumed at a 13% level in 2010, the highest in South America, but slowed to 4% in 2011 as the stimulus subsided. In 2012, severe drought and outbreaks of foot-and-mouth disease led to a drop in beef and other agricultural exports and the economy contracted about 0.5%. Political uncertainty, corruption, limited progress on structural reform, and deficient infrastructure are the main obstacles to economic growth.
Telecommunications
Until 1998, Telefonica Celular del Paraguay S.A. (Telecel), a wholly owned subsidiary of the Millicom Group, enjoyed a sole provider position in the mobile market when Personal (owned by Telecom Argentina) entered the market as the second operator. In 1999, Vox (a joint venture between KDDI Corporation of Japan and Mr. Toyotoshi, a local businessman) entered the market with a GSM network as the third operator. In 2010, Vox was acquired by Copaco, the state owned fixed-line operator. Hutchison Whampoa-owned Porthable entered the market as the fourth mobile operator in 2000, followed in 2005 by América Móvil, which acquired Porthable, re- named CTI, from Hutchison Whampoa, currently operating under the brand name Claro.
As of December 31, 2012, Paraguay had approximately 7.1 million mobile subscribers. According to WCIS, approximately 85% of subscribers were prepaid as of the same date.
In March 2009, the Consejo Nacional de Telecomunicaciones (Conatel) terminated the monopoly of the fixed-line incumbent, Copaco, as the only wholesale provider of internet services. Previously, all internet service providers had to rely on Copaco for access to internet infrastructure. Copaco is the leading provider of fixed line broadband and expanded its corporate internet business to the residential market in 2005. Through the recent acquisition of Cablevisión in 2012, Millicom now offers cable services, including broadband, in the Paraguayan market. The Rieder Group, another competitor, launched in 1997, specializes in business broadband.
According to TeleGeography, with an estimated 140,000 broadband subscribers at December 31, 2012, the market has grown 22% from 115,000 subscribers at the end of 2011.
Telecommunications in Africa
Africa is the world’s second largest mobile market by connections, after Asia, and the fastest growing mobile market in the world. Over the past 10 years, the number of mobile connections in Africa has grown at an average of 30% per year and was forecast to reach 735 million connections by the end of 2012. This rapid increase is due in part to intense competition among mobile providers in Africa, driving down prices and increasing penetration. Most mobile subscriptions in Africa are prepaid, with voice services dominating the market.
The mobile industry in Africa contributes over $50 billion per year to the regional economy and employs an estimated 5 million Africans. The mobile industry in Africa has become a cornerstone for industries including agriculture, banking, education and healthcare, enabling greater penetration than the limited fixed-line infrastructures in the African markets in which the Millicom Group operates. However, many Africans still have no access to mobile services. In addition, limited spectrum availability generally remains a key barrier to sustaining long-term growth to enable the mobile industry to continue to serve as a catalyst for future growth.
One of the most important trends of the last few years in the African mobile telecommunications market has been the rapid development of MFS throughout Africa. According to a McKinsey
95 report, as of 2009, 80% of the population in Sub-Saharan Africa was not using formal or semiformal banking services such as moneylenders or microfinance institutions. Of those who used such services, approximately two-thirds were living on less than $5 per day. A recent Bill & Melinda Gates Foundation study, citing a 2011 survey conducted by Gallup in 11 African countries, including DRC and Tanzania, concludes that the introduction or extension of MFS throughout Africa has the potential to improve the lives of millions. In the countries surveyed, Gallup found that approximately 53% of the adult population surveyed had paid or had been paid by a counterparty in a different part of the country in the previous 30 days, and 31% of adults still use only informal cash payment systems. In addition, 32% of adults in the surveyed countries reported having received at least one domestic remittance within the previous 30 days. Survey participants reported using remittances to send money to a school, pay utility bills or other debt obligations, and 12% reported have received money from a government agency or employer during that period. Tanzania had one of the highest percentages of remittance senders (60%), and a majority of people in all countries reported having access to a mobile phone. This study also reported that respondents in rural areas were considerably more likely to have sent or received money via MFS than those living in cities. All of this points to a potentially immense expansion potential for MFS in African markets.
Chad (unaudited) Population ...... 11million(1) GDP real growth ...... 7.3%(2) GDP per capita (PPP)(3) ...... $ 2,000(2) Penetration ...... 30%(4) Median ARPU ...... $ 5.80(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012 calculated based on WCIS data.
Chad’s government system is a republic. The President of Chad, Idriss Déby of the Patriotic Salvation Movement (MPS), was first elected in 1996 in the country’s first multiparty presidential election following its independence from France in 1960 and the ensuing three decades of ethnic strife and conflict with neighboring Libya. In 2006, shortly before the presidential election, rebels launched an assault on the capital N’Djamena, in a failed attempt to overthrow President Déby’s government. Following the elections, President Déby accused Sudan of sponsoring the attempted coup and cut off all ties. Chad reached a peace accord with the Sudanese governing of President Omar al-Bashir in 2010. MPS won an absolute majority in the Parliamentary elections in 2011, which were tainted with allegations of corruption and resulted in a boycott of the presidential elections by the main opposition parties and another victory for President Déby. The unbroken tenure of President Déby has prompted speculation that a resurgence in rebel activity might be imminent, though the government has promised to tackle corruption and emphasize rural development. In early 2013, Chadian forces joined a French-led mission to Mali to combat Islamic fundamentalist militants in the region. After a series of successful attacks, President Déby announced in April 2013 that he would withdraw Chad’s forces.
Economy
Chad ranks 183 out of 187 in the United Nations Human Development Index and consistent with its status as one of the poorest countries in the world, the population is comprised largely of subsistence farmers. As a result, there is little relevant information on employment levels. Chad suffers from limited infrastructure, with only three in ten people with access to clean water, electricity accessible by only 1% of the population and only 1,100 kilometers of paved roads and no railroads. Instead, Chad must rely on Cameroon’s rail system for transport to the ports. The International Monetary Fund has set security, economic diversification and improvement of government as development targets of the highest priority for the country’s development. In the
96 past decade, an international consortium invested $3.7 billion to develop Chad’s oil reserves following the completion of a pipeline linking the southern part of the country to Cameroon, however delays in implementing economic reforms to address the lack of accountability for public finances continue to stifle economic development and leave the economy vulnerable to volatile oil prices.
The global economic downturn had a considerable negative impact on GDP growth of -0.36% in 2008 and increasing slightly to 0.28% in 2009, before subsequently recovering to 5.06%, 3.00% and 7.3% in 2010, 2011 and 2012 respectively on the back of greater oil output and improvements to infrastructure. The Central African CFA Franc (XAF) issued by the Bank of Central African States (BEAC) is the official currency. In addition to Chad, it is also the currency used by Cameroon, the Central African Republic, Republic of Congo (Brazzaville), Equatorial Guinea and Gabon. Accordingly the state of the domestic economy of Chad does not affect the XAF.
Telecommunications
Of Chad’s three wireless network operators, Airtel Chad (formerly Zain Chad), launched in 2000, is the oldest. Airtel Chad is currently owned by the Indian telecommunications company, Bharti Airtel following a 2010 acquisition of the African assets of Kuwaiti-based Zain (the Zain Acquisition). Millicom Tchad, MIC S.A.’s wholly-owned subsidiary, entered the market in 2004 followed by Salam Mobile in 2009, a joint venture between Société des Télécommunications de Tchad (SOTEL) and Orascom Telecom Holding. There is limited information about the status of Salam Mobile. It had been shut down after an ownership dispute, and in 2010, the government sold a controlling stake to a Libyan holding company LAP Green Network. Due to sanctions against the Gaddafi regime in Libya in 2011, LAP Green’s assets were frozen or seized and by the end of the year, Salam Mobile had been renationalized. It is expected that the state will attempt to find a partner for the company.
Wireless communications in Chad faces challenges particular to developing economies, such as limited access to electrical infrastructure and an underdeveloped banking sector. The near complete dependence on diesel generators for cell site power generation contributes to high costs for wireless operators and inadequate financial services infrastructure means that postpaid subscriptions are almost exclusively available to the few corporate subscribers. Realizing the considerable growth potential for wireless telecommunications in Chad will depend on whether political stability, economic reforms and infrastructure development can be achieved. Notwithstanding these challenges, Chad’s wireless customer base increased by tenfold since 2005 to approximately 3.1 million in 2010 and over 4 million at December 31, 2012. According to WCIS, 99.95% of mobile subscribers in Chad were prepaid as of the same date.
Democratic Republic of Congo (DRC)
(unaudited) Population ...... 76million(1) GDP real growth ...... 7.1%(2) GDP per capita (PPP)(3) ...... $ 400(2) Penetration ...... 59%(4) Median ARPU ...... $ 4.50(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate in the Kinshasa/Bas-Congo region as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
The government system of the Democratic Republic of Congo (DRC) is a republic. A former Belgian colony, the country (then the Republic of Congo) became independent in 1960. Following several years of instability, Colonel Joseph Mobutu seized power in 1965 launching a regime that would control the country for over three decades. In 1997, Mobutu was ousted by a rebellion led by Laurent Kabila, who then assumed power backed by Rwanda and Uganda.
97 Kabila’s regime was met with continued escalating violence, culminating in his 2001 assassination. Following his death, his son, Joseph Kabila, became head of state and oversaw negotiations resulting in a peace accord in 2003 and the creation of a transitional government which resulted in a constitutional referendum and presidential elections in 2005. The most recent elections in 2011 resulted in a victory for Joseph Kabila against his opponent, Etienne Tshisekedi, who unsuccessfully disputed the results.
In recent years, armed conflict has resumed in the east of the country and resulted in considerable population displacement and human rights abuses. UN-led forces remain a presence in the country and while some progress has been made toward achieving stability, armed groups continue to invite conflict in the DRC, in particular in the eastern provinces of North and South Kivu and Orientale. In November 2012, the rebel group March 23 Movement (M23) in DRC seized the city of Goma the capital of North Kivu. While they have since withdrawn, they continue to threaten the North Kivu region following failed peace talks with the government. Other armed groups, such as the Democratic Forces for the Liberation of Rwanda and Mai Mai groups continue to cause violence in the DRC. In March 2013, the U.N. Security Council authorized an intervention brigade targeting militant groups in the country, and also extended the mandate of the U.N. peacekeepers in DRC through March 2014.
Economy
Rich in natural resources and home to the second largest rainforest in the world, the DRC also contains considerable reserves of minerals such as cobalt, copper, gold, uranium, oil and columbite-tantalite, a mineral used to form essential components of mobile phones due to its light weight and conductivity. Despite these assets, the economy has collapsed as result of the pervasive armed conflict, political instability and poor financial management. A 2008 deal that would permit China to tap the DRC’s cobalt and copper reserves in exchange for a $9 billion infrastructure investment (including $3 billion in the mining project) drew criticism from the IMF which threatened to withhold funds if terms were not changed. Since 2003, the DRC has been part of the World Bank’s Highly Indebted Poor Countries initiative, as a result of which it has been afforded debt relief and has access to an extended credit facility, provided the government meets certain performance targets.
IMF estimates are likely to provide the most accurate statistical information about a country for which little reliable data is available. The global economic downturn severely impacted the DRC economy, resulting in a precipitous drop in export growth from 84.7% in 2007, to just 2.9% in 2008 and contracting to -6.2% in 2009, but has since stabilized. Inflation increased considerably during the downturn from 18% in 2008 to 46.2% in 2009, but has also stabilized and was 10.5% in 2012. GDP growth was less severely affected, and fluctuated within a range of 2.8% and 7.2% between 2007 and 2010 and has since remained relatively constant at approximately 7% in the prior two years.
Telecommunications
When Oasis, MIC S.A.’s wholly-owned subsidiary acquired in 2005, entered the market as a GSM provider, there were three operators, Starcel, Comcel and Afritel offering analog and CDMA mobile services, all of which had ceased operations by the end of 2003. Airtel DRC (formerly MSI Cellular International) is the leading operator in the DRC, covering approximately 244 locations in all 11 provinces, and is majority-owned by Bharti Airtel following the Zain acquisition. Vodacom Congo launched GSM services in DRC in April 2002 and has extended its coverage to a large number of cities. The fourth operator, Orange DRC (formerly Congo Chine Telecom (CCT)), acquired by France Telecom in 2011 from equipment vendor ZTE and the Congolese government, launched its GSM network in 2001. In 2008, additional GSM licenses were granted to Niletel (present in Sierra Leone) and HiTS Telecom (present in Tanzania and Equatorial Guinea). Four 3G licenses were awarded in July 2012 to DRC’s main telecommunications operators (Oasis, Airtel DRC and Vodacom Congo plus one new entrant, Africell, which launched its operation in November 2012) at a cost of $15 million each.
98 As of December 31, 2012, DRC had approximately 21 million mobile subscribers. According to WCIS, 99.86% of subscribers were prepaid as of the same date.
Ghana
(unaudited) Population ...... 25million(1) GDP real growth ...... 8.2%(2) GDP per capita (PPP)(3) ...... $ 3,300(2) Penetration ...... 75%(4) Median ARPU ...... $ 6.10(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Ghana’s government system is a constitutional democracy. One of the first colonies in Sub- Saharan Africa to gain independence, in 1957, Ghana is the amalgamation of the British colony of the Gold Coast and Togoland. Over the course of the next two decades, Ghana experienced considerable political instability before Lt. Jerry Rawlings came to power in 1981. Under his rule, political parties were banned for over a decade until 1992. Following the reinstatement of multiparty politics, regular presidential elections have been held every four years. Most recently, following the death of the then-President, John Atta Mills in 2012, the current President, John Dramani Mahama, the Vice President and a respected historian and writer, succeeded him as interim President, subsequently winning a special presidential election in December 2012.
Economy
After almost three decades of positive income growth, Ghana became one of Africa’s middle- income nations in 2010 and has been one of the fastest growing economies in Africa in recent years, aided by high oil prices. After growth of 14.4% in 2011, largely attributable to new oil production, the growth rate of real GDP fell to 8.2% in 2012. The exchange rate of the local currency, the Cedi, has risen steadily against the dollar from 1.1 in 2008 to 1.8 in 2012. Inflation has continued to rise from 8.7% in 2011 to 9.1% in 2012. Unemployment too remains a problem, particularly youth unemployment. The official unemployment rate stood at 3% in 2012, but is double that for the younger members of society, who constitute a high proportion of the population. One report estimates that the unemployment rate among people aged 15 to 24 in Ghana stands at 25.6%, twice that of the 25-44 age group and three times that of the 45-64 age group.
Telecommunications
As of July 2012, Ghana had six licensed and operational wireless operators in Ghana, five GSM operators, MTN Ghana, Airtel Ghana, Vodafone Ghana, Millicom Ghana (Tigo), a wholly-owned subsidiary of the Millicom Group, and Glo Mobile, and Expresso, the sole CDMA platform. Millicom Ghana was the first mobile operator in the country and began operating in 1992. In 1998, it introduced prepaid services in Ghana. Millicom Ghana’s GSM license authorizes it to provide mobile and local fixed wireless services. Expresso (then Celltel) entered the market in 1995 with a rival AMPS network. Expresso acquired the network in 2008 and now operates the CDMA service with limited coverage. It is the smallest mobile operator in Ghana. The third entrant, MTN, began operations in 1996, and currently has the largest network coverage in Ghana. Vodafone acquired a majority stake in OneTouch, which entered the market in 2000. The other two GSM operators, Airtel Ghana, acquired by Bharti Airtel as part of the Zain acquisition in 2010, and Glo which acquired a license in 2008 and launched services in 2012, launched operations within the last five years.
In 2010, the NCA confirmed that the country’s limited spectrum resources had already been allocated to the country’s six incumbent mobile license holders, and that there was no room left
99 for new market entrants, however there remains some room for data-only service providers. To optimize the use of scarce radio spectrum, the NCA has been directed reallocate frequencies that have been dormant for three years to enable operators to provide coverage to underserved areas of the country.
As of December 31, 2012, Ghana had approximately 25.6 million mobile subscribers. According to WCIS, approximately 99% of subscribers were prepaid as of the same date.
Mauritius
(unaudited) Population ...... 1million(1) GDP real growth ...... 3.4%(2) GDP per capita (PPP)(3) ...... $ 15,600(2) Penetration ...... 97%(4) Median ARPU ...... $ 14.30(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Mauritius’s government system is a Parliamentary Democracy. After almost four centuries under Dutch, French and British control, the country gained its independence in 1968. A stable democracy with regular free elections, Mauritius has attracted considerable foreign investment and has earned one of Africa’s highest per capita incomes. Rajkeswur Kailash Purryag has been president since July 2012. Former president Sir Anerood Jugnauth resigned on March 31, 2012. Navinchandra Ramgoolam of the Labor Party was elected prime minister in the July 2005 elections and was re-elected in May 2010 within a coalition of the Labor Party, the Militant Socialist Movement and the Social Democrat Party. Stated priorities of the government are improvement of road infrastructures, the security of the people, education, and health and youth development.
Economy
Since independence in 1968, Mauritius has developed from a low-income, agriculturally based economy to a middle-income diversified economy with growing industrial, financial, and tourist sectors. For most of the period, annual growth has been in the order of 5% to 6%. This remarkable achievement has been reflected in more equitable income distribution, increased life expectancy, lowered infant mortality, and a much-improved infrastructure. The economy rests on sugar, tourism, textiles and apparel, and financial services, and is expanding into fish processing, information and communications technology, and hospitality and property development. Sugarcane is grown on about 90% of the cultivated land area and accounts for 15% of export earnings. The government’s development strategy centers on creating vertical and horizontal clusters of development in these sectors. Mauritius has attracted more than 32,000 offshore entities, many aimed at commerce in India, South Africa, and China. Investment in the banking sector alone has reached over $1 billion. Mauritius, with its strong textile sector, has been well poised to take advantage of the Africa Growth and Opportunity Act (AGOA). Mauritius’s sound economic policies and prudent banking practices helped to mitigate negative effects from the global financial crisis in 2008-2009. GDP grew in the 3-4% range in 2010-2012 and Mauritius continues to expand its trade and investment outreach around the globe.
Telecommunications
Emtel Limited, in which the Millicom Group has a 50% equity interest, entered the market in 1989 as the first mobile operator in the country. Until 1996, Emtel enjoyed a sole provider position when Cellplus, owned by incumbent Mauritius Telecom, entered the market as the second operator with the launch of a GSM network. Emtel launched 3G services in Mauritius in
100 December 2004, making it the first mobile operator to offer such services in Africa. A third mobile operator, Mahanagar Telephone (Mauritius) Ltd., entered the market in December 2006 using CDMA technology.
Mauritius has the highest mobile and fixed-line penetration rates in sub-Saharan Africa. The domestic telecommunications market is dominated by Mauritius Telecom.
As of December 31, 2012, Mauritius had approximately 1.5 million mobile subscribers. According to WCIS, approximately 91% of subscribers were prepaid as of the same date.
Rwanda
(unaudited) Population ...... 12million(1) GDP real growth ...... 7.7%(2) GDP per capita (PPP)(3) ...... $ 1,400(2) Penetration ...... 38%(4) Median ARPU ...... $ 3.40(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
In 1959, three years before independence from Belgium, the majority ethnic group in Rwanda, the Hutus, overthrew the ruling Tutsi king. Over the next several years, thousands of Tutsis were killed, and some 150,000 driven into exile in neighboring countries. The children of these exiles later formed a rebel group, the Rwandan Patriotic Front (RPF), and began a civil war in 1990. The war, along with several political and economic upheavals, exacerbated ethnic tensions, culminating in April 1994 in the genocide of roughly 800,000 Tutsis and moderate Hutus. The Tutsi rebels defeated the Hutu regime and ended the killing in July 1994, but approximately 2 million Hutu refugees, many fearing Tutsi retaliation, fled to neighboring Burundi, Tanzania, Uganda, and DRC (at that time Zaire). Since then, most of the refugees have returned to Rwanda, but several thousand remained in the neighboring DRC and formed an extremist insurgency bent on retaking Rwanda, much as the RPF tried in 1990. Rwanda held its first local elections in 1999 and its first post-genocide presidential and legislative elections in 2003. In 2009, Rwanda staged a joint military operation with the Congolese Army in DRC to root out the Hutu extremist insurgency there and Kigali and Kinshasa restored diplomatic relations. Rwanda also joined the Commonwealth in late 2009. A second presidential election was held in 2010, and the incumbent Paul Kagame was re-elected until 2017. Recently, the Rwandan government has been accused of sponsoring the M23 insurrection in DRC that briefly led to the capture of Goma in 2012; however, Rwanda signed a peace deal with the U.N. and other African countries in which it pledged not to interfere in neighboring countries or provide support to armed groups.
Economy
Rwanda is a poor rural country with about 90% of the population engaged in (mainly subsistence) agriculture and some mineral and agro-processing. Tourism, minerals, coffee and tea are Rwanda’s main sources of foreign exchange. Mineral exports declined by 40% in 2009-2010 due to the global economic downturn. The 1994 genocide decimated Rwanda’s fragile economic base, severely impoverished the population, particularly women, and temporarily stalled the country’s ability to attract private and external investment. However, Rwanda has made substantial progress in stabilizing and rehabilitating its economy to pre-1994 levels. GDP has rebounded and inflation has been curbed. Nonetheless, a significant percentage of the population still lives below the official poverty line. Despite Rwanda’s fertile ecosystem, food production often does not keep pace with demand, requiring food imports. Rwanda continues to receive substantial aid money and obtained IMF-World Bank Heavily Indebted Poor Country (HIPC) initiative debt relief in 2005-2006, although these levels were impacted in 2010 by the
101 global economic downturn. In recognition of Rwanda’s successful management of its macro economy, in 2010, the IMF graduated Rwanda to a Policy Support Instrument (PSI). Rwanda also received a Millennium Challenge Account Compact in 2008. Africa’s most densely populated country is trying to overcome the limitations of its small, landlocked economy by leveraging regional trade. Rwanda joined the East African Community and is aligning its budget, trade, and immigration policies with its regional partners. The government has embraced an expansionary fiscal policy to reduce poverty by improving education, infrastructure, and foreign and domestic investment and pursuing market-oriented reforms, although energy shortages, instability in neighboring states, and lack of adequate transportation linkages to other countries continue to handicap growth. The Rwandan government is seeking to become a regional leader in information and communication technologies. In 2010, Rwanda neared completion of the first modern Special Economic Zone (SEZ) in Kigali. The SEZ seeks to attract investment in all sectors, but specifically in agribusiness, information and communications technologies, trade and logistics, mining, and construction. The global downturn hurt export demand and tourism, but economic growth is recovering, driven in large part by the services sector, and inflation has been contained. On the back of this growth, the government is gradually ending its fiscal stimulus policy while protecting aid to the poor. In 2011, inflation in Rwanda reached 7.4%, spurred by rising oil prices. In April 2013, the government of Rwanda conducted its first international bond offering of $400 million ten-year notes, which met with considerable investor demand and resulted in a lower than anticipated yield. Telecommunications The first operator, MTN Rwandacell, received its license in 1998. As the main cellular provider until 2008, when Rwandatel entered the market, MTN Rwandacell currently has coverage in all of the provinces in Rwanda, covering more than 90% of the country. The operator mainly supplies mobile services, but is now offering internet services via its GPRS and UMTS cell phone network. The operator has also started to roll out wireless broadband data services using WiMAX, and, with its new fixed-line license, has started offering fixed-line services. In late 2008, the Millicom Group was successful in its tender against three other bidders for the third national mobile license in Rwanda. The Millicom Group set up Tigo Rwanda S.A. and, after roll-out of the network, 3G services were launched in December 2009. In April 2011, Rwandatel’s license was revoked by the government after failing to comply with license obligations. Rwandatel, which was majority owned by Libyan company LAP Green Network, was liquidated in mid-2011, with most of its assets, including the mobile tower infrastructure, purchased by new entrant Bharti Airtel. The liquidation of Rwandatel to satisfy creditors was the first in Rwanda’s history. Rwandatel’s remaining assets, including its public switched telephone network (PSTN) and broadband network, are also now up for sale. As of December 31, 2012, Rwanda had approximately 5.7 million mobile subscribers. According to WCIS, approximately 99% of subscribers were prepaid as of the same date. Senegal (unaudited) Population ...... 13million(1) GDP real growth ...... 3.7%(2) GDP per capita (PPP)(3) ...... $ 1,900(2) Penetration ...... 69%(4) Median ARPU ...... $ 5.40(5)
(1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Penetration is the mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data. Senegal Senegal’s government system is a unitary republic under multiparty democratic rule. Senegal became independent from France in 1960 and recently it has been one of the most stable
102 democracies in Africa. In 2000, Senegal elected Abdoulaye Wade who served two terms as President but was defeated in 2012 in the wake of controversy surrounding constitutional amendments that would permit him to seek a third term. President Wade was defeated by Macky Sall, Senegal’s current President. In September 2012, the Senegalese parliament voted to eliminate the Senate (which had only been reinstated in 2007) as a cost-savings measure, leaving the 120-seat National Assembly as the sole legislative body. Economy Without significant mineral deposits, tourism and the service sector are the heart of the Senegalese economy and have successfully attracted foreign investment. France plays a prominent role in the economy, with the French treasury supporting the CFA franc BCEAO (XOF), Senegal’s regional (West African) currency, significant investment by French businesses and France representing the largest trading relationship accounting for approximately 25% of all exports. Key industries include agriculture and commercial fishing, mining (especially phosphate), fertilizer production and petroleum refining. Senegal is a member of the World Trade Organization in 1995 and receives support from the IMF, including participation in the debt- forgiveness program. In addition, in 2009, Senegal received a commitment from the U.S. Millennium Challenge Corporation to support infrastructure development, primarily in the form of road construction, irrigation and agricultural projects. The economy started to recover in 2010, after feeling the impact of the global financial crisis. Government efforts helped to drive GDP to 4.2% from 2.2% in 2009, but lack of rainfall in 2011 dampened the recovery limiting GDP growth to 2.0%. In 2012, GDP growth improved to 3.9%. Senegal’s finance minister confirmed that national debt accumulated under former president Abdoulaye Wade’s government had left the country with a “worrying” annual debt service of XOF554 billion, the equivalent of 37% of receipts. Consumer price inflation should remain moderate in 2012, at about 2.5%, according to the Agence Nationale de la Statistique et de la Démographie (ANSD). Telecommunications Orange Senegal (formerly Sonatel Mobiles) was the first mobile operator in Senegal, launching in 1996. Sentel GSM, the Millicom Group’s operation in Senegal, (rebranded as Tigo in 2005) followed in 1999 as the first operator to introduce GPRS services. Sentel is currently operating under a 20-year concession for a nationwide network. The concessions expire in 2018 and are renewable every five years thereafter, subject to the approval of the Senegalese authorities and provided both operators have complied with the terms of the concession. In 2007, to foster competition, the government invited bids for a third concession that would combine national licenses for fixed line and internet services. Sudatel submitted the winning bid and launched a CDMA network under the Expresso brand. Sudatel was the first operator with a 3G license and launched W-CDMA/HSPA in mid-2010, while Orange was awarded a concession for 3G W-CDMA technology in February 2011, which it launched in December 2011. In June 2010, Nigeria-based Globacom was reportedly issued a mobile operator’s license (the fourth to be awarded in Senegal) as well as rights to land its Glo 1 trans-Atlantic submarine cable in the country, however, as of 2012 nothing had materialized casting doubt on whether the company had received a concession at all. As of December 31, 2012, Senegal had approximately 11.6 million mobile subscribers. According to WCIS, approximately 99% of subscribers were prepaid as of the same date. Tanzania
(unaudited) Population ...... 48million(1) GDP real growth ...... 6.5%(2) GDP per capita (PPP)(3) ...... $ 1,700(2) Penetration ...... 44%(4) Median ARPU ...... $ 3.90(5)
103 (1) Population data is a 2013 estimate derived from the World Factbook. (2) GDP figures are 2012 estimates derived from the World Factbook. (3) GDP is presented on a purchasing power parity basis divided by population as of July 1, 2012. (4) Mobile penetration rate as of March 31, 2013. (5) Median ARPU is for the quarter ended December 31, 2012, calculated based on WCIS data.
Tanzania
Tanzania’s government is a republic. Shortly after becoming independent from Britain, Tanganyika and Zanzibar merged to form the United Republic of Tanzania in 1964. One-party rule ended in the mid-1990s when the country held the first democratic elections held in the country since the 1970s, in which the Chama Cha Mapinduzi (CCM) party candidate Jakaya Kikwete, Tanzania’s long-serving foreign minister, was elected President. Kikwete was subsequently re-elected in October 2010. The CCM dominates the National Assembly (Bunge) holding a sizeable majority of the 314 seats. The Prime Minister, Mizengo Kayanza Peter Pinda leads the Bunge following the resignation of Edward Lowassa in February 2008 amid allegations of corruption.
In Zanzibar, recent elections have been contentious due to its semi-autonomous status and popular opposition have led to two contentious elections, however, the formation of a government of national unity between Zanzibar’s two leading parties succeeded in minimizing electoral tension in 2010.
Economy
Responsible for over one quarter of GDP and 80% of employment, agriculture is the largest and most important sector of the Tanzanian economy. Tanzania’s industrial sector is among the smallest in Africa and per capita income is among the lowest in the world. International organizations such as the World Bank and the IMF have committed funds to improving Tanzania’s infrastructure, including its railroads and ports that are also critical to its inland neighbors. Recent reforms have contributed to an increase in private investment by easing foreign exchange controls and financial services have improved as a result of increased competition in the banking sector, though interest rates remain high due to fraud risk. Like other Sub-Saharan African economies, Tanzania suffers from underdeveloped infrastructure, a lack of skilled labor and bureaucratic impediments to economic development. In January 2013, the government announced projects to upgrade roads worth $225.5 million and other initiatives to promote science, technology and innovation.
GDP growth in 2009-12 was a respectable 6% per year due to high gold prices and increased production. GDP growth is expected to be 6.5% to 7% over the next two years according to the World Bank. The high cost of living in Tanzania and the problem of rising youth unemployment have stoked anti-government sentiment. After inflation reached 17.9% in October 2011, the Bank of Tanzania (BoT) implemented more stringent fiscal and monetary policies and is expected to ease even further in 2013. The unemployment rate was estimated at 10.7% at the end of 2011 (latest official figure from the NBS).
Telecommunications
In January 1994, Millicom Tanzania was awarded a 15-year analog ETACS network license to operate a nationwide mobile network which was extended in 2004 through January 2019. Following the introduction of GSM services in August 2000, the analog platform has since been retired. The license was reissued and its term extended in 2006 under the new converged, technological neutral licensing framework introduced in Tanzania in 2005, requiring all operators to migrate to the new licensing regime. Millicom Tanzania migrated to the new regime in May 2007, and was issued three separate licenses for Network Facilities Services, Network Services and Application Services. In addition to the Millicom Group’s licenses, there are 11 other licenses for mobile operators in Tanzania. The Millicom Group’s main competitors are Vodacom Tanzania (65% owned by South Africa’s Vodacom Group and 35% owned by Mirambo Limited of Tanzania, it entered the market in August 2000 and has become the leading provider of mobile services in Tanzania in terms of customers), Airtel Tanzania (formerly Zain, and before that Celtel,
104 which is majority owned by Bharti Airtel following the Zain Acquisition and which launched GSM services in Tanzania in November 2001) and Zantel (jointly owned by the government of Zanzibar, Emirate Telecommunication Company, Kintbury Investment of the Channel Islands and a local technology firm, Meeco International; introduced GSM services in Zanzibar and the islands of Unguja and Pemba in August 1999; and entered the Tanzanian mainland in June 2005 through a national roaming agreement with Vodacom Tanzania). CDMA-based operator TTCL Mobile (the wireless arm of the national PTO) has a limited presence with less than 1% of the market as of September 2012, while Benson Infomatics Limited (BOL) and Dovetel (including Sasatel) are said to be interested in entering the mobile sphere, although no concrete plans have been released.
As of December 31, 2012, Tanzania had approximately 26.3 million mobile subscribers. According to WCIS, approximately 99% of subscribers were prepaid as of the same date.
105 Our business Overview
Established in 1992, the Millicom Group is a leading international telecommunications and media group dedicated to emerging markets in Latin America and Africa, providing mobile communications and data services, cable television, broadband and other related products to its customers. We position ourselves as a fast-moving consumer goods company and, operating under the “Tigo” brand, we hold the number one or number two market position in at least 11 of the 13 markets in which we offer mobile services. We are evolving beyond, traditional mobile communications and data services to offer a combination of fixed telephone, pay television and fixed broadband services to residential and business subscribers through our cable operations in six markets in Latin America. Our existing mobile and cable licenses cover a combined population of approximately 288 million people. As of March 31, 2013, we had approximately 47 million mobile customers and provided cable services to approximately 800,000 homes.
The Millicom Group offers mobile telephone services in the following countries: in Central America: El Salvador, Guatemala and Honduras; in South America: Bolivia, Colombia and Paraguay; and in Africa: Chad, DRC, Ghana, Mauritius, Rwanda, Senegal and Tanzania. The Millicom Group has cable operations in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua in Central America and Paraguay in South America.
We have offered mobile services in emerging markets for over 20 years and have leveraged this experience to bring our best practices to our newer markets as we pursue diversification and growth opportunities. We have a demonstrated track record of cost-efficient management and sustainable growth, as exhibited by our adjusted EBITDA margins, which have historically averaged approximately 40% for the previous seven fiscal years, and, we believe, exceed or are in line with the margins of many of our major competitors.
Organizational structure
In 2013, we restructured our business around four organizational categories—Mobile, Cable and Digital Media, MFS and Online. This new organizational structure was implemented and is designed to support our strategic goals to accelerate the development of new products and categories, deepen our consumer understanding skills and bring innovation to our go-to-market strategies, while continuously focusing on increasing efficiency.
• Mobile is our largest revenue contributor and comprises voice calls, SMS, VAS and data. Mobile also includes airtime lending products (such as “Tigo Lends You,” a service that allows customers who run out of minutes to make an essential call on credit which they pay back when they next top up their minutes, and “Give Me Balance,” a service that allows airtime credit transfers between subscribers) and products offered under the “Tigo Care” umbrella, a range of products related to health, safety, insurance and welfare, such as insurance for device theft and medical consultation call services.
• Cable and Digital Media comprises fixed telephone services, fixed broadband internet, and cable and pay TV services.
• MFS provides subscribers with access to national and international money transfer services.
• Online comprises our internet and digital commerce and services businesses, targeted both at our consumer customers as well as our business customers, which represents a significant share of commercial interaction in our markets.
106 The table below sets forth our revenue by category and by percentage of total revenue, as well as the growth between periods, for the three-month periods indicated.
Three months ended Three months ended March 31, 2012 March 31, 2013 Growth (U.S. dollars in millions, except percentages, unaudited) Mobile ...... 1,016 87% 1,030 83% 1.4% Cable and Digital Media ...... 82 7% 107 9% 30.5% MFS ...... 6 – 16 1% 166.7% Online ...... – – 11 1% – Others(*) ...... 63 5% 81 7% 28.6% Total revenue ...... 1,168 100% 1,246 100% 6.7% (*) “Others” includes nonrecurring revenue, such as terminal and equipment sales, inbound roaming and miscellaneous revenue.
Our Mobile operations
Our Mobile category, which represents our primary source of revenue, includes voice, SMS, VAS and data. Our mobile services are provided via 2G and (in 10 out of 13 of our markets) 3G mobile networks, which benefit from our extensive distribution network of over 640,000 points of sale across 13 countries. We are investing in expanding our coverage in Africa and increasing our capacity in Latin America, and expect to continue investing in technology to meet market demands in line with our overall business strategy.
Data services are an increasing important contributor to our mobile business, as digitization accelerates rapidly across our markets. For the three-month period ended March 31, 2013, data penetration as a percentage of mobile customers was 16.4% in Central America, 22.5% in South America and 7.8% in Africa, compared to 12.8%, 14.0% and 4.4%, respectively, for the three-month period ended March 31, 2012.
Description of our mobile technology
We have 2G and 3G networks across our markets. Our network is supplied by leading telecom equipment manufacturers including Ericsson and Huawei. We have 3G-enabled networks in Latin America, Ghana, Tanzania, Mauritius and Rwanda, and we intend to launch our 3G networks in DRC and Senegal by mid-2013.
We have adopted Universal Mobile Telecommunications Service (UMTS), a 3G mobile networking standard commonly used to upgrade GSM networks to 3G standards. UMTS uses W-CDMA radio access technology to offer greater spectral efficiency and bandwidth.
3G technologies have enabled us to offer our users a wide range of advanced services, including data services, while achieving greater network capacity through improved spectral efficiency. In those markets in which we use 3G technology, 3G enables us to offer new services to our users like video calls, mobile broadband data, and full internet experience with richer mobile content.
Our 3G networks have allowed us to enter into new business opportunities, such as the wireless broadband market. Our 3G networks also give us more capacity to provide data and voice services than our GSM networks using our current spectrum. Our 3G networks are normally co- located with existing infrastructure allowing faster and cost-effective network deployment.
During 2011, we expanded our 3G networks using HSDPA technology. We expect to introduce HSPA+ in some of our Latin American markets during 2013, which we believe will provide our users with even higher speed capabilities.
107 Mobile subsidiaries
The following table shows certain information for each of our mobile subsidiaries as of March 31, 2013.
Method Start-up/ Population of acquisition of Mobile/ Market Company name Ownership consolidation(1) date area(2) penetration(3) (unaudited) (in millions) Central America El Salvador . . Telemóvil El Salvador S.A. 100% S 1993 6 110% Guatemala . . Comunicaciones Celulares S.A. 55.0% JV 1990 14 99% Honduras . . . Telefónica Cellular S.A. 66.7% S 1996 8 80% South America Bolivia ...... Telefónica Celular de Bolivia S.A. 100% S 1991 10 70% Colombia . . . Colombia 50.0%+1 Móvil S.A. E.S.P. share S 2006 46 104% Paraguay .... Telefónica Celular del Paraguay S.A. 100% S 1992 7 98% Africa Chad ...... Millicom Tchad S.A. 100% S 2004 11 30% DRC...... Oasis S.P.R.L. 100% S 2005 76 59% Ghana ...... Millicom Ghana Company Limited 100% S 1992 25 75% Mauritius . . . Emtel Limited 50.0% JV 1989 1 97% Rwanda ..... Tigo Rwanda S.A. 87.5% S 2009 12 38% Senegal ..... Sentel GSM S.A. 100% S 1999 13 69% Tanzania .... MICTanzania Limited 100% S 1994 48 44%
(1) JV = Joint Ventures. Under IFRS, joint ventures are consolidated using the proportional method of accounting in which only our share of the assets, liabilities, income and expenses of the joint ventures in which we have an interest are consolidated. The Millicom Group determines the existence of joint control by reference to the joint venture agreements, articles of association, capital structure and voting protocols of the board of directors of the relevant entity, as well as the influence it has over day-to-day operations. S = Subsidiary. Subsidiaries are entities over which we have control and are fully consolidated. (2) Population data are 2013 estimates derived from the World Factbook. (3) The Millicom Group derives mobile penetration rates from estimates of the total active customers in the relevant market based on interconnect activity on its own networks. This methodology may differ from the mobile penetration rate methodology used by different operations and other third party sources, as discussed under “Industry, Market and Subscriber Data—Market Share and Penetration Rates.”
108 Competitive position in the mobile market
The table below sets out our mobile competitors and our estimated mobile market share position in each of our markets as of March 31, 2013.
Market Market share share Market position(1) percentage(1) Competitors Central America (unaudited) El Salvador .... 1of5 40.0% Am.Móvil, Digicel, Telefonica, Red Intelfon Guatemala .... 1of3 52.7% Am. Móvil, Telefonica Honduras ..... 1of4 69.2% Am.Móvil, Digicel, Honducel South America Bolivia ...... 2of3 35.4% Entel, NuevaTel Colombia ..... 3of3 12.1% Am. Móvil, Telefonica Paraguay ..... 1of4 58.2% Personal, Am. Móvil, Vox Africa Chad ...... 1of3 55.4% Bharti (Airtel), Salam DRC...... 1of6(2) 35.1% Vodacom, Bharti (Airtel), Orange (France T), Standard, Africell Ghana ...... 2/3of6(3) 16.7% MTN, Vodafone, Bharti (Airtel), Expresso, Glo Mobile Mauritius ..... 2of3 41.9% Orange, Mahanagar T. Rwanda ...... 2of3 36.6% MTN, Bharti (Airtel) Senegal ...... 2of4 29.7% Orange (France T), Expresso, Kirene Tanzania ...... 2of7 30.7% Vodacom, Bharti, Zantel, TTCL Mobile, Bol, Sasatel
(1) The Millicom Group derives its market share and market position from internal estimates, measuring its active customers (those customers who have been active within 60 days) based on interconnect activity on its own networks. The Millicom Group’s market share calculations may differ from the calculation methodology used by different operators and other third party sources, as discussed under “Industry, Market and Subscriber Data—Market Share and Penetration Rates.” Owing to these differences in calculation methodology, some of our market share data may differ materially from what is reported by third parties in certain jurisdictions. For example, WCIS reports materially different figures from our internal calculations of market share in the following jurisdictions (figures as of December 31, 2012): EI Salvador - 34.2%; Honduras - 50.3%; Chad - 45.9%; DRC - 14.3% (owing, we believe, to assessment of market share across the country versus our assessment of the Kinshasa/Bas- Congo area only); Mauritius - 34.8%; Senegal - 22.8%; and Tanzania - 23.0%. (2) DRC market share position relates to the Kinshasa/Bas-Congo area only. (3) Millicom Ghana’s market share position regularly fluctuates between second and third position.
109 Selected mobile operating data
The following table presents, at the dates and for the periods indicated, selected operating data for each of our mobile operations.
Prepaid customers as % of total Total customers as As of customers as of As of of December 31, March 31, December 31, March 31, Market 2010 2011 2012 2013 2010 2011 2012 2013 Central America (unaudited) El Salvador ...... 2,728,136 3,026,854 2,978,857 2,849,232 89% 87% 87% 89% Guatemala ...... 6,308,543 7,122,987 7,921,732 8,251,783 95% 95% 95% 95% Honduras ...... 4,448,317 4,476,593 4,696,204 4,732,771 93% 93% 94% 94% Subtotal Central America ...... 13,484,996 14,626,434 15,596,793 15,833,786 93% 93% 93% 93% South America Bolivia ...... 2,404,406 2,686,504 3,040,990 2,861,584 92% 90% 90% 90% Colombia ...... 4,293,423 4,854,354 5,726,470 5,967,886 81% 80% 81% 82% Paraguay ...... 3,441,423 3,613,754 3,948,733 3,930,929 86% 82% 79% 78% Subtotal South America ...... 10,139,252 11,154,612 12,716,193 12,760,399 85% 83% 83% 82% Africa Chad ...... 1,429,350 1,894,278 2,029,882 1,954,908 100% 100% 100% 100% DRC ...... 2,156,151 2,381,987 3,000,701 2,935,742 100% 100% 100% 100% Ghana ...... 3,525,146 3,508,372 3,169,746 3,184,979 100% 99% 99% 100% Mauritius ...... 471,579 497,882 529,270 532,081 92% 93% 92% 92% Rwanda ...... 549,532 1,192,259 1,502,028 1,471,017 100% 100% 100% 99% Senegal ...... 2,356,064 2,378,500 2,640,650 2,663,706 100% 100% 100% 100% Tanzania ...... 4,477,510 5,450,766 6,043,441 6,067,511 100% 100% 100% 100% Subtotal Africa ...... 14,965,332 17,304,044 18,915,714 18,809,944 100% 100% 99% 99% Total ...... 38,589,580 43,085,090 47,228,700 47,404,129 94% 93% 93% 93%
Material mobile telecommunications licenses
To date, we have not encountered any challenges to our telecommunications licenses, except for the license dispute in Senegal, which was recently resolved (see “Our Business—Litigation and Legal Proceedings—Senegal”).
The following table sets forth the expiration dates and frequency allocations of our material mobile telecommunications licenses.
Technology (Renewal Year) Frequency Allocation 850/ 1800/ 2300/ Country 2G 3G 900MHz 1900MHz 2100MHz 2600MHz 3500MHz Central America (unaudited) EI Salvador ...... 2018/2021/2028 25 20 – – 35 Guatemala ...... 2033 48/12 – – 34.5 125 Honduras ...... 2021 50 – – – 21 South America Bolivia ...... 2014/2028 25 20 – – 50 Colombia ...... 2023 – 55 – – – Paraguay ...... 2016/2017 25 30 – 50 100 Africa Chad ...... 2014 – 20 20 – – – DRC...... 2024 2032 8 24 20 – – Ghana ...... 2019 2023 16 20 20 – – Mauritius ...... 2016 25 40 10 – 10.5 Rwanda ...... 2023 17 20 30 – – Senegal ...... 2028 20 18 20 – – Tanzania ...... 2022 15 25 20 – –
110 Cable and Digital Media
Our Cable and Digital Media category includes residential cable and pay television, residential and corporate fixed broadband, digital media services and fixed telephone services throughout Latin America. In our Latin American cable business, we provided services to 776,124 homes as of March 31, 2013, representing 1,055,797 RGUs and a 35.4% penetration rate of homes passed. In October 2012, we acquired Cablevisión Paraguay, Paraguay’s leading provider of pay-TV services, which expanded and diversified our presence in the Paraguay telecommunications market, where we are already the number one provider of mobile services. In our Latin American broadband business, we had approximately 245,000 fixed broadband RGUs as of March 31, 2013, and the fixed broadband penetration rate in our pay-TV customer base was 36.0%. We have significantly increased the speed offered to our cable broadband customers, with 63.6% of our cable broadband customers enjoying speeds in excess of 1Mbps as of March 31, 2013, compared to 43.3% as of March 31, 2012. Our corporate fixed broadband operations in Nicaragua do not represent a material part of our operations, so we have not included it in the presentations below.
Selected Cable and Digital Media operating data
Cable and Digital Media operations have contributed an increasing share of our revenue during the past two fiscal years. The following chart shows the Cable and Digital Media category’s contribution to our total revenue by quarter during fiscal 2011, fiscal 2012 and the first quarter of 2013.
2011 2012 2013 Fiscal Fiscal Q1 Q2 Q3 Q4 year Q1 Q2 Q3 Q4 year Q1 (U.S. dollars in millions, unaudited) Cable & Digital Media ...... 66,436 68,188 70,142 75,740 280,505 82,220 83,488 85,480 103,059 354,247 107,048
The table below sets out our primary cable and fixed broadband competitors and our estimated market share position and percentage in each market in which we offer cable and fixed broadband services as of March 31, 2013.
Cable Broadband Market share Market share Market share Market share Primary position percentage position percentage competitors* Central America Costa Rica ..... 1of5 33.3% 2 of 3 19.0% Cable Tica, Tele Cable, Cable Vision, Sky (cable), ICE, Cable Tica (broadband) El Salvador ..... 2of2 43.3% 2 of 2 34.4% Claro Guatemala ..... 2of2 10.3% 2 of 2 3.8% Claro Honduras ...... 2of3 14.5% 1 of 3 26.6% Cable Color, Claro South America Paraguay ...... 1of2 43.0% 1 of 2 48.5% Claro (cable), Copaco (broadband)
* Market share calculations are based on data provided by Dataxis, as adjusted to account for smaller competitors in each market which are not included in Dataxis’s calculations.
111 The following table presents the number of homes connected, the total RGUs, number of homes passed, the RGU ratio and the fixed penetration rates with respect to our pay-TV, fixed broadband and fixed telephone services in each of our Cable and Digital Media operations as of March 31, 2013. No. Homes Total RGU homes Fixed Market connected RGUs ratio(1) passed penetration(2) Central America (unaudited) Costa Rica ...... 216,634 313,685 1.45 543,792 39.8% El Salvador ...... 245,331 339,554 1.38 618,306 39.7% Guatemala ...... 89,213 93,421 1.05 281,077 31.7% Honduras ...... 83,386 118,137 1.42 299,509 27.8% South America Paraguay ...... 141,560 191,000 1.35 449,000 31.5% Total ...... 776,124 1,055,797 1.36 2,191,684 35.4%
(1) The RGU ratio is the total RGUs divided by the number of homes connected in each market. (2) The fixed penetration rate is the total number of homes connected divided by the number of homes passed in each market.
The following table sets forth the license renewal dates and types of licenses for our material cable and broadband licenses in our Cable and Digital Media operations.
Fixed Country Broadband Cable telephone Type of services licensed
Central America Costa Rica ...... 2019 2019 – internet, data, SMS, VoIP, videoconferencing El Salvador ...... 2021 2018, 2021, 2030, 2037 cable TV, subscription services, 2029 fixed telephone Guatemala ...... – 2026 – cable operator services Honduras ...... 2022 2014 – cable TV, data transmission South America Paraguay ...... 2016, 2017 2020, 2021 – internet, cable, video uplink
MFS
MFS provides subscribers with access to national and international money transfer services. Our “Tigo Cash” service is a mobile wallet system that allows subscribers to send money to anyone in the Tigo network using their mobile phone. Subscribers deposit cash with a Tigo Cash agent at a Tigo point of sale. Once the subscriber has received a text message confirming the deposit, the subscriber can access the Tigo Cash menu on the phone to transfer money to another customer. The recipient of the money transfer can then go to a Tigo point of sale and withdraw cash. MFS allows us to provide an affordable, fast, convenient and safe way to transfer money using a mobile phone, a service that can be especially valuable to subscribers who do not have bank accounts or convenient access to financial institutions.
We offer MFS in El Salvador, Guatemala, Honduras, Bolivia, Paraguay, Chad, DRC, Ghana, Tanzania and Rwanda and expect to offer MFS in Colombia and Mauritius before the end of the third quarter of 2013. Our MFS penetration rate as of March 31, 2013, which we define as the percentage of Tigo Cash customers as a percentage of our total active mobile subscribers, was approximately 12% across the markets in which we offer MFS, with approximately 40% of our total mobile customer base using MFS in Tanzania, 26% in Paraguay and Rwanda, 5% in El Salvador, and 3% in Ghana and Honduras. In Tanzania, we achieved over 30% MFS penetration two years after launch. The development of MFS is highly dependent upon the specific environment in each market, including the regulatory framework, varying customer needs (such as local or international remittances), banking penetration, and the image of the telecommunications industry. Accordingly, we expect that the popularity and acceptance rate of our MFS will vary from country to country.
112 In partnership with Western Union, we have now launched an international money transfer service for our customers in Paraguay, El Salvador and Guatemala (as discussed further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Western Union Agreements”). In the coming quarters, we also intend to roll out a foreign remittance service, in partnership with Western Union, to the rest of our Latin American markets.
The table below sets forth the MFS penetration rates by quarter for the periods indicated below for some of our more mature MFS markets.
Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 (unaudited) Paraguay ...... 7.3% 10.0% 14.2% 15.8% 18.0% 20.3% 23.8% 26.0% Tanzania ...... 6.0% 11.2% 17.7% 24.0% 29.7% 33.8% 37.4% 39.7% Rwanda ...... 1.2% 2.6% 3.7% 6.7% 11.9% 16.3% 22.1% 26.2% El Salvador ...... 0.0% 0.3% 0.7% 0.6% 1.3% 2.5% 3.8% 4.6% Ghana ...... 0.4% 0.5% 0.5% 0.5% 1.4% 2.4% 4.0% 2.8%
Online
As further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Acquisitions—Rocket Internet agreement,” we entered into an agreement with Rocket Internet GmbH in August 2012 to jointly develop franchises in the online sector in Latin America and Africa by acquiring interests in two Rocket Internet subsidiaries, which we believe will position us well for growth in the emerging data markets. These Rocket Internet businesses develop and offer services through franchises operating in the largest markets in Latin America and Africa in three categories, namely e-Commerce (such as “Kanui,” an online shopping website that sells sporting goods in Brazil), Marketplaces (such as “Airu,” an online marketplace for buying and selling creative products, such as art and handicrafts, in Brazil), and Subscription (such as “YepDoc,” a medical and dental appointment scheduling website in Brazil). Since the fourth quarter of 2012, we have been rolling out the online food ordering site Hellofood and taxi ordering application EasyTaxi throughout South America. In Africa, we launched Jumia (a general merchandise e-commerce site) in Kenya during the first quarter of 2013, which now operates in four markets (Nigeria, Kenya, Egypt and Morocco), and we launched Kaymu (a marketplace site) and Vamido (offering on-line real estate classifieds) in Nigeria during the first quarter of 2013. During the first quarter of 2013, it became possible to use our MFS services when buying on Hellofood in Ghana. We are working on having Hellofood and EasyTaxi apps pre-installed on mobile phones we sell in Colombia.
Regional operations Overview
Our operations are divided into the following regions and businesses:
• Central America. The Millicom Group has mobile operations in El Salvador, Guatemala and Honduras. The Millicom Group’s cable, broadband, television, fixed telephone service and corporate data business is spread across Central America. During 2011, we integrated our cable and mobile operations in Central America to generate synergies. As a consequence we now report both cable and mobile operations together in the Central America segment. We have restated the segment data from 2009 to 2010 to reflect the reclassification of the former cable segment.
• South America. The Millicom Group has mobile operations in Bolivia, Colombia and Paraguay. Following its acquisition of Cablevisión in 2012, the Millicom Group now has cable operations in Paraguay, as well.
• Africa. The Millicom Group has mobile operations in Chad, DRC, Ghana, Mauritius, Rwanda, Senegal and Tanzania.
113 The table below sets forth the Millicom Group’s revenue from continuing operations by operating segment, in percent of total revenues, for the periods indicated.
Three months Year ended December 31, ended March 31, 2010 2011 2012 2012 2013 Central America* ...... 42% 41% 40% 41% 38% South America ...... 35% 38% 40% 39% 43% Africa ...... 23% 21% 20% 20% 19% * During 2011, we integrated our cable and mobile operations in Central America to generate synergies. As a consequence we now report both cable and mobile operations together in the Central America segment. We have restated the segment data from 2009 to 2010 to reflect the reclassification of the former cable segment
Central America
The Millicom Group’s mobile and cable operations in Central America are located in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Our Central American mobile licenses cover approximately 39 million people (see population data under “Our Markets and Our Industry—Central America”). Our cable operation has a large network in Central America with more than 1.7 million homes passed, which together with the Millicom Group’s existing mobile network gives the Millicom Group opportunities for future growth with cost efficiencies. Our cable operation has approximately 864,797 RGUs across Central America with cable and broadband customers in Guatemala, El Salvador, Honduras and Costa Rica as well as corporate broadband customers in Guatemala, Nicaragua, El Salvador and Honduras.
An important trend in the Latin American telecommunications market has been the development of MFS. According to a 2009 McKinsey report, approximately 65% of the population in Latin America was not using formal or semiformal banking services such as moneylenders or microfinance institutions.
Costa Rica
Cable and Digital Media
In 2008, the Millicom Group acquired Amnet Telecommunications Holding Limited, which provides broadband and cable television services and corporate data services in Costa Rica. In July 2012, Amnet Costa Rica was rebranded under the Tigo name as Tigo Costa Rica and offers cable television, internet and fixed telephone services.
Tigo Costa Rica is the leading cable and paid television operator in Costa Rica, and began offering fixed telephone services at the end of the first quarter of 2011 with very good reception from the market, allowing it to offer triple play bundles (cable television, internet and fixed telephone). We believe that Tigo Costa Rica offers the best High Definition television signal in the market and offers the highest number of High Definition channels. Tigo Costa Rica offers broadband speeds of up to 10 Mbs, which is the highest speed offered in the market by any provider.
In 2002, the predecessor to Amnet Costa Rica was granted a license (titulo habilitante), effective as of July 2004 and valid for 20 years. The license is renewable for a five-year period. Amnet Costa Rica (now Tigo Costa Rica) was formed out of the merger between Dodona S.R.L. and Newcom Solutions Costa Rica S.A. In March 2011, the Ministry of Telecommunication confirmed that the license (titulo habilitante) was validly awarded to Amnet Costa Rica, and that the license entitles it to provide cable services. The license is effective as of July 2009 and is valid for 10 years.
El Salvador
Mobile
Telemóvil El Salvador, S.A. is wholly owned by the Millicom Group, which accounts for this operation as a subsidiary using the full consolidation accounting method. As of December 31,
114 2012, our network in El Salvador comprised 1,149 cell sites and covered 94% of the total population. As of March 31, 2013, we served our customers via over 25,000 points of sale.
Telemóvil launched its operations in 1993 and was the only mobile services provider in El Salvador until 1999. Since its entry into the market, Telemóvil has rapidly expanded its coverage of the country’s main cities and remains the market leader. The GSM network was launched in August 2004. Telemóvil’s 3G/HSDPA network was launched in September 2008 offering services such as video calls, mobile internet (datacards) and all current 3G network telecommunication services. Telemóvil was awarded a 15-year mobile license in September 1991 which was subsequently extended until 2018. Telemóvil acquired WiMAX spectrum in 1998.
Cable and Digital Media
Telemóvil is the leading cable operator in El Salvador, and also offers broadband, fixed wireless telephone services and, following our Amnet acquisition, public telephone services. In 2011 and 2012, we consolidated certain commercial sectors in order to achieve a common commercial strategy, focusing on the quality of our product by improving our High Definition TV product and increasing our broadband speeds, which we believe are the highest in the market. We have worked on the integration of the cable business with our mobile business and focused on improving customer service as a key aspect of our future growth.
MFS
We launched MFS services in El Salvador in July 2011, and we had a 5% MFS penetration rate as of March 31, 2013. In September 2011, we signed agreements with Western Union for the provision of cross-border mobile money transfers in El Salvador.
Guatemala
Mobile
On August 20, 2010, to facilitate the integration of its various business lines and to create synergies, we entered into agreements with our partners in Honduras and Guatemala to align ownership of its Amnet and Navega businesses. As a result, the Millicom Group sold a 45% equity interest in Comunicaciones Celulares, S.A., its Amnet operations in Guatemala, to its local partner in Guatemala, retaining a 55% equity interest and sharing management control of Comunicaciones Celulares with its local partner. We account for this operation as a joint venture using the proportionate consolidation accounting method. As of December 31, 2012, our network in Guatemala comprised 3,719 cell sites and covered 99% of the total population. As of March 31, 2013, we served our customers via approximately 59,000 points of sale.
Comcel operates GSM/GPRS/EDGE and 3G/HSDPA networks. The GSM/GPRS/EDGE network was launched in August 2004 and the 3G/HSDPA network was launched in August 2008. Comcel also provides international long-distance services, roaming service, internet services and local telephone services. In January 1990, Comcel was awarded its initial 20-year license to operate a nationwide 800 MHz network, and in March 2003, Comcel was awarded a revised license to operate 10 MHz of frequency, as well. In August 1998, as validated in October 2001, Comcel received a license to operate another 4 MHz spectrum and in July 2006, Comcel acquired 25 MHz in the 2.5 GHz spectrum to operate WiMAX. On November 20, 2012, new regulations came into effect which grant telecommunications license holders the right to apply for automatic extensions of all existing licenses by an additional 20 years. Comcel submitted applications to extend most of its licenses in December 2012, receiving extensions through December 2032. The remaining licenses have been renewed for 20 years until 2033.
Cable and Digital Media
Guatemala’s cable business, through its VPN technology, provides a wide range of services with enterprise VoIP, IP video conferencing and IP-PBX.
115 MFS We launched MFS services in Guatemala in January 2011, and we had a 2% MFS penetration rate as of March 31, 2013. In September 2011, we signed agreements with Western Union for the provision of cross-border mobile money transfers in Guatemala.
Honduras Mobile The Millicom Group has a 66.67% equity interest in Telefonica Celular S.A. de C.V. (Celtel). The remaining 33.33% of Celtel is owned by our local partner. On July 1, 2010, we reached an agreement with our local partner whereby it granted us an unconditional call option for the next five years for its 33% stake in Celtel, and we granted to our local partner a conditional put option for the same duration in the event of a change of control of the Millicom Group. As a result of the above agreement, as of July 1, 2010, we have accounted for this operation as a subsidiary using the full consolidation accounting method. We have management control over Celtel through the call and put options with our local partner. As of December 31, 2012, our network in Honduras comprised 1,722 cell sites and covered 94% of the total population. As of March 31, 2013, we served our customers via over 49,000 points of sale. Celtel operates a GSM/GPRS/EDGE network and a 3G/HSDPA network. The 3G/HSDPA network was launched in August 2008. Celtel also provides international long-distance services and local telephone services. In June 1996, Celtel was awarded a 10-year license to operate a nationwide mobile network for a price of $5.1 million. The license was transformed into a 25-year license in March 2005 with an expiration date of June 2021 at a cost of $4.8 million. Celtel has already acquired a WiMAX license but has not yet performed a commercial launch.
Cable and Digital Media Our Honduran cable operation is in the process of network rebuild, and recently launched triple play (cable television, internet and fixed telephone), to be followed in the near future by an integration of our mobile services. Internet services are offered for residential customers and packages are offered for small and medium businesses. For bigger companies, internet services are offered in larger capacities. In addition, the cable business offers services such as data transmission, corporate networks, point-to-point connection and fiber access in the region, as well as digital and VAS.
MFS We launched MFS services in Honduras in January 2011, and we had a 3% MFS penetration rate as of March 31, 2013.
Nicaragua Cable and Digital Media In 2008, we acquired pan-Central American telecommunications company Amnet Telecommunications Holding Limited, a provider of broadband and cable television services in Costa Rica, Honduras and El Salvador, fixed telephone in El Salvador and Honduras, and corporate data services in Costa Rica, Honduras, El Salvador, Guatemala and Nicaragua. Amnet Nicaragua’s interests are currently limited to the corporate broadband market, which do not represent a material part of our business. Amnet Nicaragua’s ISP license is due to expire on January 30, 2017.
South America The Millicom Group’s mobile and cable operations in South America are located in Bolivia, Colombia and Paraguay. Our South American mobile licenses cover approximately 62 million people (see “Our Markets and our Industry—South America”).
116 Bolivia
Mobile
Telefonica Celular de Bolivia S.A. (Telecel Bolivia) is wholly owned by the Millicom Group, which accounts for this operation as a subsidiary using the full consolidation accounting method. As of December 31, 2012, our network in Bolivia comprised 1,071 cell sites and covered 57% of the total population. As of March 31, 2013, we served our customers via approximately 57,000 points of sale.
Telecel Bolivia launched commercial operations in 1991 through an offering of analog mobile services in Bolivia’s three main cities: La Paz, Santa Cruz and Cochabamba. Telecel Bolivia introduced the first prepaid mobile telephone offering in Bolivia at the end of 1996 and launched digital services through its TDMA network in 1997. Telecel Bolivia started offering nationwide GSM services in December 2005 and was the first and only operator in Bolivia to offer 3G services since 2008. Telecel Bolivia was awarded a 20-year license in 1990 to operate a mobile network in Bolivia’s three main cities. The license was extended in 1995 and will expire in November 2015. Telecel Bolivia’s license was extended in 1997 to cover the rest of the country for a period of 20 years. In December 2001, Telecel Bolivia was also awarded a 40-year license to provide long-distance telecommunication services in Bolivia. This license is mainly used to carry Telecel Bolivia’s mobile traffic. In May 2006, Telecel Bolivia was awarded a 40-year data concession to provide data services in Bolivia.
Telecel Bolivia is participating in three spectrum auctions. It was recently awarded 2x10MHz of spectrum in the 1900MHz band, for which it paid $15 million, and the results of the remaining auctions, in which Telecel Bolivia is seeking 2x12MHz in the 700MHz band and 2x15MHz in the 1700/2100MHz band, are expected to be announced in the second quarter of 2013.
MFS
In January 2013, Telecel Bolivia received a license to offer MFS in Bolivia and performed a soft launch of MFS.
Colombia
Mobile
In October 2006, we acquired 50% plus one share of the share capital of Colombia Móvil. UNE Telecomunicaciones S.A. ESP (“EPM”), a company owned and controlled by the municipality of Medellín, and Empresa de Telecomunicaciones de Bogotà S.A. ESP (“ETB”), a company owned and controlled by the municipality of Bogotà, each own 24.99% of the share capital of Colombia Móvil. We have management control of Colombia Móvil, and we are currently in negotiations with EPM regarding a potential combination of its and our telecom businesses in Colombia, as further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Proposed Business Combination in Colombia.” We account for this operation as a subsidiary, using the full consolidation accounting method. As of December 31, 2012, our network in Colombia comprised 3,626 cell sites and covered 74% of the total population. As of March 31, 2013, we served our customers via approximately 94,000 points of sale.
Colombia Móvil was awarded three licenses in February 2003 to offer Personal Communication Services (PCS) covering all of Colombia. The PCS licenses each have a term of 10 years and allow Colombia Móvil to offer voice, data and video services. Additionally, Colombia Móvil has one license for offering carrier services. The initial term of the license was 10 years (until 2013), extendable for an additional ten years. Colombia Móvil operates with GSM/GPRS/EDGE/HSPA/HSPA+ networks on the 1900 MHz band, with 55 MHz of spectrum in the 1900 MHz band composed of 50 MHz of spectrum and 5 MHz, which is due to expire in 2021. In December 2012, Colombia Móvil renewed its license for 40 MHz of spectrum in the 1900 MHz band for another 10 years (until February 2023). Through this
117 license, Colombia Móvil is offering VAS, has offered international gateway services since July 2003 and is able to offer bearer services. Colombia Móvil has another license that permits it to offer several nationwide telecommunication services (Título Habilitante Convergente), which was awarded in April 2008 for a renewable 10-year term. Colombia Móvil launched 3G services in 2008. Colombia Móvil S.A. has fully operational interconnection agreements for voice and SMS services with the other mobile operators in Colombia and is considering the interconnection conditions for other data services, such as MMS.
In July and December 2011, Colombia Móvil signed a sale and purchase agreement and lease- back agreement, respectively, with American Towers to transfer most of its tower sites for $182 million. By April 2, 2013, approximately 68% of the towers had been transferred and the remaining towers are expected to be transferred by mid-2013. We have an approximate 40% equity interest in the local American Towers subsidiary which holds the Colombia Towers. We have provided our local partners with a call option which expires in July 2013 giving them the opportunity to acquire up to half of our shareholding. See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.”
Paraguay
Mobile
Telefonica Celular del Paraguay S.A. (Telecel) is wholly owned by the Millicom Group. We account for this operation as a subsidiary, using the full consolidation accounting method. As of December 31, 2012, our network in Paraguay comprised 1,170 cell sites and covered 94% of the total population. As of March 31, 2013, we served our customers via over 35,000 points of sale.
Telecel started operations in 1992. It operates both GSM/GPRS/EDGE and UMTS/HSPA networks. Its mobile network architecture includes ten 2G mobile switching centers and two 3G mobile switching centers. Telecel additionally provides fixed wireless internet services to the largest cities in the country using WiMAX technology. Its fixed wireless network is composed of more than 200 cellular base stations, including the new generation WiMAX-e cell sites.
In 2008, Telecel launched HSDPA services. Telecel was awarded a 10-year license for an 800 MHz network in 1991, which was renewed in October 2001, October 2006, and in 2011 was renewed until 2016. The 1900 MHz PCS license that was due to expire in November 2012 was also renewed for an additional 5-year period at the same time. The ISP services license was renewed in 2009 until 2014 and in 2010 Conatel announced that both ISP and data licenses were to become a single license. Telecel launched its fiber-to-the-home (FTTH) network in 2008.
Cable and Digital Media
On October 1, 2012, Telecel acquired substantially all of the assets and business of Cablevisión, the leading digital cable operator in Paraguay and one of the principal broadband internet providers in Paraguay, for $150 million. Before this, Telecel did not provide cable services in Paraguay. We acquired through this transaction the net assets, excluding debt and cash, of the operating companies of the Cablevisión Group, Cable Vision Comunicaciones S.A., Television Dirigida S.A., Consorcio Multipunto Multicanal S.A., Producciones Unicanal S.A. and 100% of the shares of Teledeportes Paraguay S.A. The net assets of Cablevisión were purchased from Grupo Clarín S.A. Cablevisión Paraguay began offering television services in Asunción in 1989 and is the leading provider of cable pay-television services in Paraguay with an 82% market share in the metropolitan area as of March 31, 2013. As of March 31, 2013, the coverage area of Cablevisión Paraguay’s HFC and UFC network included approximately 449,000 homes passed and Cablevisión Paraguay had approximately 134,000 cable TV customers, with approximately 18% of these customers subscribing to fixed broadband internet services. Cablevisión Paraguay does not provide satellite TV service. Teledeportes has exclusive rights to broadcast Paraguay’s soccer championship games through 2020 and also exclusive sponsorship rights for the Paraguayan National Soccer Team for the years 2015
118 through 2020. In addition to the ability to offer new services and bundle them with Telecel’s existing services, we expect that this acquisition will provide synergies allowing us to optimize capital expenditures and operating costs.
MFS
We launched MFS services in Paraguay in May 2010, and we had a 26% MFS penetration rate as of March 31, 2013. In 2011, we commenced cross-border money transfer service with Western Union in Paraguay under the Giros Tigo brand (Tigo Cash), which allows our customers in Paraguay to receive money from other countries using their mobile phones.
Africa
The Millicom Group’s mobile and MFS operations in Africa are located in Chad, DRC, Ghana, Mauritius, Rwanda, Senegal and Tanzania. Our African mobile licenses cover approximately 186 million people (see population data under “Our Markets and our Industry—Africa”).
Chad
Mobile
Millicom Tchad S.A. is wholly owned by the Millicom Group, which accounts for this operation as a subsidiary, using the full consolidation accounting method. As of December 31, 2012, our network in Chad comprised 427 cell sites and covered approximately 80% of the total population. As of March 31, 2013, we served our customers via approximately 53,000 points of sale.
Millicom Tchad launched commercial operations in the capital city, N’Djamena, in October 2005 and coverage was quickly expanded to six other major cities. The company offers Tigo-branded prepaid services over its GSM network. Its services include GPRS, EDGE, MMS and ePIN. In November 2004, Millicom Tchad was awarded a ten-year license to operate a nationwide GSM network in Chad. The license will expire in 2014, and we intend to renew the license during 2013. The company’s license was amended in July 2005 to allow for international gateway operations and in January 2007 for the deployment of GPRS/EDGE services. Millicom Tchad does not have a WiMAX license because no such licenses have yet been issued in Chad.
In the fourth quarter of 2011, Millicom Tchad overtook Airtel Chad (the only other major mobile operator in Chad) in terms of subscribers, and had approximately 2 million subscribers as of March 31, 2013.
MFS
We launched MFS services in Chad in November 2012, and we had a 2% MFS penetration rate as of March 31, 2013.
DRC
Mobile
Oasis S.p.r.l. is wholly owned by the Millicom Group, which accounts for this operation as a subsidiary, using the full consolidation accounting method. As of December 31, 2012, our network in DRC comprised 775 cell sites (of which 565 were inactive on December 31, 2012), and covered 70% of the Kinshasa/Bas-Congo region population. We ceased using the inactive sites because they are located outside the Kinshasa/Bas-Congo region, which has been our primary focus in DRC. As of March 31, 2013, we served our customers via over 64,000 points of sale.
In November 1997, Oasis was awarded a 20-year license to operate a fixed-line network in DRC. An amendment to the license was signed in October 1999, which allows the company to construct a
119 nationwide GSM network. Oasis now has a 3G license and is in the process of rolling out 3G services, with the commercial launch expected to take place in the second quarter of 2013. This valuable low frequency band spectrum and licensing will enable us to more efficiently expand our network in DRC to new regions of this large and populous country outside of the Kinshasa/Bas- Congo region. Oasis does not have a WiMAX license. In June 2012, the original 1997 license was amended to grant Oasis additional spectrum in the GSM 900 band. This amendment provides that the license is prorogated until 2024. Oasis paid for spectrum in the 900 MHz and 1800 MHz bands in 2011 and began rolling out services on the 900 MHz band starting in the fourth quarter of 2012. Oasis also has an international gateway. In October 2011, Oasis signed a sale and purchase agreement and lease-back agreement with Helios Towers DRC, a direct subsidiary of Helios Towers Africa, to transfer 729 of its tower sites. As of April 2, 2013, 685 towers had been transferred (approximately 94%) and 100% of the proceeds had been received. The remaining sites are expected to be transferred in 2013. The Millicom Group has an approximate 40% equity interest in Helios Towers DRC. See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.”
MFS We launched MFS services in DRC in July 2012, and we had a 1% MFS penetration rate as of March 31, 2013.
Ghana Mobile Millicom Ghana Company Limited is wholly owned by the Millicom Group, which accounts for this operation as a subsidiary, using the full consolidation accounting method. As of December 31, 2012, our network in Ghana comprised 820 cell sites and covered 81% of the total population. As of March 31, 2013, we served our customers via over 53,000 points of sale. Millicom Ghana commenced operations in 1992 as the first mobile operator in Ghana and introduced the concept of prepaid services in Ghana in 1998. In October 2010, Millicom Ghana was authorized to operate nationwide mobile money transfer services (Tigo Cash) for five years. We have also introduced micro-insurance products in Ghana. Millicom Ghana’s GSM license authorizes it to provide mobile and local fixed wireless services. Although Millicom Ghana applied for a GSM license in 2000, it was not allowed to launch GSM services until July 2002. In 2004, Millicom Ghana received a formal nationwide 15-year GSM operating license. Millicom Ghana also acquired a 10-year international gateway license in June 2005. In late 2008, Millicom Ghana acquired a 15-year 3G license and began offering 3G services in March 2011. In May 2012, Millicom Ghana unveiled the country’s first unlimited mobile internet plans which offer customers time-based rather than volume-based tariffs. Also in May, the company announced that it was working with equipment vendor Ericsson to utilize hybrid power technology to improve network coverage for unconnected villages in the north of the country under the Millennium Village project. This project enables telecommunications companies to provide services in areas without links to the national power grid. In January 2010, Millicom Ghana signed a sale and purchase agreement, as well as a lease-back agreement in June 2010, with Helios Towers Ghana, a direct subsidiary of Helios Towers Africa, for most of its tower sites, almost all of which were transferred to Helios Towers Ghana during 2010 and 2011. 271 towers were transferred in June 2010. As of April 2, 2013, Millicom Ghana had transferred 706 sites to Helios Towers Ghana. We expect to transfer an additional 23 sites in 2013 for approximately $1 million. The Millicom Group has an approximate 40% equity interest in Helios Towers Ghana. See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.”
120 In January 2013, Millicom Ghana agreed to non-exclusively lease up to 300 towers from American Tower Corporation over a three-year period. Constructing new towers is expensive in Ghana, so this arrangement should be a cost effective method for increasing our service quality and coverage in Ghana. The total commitment under the lease arrangement is approximately $3 million.
MFS
We launched MFS services in Ghana in April 2011, and we had a 3% MFS penetration rate as of March 31, 2013. Millicom Ghana entered into a non-exclusive representation agreement with Western Union Network (France) SAS in 2012, under which it agreed to offer Western Union branded mobile money transfer services (limited to international remittances) in Ghana. Ghana has not yet obtained regulatory approval to launch the Western Union services.
Mauritius
The Millicom Group’s operations in Mauritius comprise a 50% equity interest in Emtel Limited. The remaining 50% of the company is owned by a local partner, Currimjee Jeewanjee & Co. Ltd, a leading diversified group in Mauritius. Emtel’s two shareholders jointly control the company. The Millicom Group accounts for this operation as a joint venture, using the proportionate consolidation accounting method. As of December 31, 2012, our network in Mauritius comprised 335 cell sites and covered 93% of the total population. As of March 31, 2013, we served our customers via over 4,000 points of sale.
Emtel launched its mobile operations in Mauritius in May 1989, establishing itself as the first mobile telephone operator in the country. Emtel owns licenses for mobile services, international long-distance and internet services. Emtel was awarded a 10-year license in 1989, including a 7-year exclusivity period. After a change of laws, Emtel’s nationwide (including the territorial waters) license was modified and is now effective for a period of 15 years from November 2000. This license entitles Emtel to provide public land mobile network services and public land mobile services. Furthermore, Emtel obtained additional spectrum for UMTS/3G services in November 2004, an international long-distance license in December 2003 (valid until 2018) and an internet service license in May 2004 (valid until 2019). Emtel launched 3G services in Mauritius in November 2004, making it the first mobile operator to offer such services in Africa. In December 2010, Emtel was granted a dealer’s license, valid for five years, under which the company is authorized to sell, expose, or offer for sale or hire radiocommunication or telecommunication devices. Emtel acquired WiMAX spectrum in 2007 and has a WiMAX network with 11 base stations. Emtel operates a GSM network which is GPRS/EDGE enabled and a UMTS/HSPA network.
Rwanda
Mobile
Tigo Rwanda S.A. is 87.5% owned by the Millicom Group, with the remaining 12.5% owned by a local partner. We account for this operation as a subsidiary, using the full consolidation accounting method. As of December 31, 2012, our network in Rwanda comprised 312 cell sites and covered approximately 96% of the population. As of March 31, 2013, we served our customers via approximately 21,000 points of sale.
In late 2008, we were successful in its tender against three other bidders for the third national mobile license in Rwanda. The license is a technology neutral license and is valid for 15 years. We set up Tigo Rwanda and, after roll-out of the network, 3G services were launched in December 2009.
MFS
We launched MFS services in Rwanda in May 2011, and we had a 26% MFS penetration rate as of March 31, 2013. In August 2012, Tigo Rwanda entered into a non-exclusive representation
121 agreement with Western Union Network (France) SAS under which it agreed to offer Western Union branded mobile money transfer services (limited to international remittances) in Rwanda. We expect to launch Western Union services in Rwanda in 2013.
Senegal Sentel GSM S.A. is wholly owned by the Millicom Group, which accounts for this operation as a subsidiary, using the full consolidation accounting method. It was rebranded under the Tigo banner in 2005 as Tigo Senegal. As of December 31, 2012, our network in Senegal comprised 619 cell sites and covered 73% of the total population. As of March 31, 2013, we served our customers via approximately 44,000 points of sale. In July 1998, Sentel was awarded the country’s second mobile license, a 20-year concession to operate a nationwide network. It launched commercial GSM-900/1800 services the following April, and has continued to upgrade its networks and services since the launch. Following a dispute with the Senegalese government, on November 11, 2008, Sentel initiated arbitration proceedings with the International Center for the Settlement of Investment Disputes (ICSID) against the Republic of Senegal under provisions of the Sentel license and international law, as further discussed under “—Litigation and Legal Proceedings—Senegal.” In August 2012, Sentel and the Senegalese government settled their dispute, and the validity of the license was recognized by both parties. The terms of the settlement, under which we agreed to pay $103 million to the Senegalese government, included a 10-year extension of the term of the license until 2028. In October 2012, an amendment to the concession was approved by the government (including the prorogation of the term until 2028). Under this amendment, Sentel acquired GSM, 3G and WiMAX licenses. During 2013-2014, Sentel intends to invest approximately $70 million in modernizing its network equipment, launching 3G (in July 2013) and acquiring extra tower sites.
Tanzania Mobile Millicom Tanzania Limited is wholly owned by the Millicom Group following the January 2006 Millicom Group buy-out of the non-controlling shareholder. We account for this operation as a subsidiary, using the full consolidation accounting method. As of December 31, 2012, our network in Tanzania comprised 1,272 cell sites and covered 63% of the total population. As of March 31, 2013, we served our customers via approximately 86,000 points of sale. In January 1994, Millicom Tanzania was awarded a 15-year license to operate a nationwide mobile network. In May 2010, Millicom Tanzania was granted separate licenses for network facilities services, network services and application services (the application services license was received in September 2012). These licenses are valid for 25 years, 25 years and 10 years, and enable Millicom Tanzania to provide international gateway related services. Millicom Tanzania launched 3G services in the first quarter of 2011. In December 2010, Millicom Tanzania signed a sale and purchase back agreement with Helios Towers Tanzania, a direct subsidiary of Helios Towers Africa, for most of its tower sites, of which 518 were transferred to Helios Towers Tanzania in September 2011 and 989 sites had been transferred as of April 2, 2013. The remaining sites are expected to be transferred in 2013. A lease agreement between the same parties was signed in September 2011. The Millicom Group has an approximate 40% equity interest in Helios Towers Tanzania. See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.”
MFS We launched MFS services in Tanzania in October 2010, and we had a 40% MFS penetration rate as of March 31, 2013. Millicom Tanzania entered into a non-exclusive representation agreement
122 with Western Union Network (France) SAS in 2012, under which it agreed to offer Western Union branded mobile money transfer services (limited to international remittances) in Tanzania. Tanzania has not yet obtained regulatory approval to launch the Western Union services.
Discontinued and divested operations
In the fourth quarter of 2009, the Millicom Group completed the sale of its mobile operations in Sri Lanka, Sierra Leone and Cambodia. A total net gain of $289 million was recognized from the sale of these operations. The Millicom Group’s operations in Sri Lanka, Sierra Leone and Cambodia ceased to be consolidated from the date of sale.
In January 2010, the Millicom Group’s operation in Ghana signed a sale and purchase agreement, as well as a lease-back agreement in June 2010, for most of its cell sites. The agreement marked the Millicom Group’s first outsourcing of passive infrastructure and is consistent with the Millicom Group’s strategy of improving both our capital and operating efficiency by focusing on our core activities. The Ghana agreement was followed by similar arrangements in Tanzania and DRC in December 2010 and in Colombia in July 2011. Together with the lease-back agreements, the Millicom Group’s operations in Ghana, DRC, Tanzania and Colombia entered into “build-to- suit” agreements to accommodate the Millicom Group’s growth and to enable the construction of additional equipment and towers. Most of the tower transfers under these agreements have been completed, with the remaining towers expected to be transferred during 2013. The carrying value of the portion of the remaining towers that will not be leased back and any related liabilities have been classified respectively as assets held for sale and liabilities directly associated with assets held for sale. See “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers.”
On August 20, 2010, to facilitate the integration of its various business lines and to create synergies, the Millicom Group entered into agreements with its partners in Honduras and Guatemala to align ownership of its Amnet and Navega businesses. As a result, the Millicom Group sold 45% of its Amnet operations in Guatemala to its partner in Guatemala. From this date, Amnet Guatemala has been accounted for as a joint venture and proportionately consolidated into the Millicom Group financial statements. Previously, the results of Amnet Guatemala were fully consolidated. There was no significant impact on profit and loss from the disposal.
On September 16, 2009, the Millicom Group announced that it had signed an agreement for the sale of its 74.1% holding in Millicom Holding Laos B.V. to VimpelCom Ltd. On March 9, 2011, the Millicom Group completed the transaction and received proceeds (net of transaction costs and taxes) from the sale of $53 million, realizing a gain on sale of $37 million. From that date, the Laos operation is no longer included in the Millicom Group’s consolidated financial statements.
Litigation and legal proceedings
The Millicom Group is subject to various legal proceedings. Below is a description of the pending legal proceedings that we consider material.
The Millicom Group is contingently liable with respect to lawsuits and other matters that arise in the normal course of business, as discussed below. As of March 31, 2013, the total amount of claims against the Millicom Group’s operations was $826 million, as compared to $955 million as of December 31, 2012 and $127 million as of December 31, 2011, of which $1 million related to joint ventures. As of March 31, 2013, December 31, 2012 and December 31, 2011, the Millicom Group had made corresponding provisions in the amount of $13 million, $13 million and $7 million, respectively. In addition, we have ongoing tax disputes in several of our markets, some of which are described below. Management is of the opinion that, while it is impossible to ascertain the ultimate legal and financial liability with respect to these claims, the final outcome of these contingencies is not expected to have a material effect on our financial position and operations.
123 Bolivia
In Bolivia, we previously engaged consultants to act as freelance sales representatives. In November 2011, some of these freelancers have brought court cases seeking retroactive employee benefits and reinstatement upon their termination, which have been successful in a few instances, as Bolivian employment laws and government regulators tend to favor these types of claims. The aggregate amount of these claims are less than $3 million. Management has made a provision in respect of these claims.
Chad
In addition, the Chadian tax authorities are seeking to recover withholding tax on commission fees paid by Millicom Tchad S.A. to non-resident and domestic dealers and distributors. We are challenging this claim in respect of payments to domestic companies, because we do not believe withholding taxes apply on payments made to domestic, as opposed to non-resident, companies. The total amount of the tax authorities’ claim, including interest and penalties, is approximately $15.0 million, for which management has made a provision of $8 million in respect of withholding tax fees paid to non-resident companies.
Colombia
In September 2010, a group of approximately 20 individuals in Colombia commenced a lawsuit seeking to hold all mobile operators in the country, including us, liable for extortion committed through their networks, seeking a total amount of $753 million from all mobile operators. Management does not believe there is any merit or legal basis for the claims, especially as the plaintiffs have not alleged that our network was used in any of the alleged extortion calls. Management takes the view that no provision should be made for this claim.
Colombia Móvil is involved in several pending legal proceedings brought during 2011, including claims brought by three Colombian municipal authorities—the municipality of Ocaña, the municipality of Lorica and the municipality of Aracataca. Under Colombian tax law, operators are liable for certain amounts in locations where revenues are generated. The municipalities claim that the location of towers in their respective jurisdictions is enough to trigger tax liabilities. Management, however, considers that service is effectively provided and revenues are generated where switches are located. The municipality of Ocaña is demanding a total of approximately 400 million Colombian pesos (approximately $218,000) for the period from 2005 to 2009, plus a penalty equal to 4 billion Colombian pesos (approximately $2 million) for failure to declare this tax during the same period; the small municipality of Lorica is demanding approximately 875 billion Colombian pesos (approximately $490 million) as a penalty for failure to declare this tax for the period from 2006 to 2010; and the municipality of Aracataca is demanding approximately 9 billion Colombian pesos (approximately $5 million) as a penalty for failure to declare this tax for the period from 2006 to 2010. Colombia Móvil is contesting the municipalities’ claims, as it does not have switches in the relevant jurisdictions, and has joined other operators seeking a tax ruling and clarifications to the applicable regulations. The outcome of this dispute is uncertain as Colombian authorities have not ruled on this type of case before, and the Lorica and Aracataca municipalities, which represent most of the claims, have not actively pursued their claims within the statutory time frame, which by law can be deemed an affirmation of Colombia Móvil’s appeal. Management takes the view that no provision should be made for this claim.
In December 2012, Colombia Móvil renewed its concession contracts for an additional 10 years (from February 2013 until February 2023). There is, however, an unresolved disagreement regarding the terms under which 40 MHz of the spectrum allocated to Colombia Móvil should be renewed, with management taking the view that the original concession price should be used— which would represent a price of approximately 70 billion Colombian pesos (approximately $40 million)—and the telecommunications ministry taking the view that market price should be used—which would represent a price of approximately 311 billion Colombian pesos
124 (approximately $173 million). In January 2013, Colombia Móvil paid 93 billion Colombian pesos (approximately $52 million) towards this amount to the government, with the final amount due to be determined by an arbitration panel by early to mid 2014.
Costa Rica
In March 2012, the Costa Rican tax authorities released guidelines that internet services are subject to 13% sales tax, with retroactive application to 2001. Consequently, the tax authorities auditing our Costa Rican subsidiary’s tax returns for fiscal years 2008, 2009 and 2010 determined that the company did not pay sales tax on its internet services for those periods and assessed the company approximately $5.2 million in unpaid taxes and a fine of approximately $1.3 million. We do not believe that the sales tax law should apply to internet services, and our appeals of the tax authorities’ determination are pending final rulings from the Administrative Tax Court and the Administrative Legal Tribunal (Tribunal Contencioso Administrativo). Including interest and penalties, we estimate that the additional tax, should we lose the appeal, will be approximately $14 million, for which management takes the view that no provision should be made.
DRC
In December 2012, the DRC tax authorities completed an audit of our DRC operation’s 2011 tax return and assessed an additional tax in the amount of approximately $29 million and penalties of approximately $35 million, for a total liability of approximately $64 million. The additional tax resulted from a different interpretation of the deductibility of accrued but unpaid interest on shareholder loans, the applicability of withholding tax on accrued interest payments and deductibility of unrealized foreign exchange losses, among other issues. We are challenging these claims, and management has made a $7.4 million provision associated with the penalties for non-deductible interest expenses.
As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—3G License Acquisition in DRC,” in June 2012, Oasis, our DRC operation, acquired a 3G license from Supercell, another DRC mobile operator, for which Oasis paid $5 million of the purchase price into escrow. In February 2012, we released half of the escrow amount to Supercell, and we are currently working with Supercell and the regulators to resolve the matter. We anticipate a full resolution of this matter and therefore a complete closing of the transaction with Supercell in the first half of 2013.
In October 2009, Oasis terminated 54 employees with the prior approval of the Ministry of Labor, although the approval was later overturned by a decision of the Labor Minister in November 2009. As a result, Oasis was obliged to negotiate settlement agreements with 26 of the 54 former employees, paying each of them three months salary. The remaining 28 of these former employees have brought unfair dismissal claims against Oasis, each claiming approximately $1 million in damages. In January 2013, a court of appeals confirmed a March 2011 court’s interim decision requiring Oasis to indemnify a group of 16 of these former employees in an aggregate amount of $320,000 until such time as a final judgment is rendered. Oasis has appealed this decision both in the DRC appellate courts and in the Common Court of Justice and Arbitration, based in Abidjan, Ivory Coast. Despite Oasis’s appeals of this decision, in February 2013, a local DRC bank paid the court-ordered indemnity amount to these 16 former employees without Oasis’s consent. In March 2013, these 16 former employees brought new claims seeking payment of an additional $314,475 relating to the 18-month period between April 2011 and September 2012, which we are also contesting. We do not believe there is any merit in these claims and have strongly opposed them. Management takes the view that no provision should be made for this claim.
El Salvador
Telemóvil El Salvador is a party to two ICDR international arbitration proceedings initiated in December 2010 by local operators against all major operators, for alleged breaches of
125 interconnection agreements, alleging Telemóvil caused their businesses to collapse. The plaintiffs (which have previously brought unsuccessful claims against other operators) have not specified damages in their claims, but in settlement discussions, they have sought $5 million from each operator. The arbitration panel held hearings on the claims in February and April 2013, with another hearing scheduled for May 2013, and we expect a final resolution of these claims in 2013. We are defending these cases vigorously. Management takes the view that no provision should be made for this claim.
Ghana
A November 2011 claim against Millicom Ghana by E-Talk Limited alleges that Millicom Ghana terminated an agreement made on July 18, 2006 with insufficient notice. The total value of the claim is approximately $30 million, including various general damages, loss of expected revenues and punitive damages. Pre-trial motions continued throughout 2012 and hearings are on-going in the Commercial Court in Accra. While it is difficult to predict the outcome of this type of litigation, management considers this claim as opportunistic and without foundation, insofar as it was filed more than four years after the events on which the plaintiff bases its claim. Management takes the view that no provision should be made for this claim.
In December 2012 and January 2013, the Ghanaian tax authorities completed a tax audit of our Ghanaian operations for the 2007 to 2011 tax years and challenged the deduction and determination of the service and management fees paid to MIC S.A. and also disallowed deductions for certain foreign exchange losses and interest income, resulting in an assessment of taxes and additional penalties in the amount of approximately $26 million. We are challenging this assessment, and management takes the view that no provision should be made.
Guatemala
The Guatemalan tax authorities have sought to apply a 3% stamp tax on the payment of dividends from the Millicom Group’s Guatemalan subsidiary through coupons attached to share certificates for the 2007 and 2010 tax years. We believe that these dividend payments are specifically exempt from stamp tax and are disputing the tax authority’s determination that a stamp tax is due for these dividend payments. We estimate that, should we lose the appeal, the additional tax assessment, plus interest and penalties, could be approximately $91 million, for which management takes the view that no provision should be made.
Tanzania
Since October 2011, MIC Tanzania and two former shareholders of MIC Tanzania’s predecessor have been engaged in a dispute with regard to purchase price adjustments for the consideration paid by the Millicom Group for the former shareholders’ shares. In December 2003, an arbitral award was rendered in favor of the former shareholders in an amount of less than $1 million. Following submission of the arbitral award to the High Court of Tanzania, the decision has been subject to a number of appeals, the most recent of which is still pending. Management has made a provision in respect of these claims.
In June 2012, the Tanzania Revenue Authority (TRA) completed a tax audit of MIC Tanzania and issued a provisional assessment for the year 2008 to 2009. The TRA disallowed certain third party expenses, such as consultancy and other technical support costs, of approximately $4 million on the grounds that the services provided to MIC Tanzania by such third parties should have been provided by MIC S.A. under the Technical Support Agreement between MIC Tanzania and MIC S.A. On those grounds, the TRA allowed technical support fees paid by MIC Tanzania to MIC S.A. but disallowed technical support fees paid to third parties. This assessment will apply to the tax due for years 2010 to 2012, resulting in an additional tax assessment of approximately $13 million. MIC Tanzania has challenged the TRA’s assessment, which is pending before the Tax Revenue Appeals Board.
126 Corporate responsibility We are working on a number of fronts to improve management of the financial, social and environmental risks relating to compliance and corporate responsibility.
Strategy
Our new corporate responsibility (CR) strategy, which is incorporated into our core strategy, aims to move the Millicom Group beyond compliance and industry standards. The strategy is aligned with the principles of the United Nations Global Compact.
Our CR strategy has four overall objectives:
• gaining a competitive advantage as a responsible employer with a strategic approach to ethical business;
• enhancing our reputational capital and increasing the transparency of our communications;
• creating value as a sustainable business and supporting capacity-building in local communities; and
• identifying opportunities while managing risks to combine cost benefit and social return.
In 2012, our focus was on assessing our key risks and impacts across different areas of corporate responsibility.
At the end of 2012, in line with our new strategy to increase our focus on CR, enhance our employer brand and strengthen communities, we decided to create Millicom Foundation. Millicom Foundation’s strategy is to support the communities in which we operate by promoting and seizing business opportunities while using technology to mobilize communities and low-income families. The goal is to empower women and children by providing information and communications technology in remote areas by enabling mobile healthcare, supporting entrepreneurship and facilitating education and training. Millicom Foundation is our tool as a digital lifestyle leader to be present and committed to promoting societies and our customers’ social and economic growth.
Governance
In the fourth quarter of 2012, we restructured our CR organization. Under the new structure, CR is now governed separately from compliance functions, whereas both CR and compliance were previously governed together under one organization. This change aims to ensure focus both on sustainable opportunities that exist in our markets and on ensuring proper compliance and risk management.
MIC S.A.’s board of directors has established a CR Committee that oversees the management of all CR issues and implementation of the CR strategy and also advises the board of directors regarding the management of CR. The CR Committee comprises directors Mia Brunell Livfors and Donna Cordner, with the President and CEO, Hans-Holger Albrecht, also participating in meetings.
The Director of CR holds the operational responsibility for implementing the CR strategy and reports directly to the CEO and the Chairman of the CR Committee.
Code of Ethics
The Millicom Group has a Code of Ethics that applies to all Millicom Group employees. Every new employee signs a declaration that they have read the Code of Ethics. The Millicom Group carries out face-to-face training with employees on the Code. The Millicom Group also has a Supplier Code of Conduct with which its suppliers must comply. By the end of 2011, the 20 most important suppliers to each of the Millicom Group’s operations had signed the Supplier Code of Conduct.
127 In 2011, the Millicom Group reviewed its whistleblower policy and introduced new channels for employees and third parties to report any potential ethical issues with respect to the Millicom Group. Employees or third parties can report ethical issues via email or telephone or via web- form, which also allows for anonymous reporting. These reporting channels are available in English, French and Spanish.
Social benefits of mobile communications
By operating in emerging markets, the Millicom Group is in an excellent position to empower people with its services and to positively influence economic development in the markets where it operates. The premise of the Millicom Group’s business strategy is to make mobile communications and other mobile services as affordable, accessible and available as possible to consumers in its markets. The Millicom Group has expanded its services beyond mobile communications to include MFS, which in many cases represent the first access to any form of financial service for its customers. We have programs to promote women’s entrepreneurship by using MFS, which aim to provide women in Tanzania, Ghana and Rwanda with support and training to establish a business as a Tigo Mobile Money agent. Using MFS allows women to access accounts, make safe transactions and support start-up initiatives.
We are also currently training 3,500 women in business and financial literacy. In addition, together with UNICEF and RITA (the Tanzanian Registration, Insolvency and Trusteeship Agency), we have developed and are testing an innovative mobile application to register children under the age of five. The mobile application simplifies the process of birth registration by entering the registration information into a mobile phone which sends the data (by SMS) to a central database at RITA.
Human rights and labor
In June 2011, the United Nations Human Rights Council endorsed the “Guiding Principles on Business and Human Rights.” The Millicom Group, together with other telecommunications stakeholders, is working to define how the UN principles should be applied in the telecommunications sector through the Telecommunications Industry Dialogue on Freedom of Expression and Privacy. Due to the nature of our business, freedom of expression and privacy are key risk areas, as government requests can put us in a difficult position with respect to our responsibility to respect human rights.
The Millicom Group carried out extensive reviews in 2012 of the legal and regulatory frameworks, local processes and risks relating to privacy in order to create global guidelines in line with international best practices.
In 2012, the Millicom Group carried out a risk assessment of the labor standards of all of its operations, which confirmed that child labor is among the most significant labor related risks for the Millicom Group. As a result, the Millicom Group has commissioned further independent risk assessment focused on child labor and other children’s rights, as defined in the Children’s Rights and Business Principles, a comprehensive set of principles developed by UNICEF, the UN Global Compact and Save the Children to guide companies on the full range of actions they can take in the workplace, marketplace and community to respect and support children’s rights. The Millicom Group intends to review its policies and procedures based on the results of the assessment, and is working with UNICEF to create guidance and a risk assessment framework on children’s rights for the telecommunications sector.
Environment, health and safety
In 2012, the Millicom Group initiated the implementation of environment, health and safety management systems in line with relevant international standards.
The Millicom Group has identified energy efficiency and management of electronic waste as key areas of focus for the Millicom Group’s environmental activities going forward. A cross-functional
128 task force is overseeing the implementation of the energy efficiency program through optimization, equipment upgrades, renewable energy and offsetting.
In 2011, for the third year in a row, the Millicom Group responded to the Carbon Disclosure Project’s request to voluntarily report environmental information. The Carbon Disclosure Project is a nonprofit organization that gathers data from companies regarding their supply chain emissions. This data helps companies measure their environmental risk so they are better able to manage it strategically. The Millicom Group reports its CO2 emissions data through the Carbon Disclosure Project.
Anti-corruption
The Millicom Group is working towards creating a robust global anti-corruption program aligned with international best practices, as set forth in the UK Bribery Act and Transparency International’s Business Principles for Countering Bribery, by simplifying and expanding its existing anti-corruption program. The Millicom Group is building on its strong existing policies by introducing more detailed guidance on the following areas: Gifts and Entertainment, Donations and Sponsorships and Third Parties. In addition to face to face training for all staff, the Millicom Group has carried out specific anti-bribery trainings to key functions, such as Finance.
Reporting
In 2012, the Millicom Group published its first report in accordance with the Global Reporting Initiative, which is the per se standard framework for corporate sustainability performance. The Millicom Group’s corporate responsibility progress and Millicom Foundation’s projects are reported in the corporate quarterly reports.
Research and development, patents, trademarks and licenses
We do not engage in research and development activities and we do not own any patents.
We own or have rights to certain trademarks in our business, including the following trademarks used in this offering memorandum: tigo®, Girostigo® and . Under trademark license agreements with MIC S.A., certain of our operations have licenses to use the Tigo trademark and/ or Millicom name, as further discussed under “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Subsidiaries of MIC S.A.”
As we established an early presence in most of the markets in which we operate, we have been able to secure our licenses at relatively low cost. Historically, we have been successful in renewing our maturing licenses, generally on terms similar to the original licenses, although we may not be able to do so in the future. Where necessary, we enter into partnerships with prominent local business partners through companies over which we typically exercise management control.
Property, plant and equipment
We own, or operate through long-term leases or licenses, properties consisting of plant and equipment used to provide mobile telephone services. In addition, we and our operating companies own, or operate through finance leases, towers, properties used as administrative office buildings and other facilities. These properties include land, interior office space, and space on existing structures of various types used to support equipment used to provide mobile telephone services. The leased properties are owned by private individuals, corporations and other third parties.
Plant and equipment used to provide mobile telephone services consist of:
• switching, transmission and receiving equipment;
• connecting lines (cables, wires, poles and other support structures, conduits and similar items);
129 • land and buildings;
• easements and other rights of use; and
• other miscellaneous properties (work equipment, furniture and plants under construction).
Insurance
We maintain the types and amounts of insurance which we believe to be customary in the industry and countries in which we operate and in accordance with our risk management strategy. Annually, we review and analyze our worldwide insurance coverage needs with the assistance of an insurance broker. We have standardized our coverage along the recommendations suggested by our insurance broker and have put in place group master insurance policies under which all our operations are covered. Certain local risks not covered under the group master insurance policies or required by local regulations are covered through local insurance policies. We consider our insurance coverage to be adequate both as to risks and amounts for the business we conduct.
130 Telecommunications regulations Regulatory overview Our ability to provide telecommunications services depends on applicable law, telecommunications regulations and the licenses we are granted under such laws and regulations. In order to comply with these laws, regulations and licenses, we may be required to obtain consents or approvals from regulatory authorities for certain activities, such as operating or owning our wireless networks, utilizing our radio frequency allocations and establishing the rates we charge our customers.
The regulatory regimes in the countries where we operate vary from market to market and are influenced by factors such as population, economic development, geographical landscape, available technologies, customer penetration rates, political factors, government, social and economic policy and the number of existing competitors.
We are required to obtain and maintain licenses in each of the countries where we offer mobile services. These licenses are limited in time and subject to renewal. For a list of our material telecommunications licenses and the expiration dates of those licenses, see “Our Business— Overview—Our Material Telecommunications Licenses.”
Our business activities in certain countries may be subject to price control regulation with respect to mobile termination rates (the tariff chargeable by operators for terminating calls on their mobile networks), and any price control regulation may impact our costs and revenues. In Chad, Senegal, Tanzania, El Salvador and Guatemala, mobile termination rates are determined through bilateral agreements between operators, while in DRC, Ghana, Rwanda, Mauritius, Bolivia, Colombia and Honduras, mobile termination rates are set ex ante by the regulatory authority.
In DRC, Rwanda, Bolivia and Colombia, a glide path for mobile termination rates has been defined by the relevant regulator. In Ghana and Tanzania, a glide path has been set for a reduction in mobile termination rates for 2013 to 2014 and 2013 to 2017, respectively.
In some markets at a more advanced stage of liberalization, regulators are revising telecommunications regulations to encourage further competition. Depending on the characteristics of the particular market, these regulations may include mobile number portability, which has been in operation in Ghana since July 2011 and in Chad since November 2012. In Paraguay, mobile number portability was introduced in November 2012 and in Colombia in August 2011. Mobile number portability is expected to be implemented in Tanzania within the next 12 to 24 months, and in Honduras in 2014.
We work with local regulators in each of the countries where we operate with a view to ensuring fair and efficient regulation that is appropriate to the particular characteristics of the relevant market. Regulatory compliance is carefully managed by each business, supported by its local legal and regulatory team. For a description of the risk of regulatory changes in our markets, see “Risk Factors—Risks Relating to Our Business and the Telecommunications Industry.”
The following is a summary of key mobile telecommunications regulations in the countries where the Millicom Group operates.
Central America Costa Rica
The Costa Rican government moved to a completely liberalized telecommunications market in the country in 2008. A new Telecommunications Law was enacted in June 2008 and the new regulatory body SUTEL was put in operation. SUTEL began authorizing new companies in 2009; however, it took a year to sign interconnection contracts, meaning that the first competitors were not fully interfaced until mid-2010. Poor regulatory mechanisms have made it difficult for new players to build their mobile infrastructure, creating delays in the roll-out schedule set by the regulator.
131 In 2010, the Constitutional Court in Costa Rica declared internet access to be a fundamental right. Since then, the government has developed a national broadband strategy, intended to foster economic growth through the deployment of broadband technology to remote areas and the promotion of innovation in the information technology sector.
El Salvador In 1996, the El Salvadoran government passed a telecommunications law designed to encourage competition in all areas of the sector and permitted foreign investment for the first time. The law governs all activities of the telecommunications sector, with particular emphasis on the regulation of the public telephone service, utilization of radio spectrum, access to essential resources and numbering plans. In 1998, El Salvador was the first country in Central America to privatize its telecommunications sector, resulting in foreign and local operators making significant investments in infrastructure improvement. This has resulted in considerable growth in the number of mobile connections, partly as a result of the underdeveloped fixed-line network with waiting time for connections often running to several years. Mobile operators have capitalized on this by offering fast, high quality service with nationwide coverage.
Guatemala Between 1996 and 1998, Guatemala implemented a liberalization and privatization program. The General Telecommunications Law was passed in 1996 and immediately opened the sector to competition, including the removal of all regulatory restrictions on prices and quality of service, and also prepared the ground for privatization of the incumbent operator Guatel, re-named Telgua, which took place in 1997. The law also created a regulatory authority, the Superintendencia de Telecomunicaciones (SIT), which is primarily responsible for the allocation of radio spectrum, resolving access disputes and administering the national numbering plan. Guatemala is trying to implement regulations that would require registration by all mobile services users. If the regulations are approved, the information that operators will be required to register includes users’ personal information, such as identity and location within the country. On December 5, 2012, new regulations came into effect which grant telecommunications license holders the right to apply for automatic extensions of all existing licenses by an additional 20 years. Because outmoded legislation relating to the development of cable networks provides the only regulatory framework for the sector, and there are no specific regulations pertaining to broadband, the provision of broadband services is largely unregulated.
Honduras The Comisión Nacional de Telecomunicaciones (Conatel) was created in October 1995 as the national regulatory authority and reports directly to the Ministry of Finance. It operates a licensing system for all telecommunication services in Honduras and is in charge of promoting the modernization and development of the sector by encouraging private investment, free competition and improved quality of service. Although Empresa Hondureña de Telecomunicaciones (Hondutel), the state owned national incumbent operator, has a monopoly over local and long-distance telephone services, the government has opened VAS and mobile telephone services to competition. Mobile operators have the right to carry international traffic for their own customer base. The General Telecoms Market Law of 1995, as amended, governs the provision of broadband services in Honduras. In 2011, Conatel promulgated regulations governing internet services and access to computer networks.
Nicaragua In 2005, the fixed-line sector was officially privatized and a competition law was issued in 2006; however, full liberalization of the fixed-line sector is pending. The mobile sector is already open
132 to full competition. Telecommunications in Nicaragua is regulated by the Nicaraguan Institute of Telecommunications and Postal Services (TELCOR). TELCOR’s functions include regulation, technical planning, monitoring, implementation and control of compliance with laws and regulations that govern installation, interconnection, operation and provision of telecommunications services and postal services. Since the creation of a competitive market there has been very little legislation specifically related to broadband.
South America
Bolivia
In 2011, a new Telecommunications Law passed in Bolivia whereby licenses (previously concessions) will have a 15-year duration and universal service obligations (fund) will be introduced, as well as tariff requirements and interconnection regulation, among others, all of which have yet to be enacted.
The new constitution guarantees the “previous concession rights.” One of the most relevant changes resulting from the new constitution was the elimination of the Sirese system, an autonomous government agency responsible for regulating the five basic utility sectors: telecommunications, electricity, transport, oil and gas and water. These functions were taken over by a government ministry. Regulations to require registration by users of fixed-line and mobile services came into force in 2010. Renegotiation of concession contracts are expected in the near future with a focus on coverage and quality of service.
Colombia
The Communications Ministry manages the radio electric spectrum and grants operating licenses, and a regulatory entity known as the Telecommunications Regulatory Commission (CRT) is in charge of issuing and controlling the regulatory framework applicable to the industry, promoting competition and ensuring that services are rendered efficiently. Colombia is a “calling party pays” country (meaning the originating calls pays the full cost of calling a mobile or fixed handset plus the full cost of terminating the call on the mobile network, while the recipient of an incoming call is not charged for that call; in “receiving party pays” countries, a party calling a mobile handset pays a standard price, comparable to the cost of calling a fixed hand-set, and the mobile user receiving the call pays the cost of terminating the call over the mobile part of the network, which is often the same price as if the mobile user was making an outgoing call).
Paraguay
The Telecommunications Law of 1995 was aimed at liberalizing the sector through the creation of the Comisión Nacional de Telecomunicaciones (Conatel), the regulatory authority of the telecommunications sector in Paraguay. Conatel has the power to reject a license renewal if the operator does not satisfy the minimum license requirements, if levels of service are poor, if the operator owes money to Conatel, or if the operator fails to comply with a network investment plan or other applicable regulation. Although the law succeeded in opening up the mobile and value-added sectors, including the internet service provider market, state-owned incumbent Compañia Paraguaya de Telecomunicaciones S.A. (Copaco) has retained its monopoly position in the fixed-line and international calls market; however, in 2009 Conatel terminated Copaco’s monoply over wholesale internet access.
In 2011, the Paraguayan government launched the National Telecommunications Plan, providing for a $150 million investment each year until 2015 in order to achieve, among other goals, 100% mobile-line teledensity penetration. The Plan sets the target for broadband access through mobile phones at 50% by 2015. Paraguay has also established a universal service fund designed to finance the provision of fixed line and basic internet access to underserved areas and funded by contributions from operators.
133 Africa
Chad
Chad’s telecommunications market is governed under Law 009/PR/98, which was passed in 1998 and establishes a basic framework for the regulation of wireless markets and services. The law also established a new regulatory body for the telecommunications sector, the Office Tchadien de Régulation des Télécommunications (OTRT). The OTRT enforces the rules on competition, mainly by instituting proceedings or applying sanctions against operators. Specifically, its role is to (i) approve the technical services on offer and the related rates, (ii) ensure that the financial, administrative and technical conditions for interconnection among authorization holders will not hinder provision of services, (iii) issue formal notification when laws or their subsidiary regulations are violated, and set a compliance deadline, and (iv) arbitrate disputes between authorization holders as well as disputes between authorization holders and service providers.
In August 2012, the OTRT reportedly fined the country’s three incumbent mobile operators, including our Chad operation, a combined figure of approximately XAF1.1 billion ($2.25 million), $1 million of which was assessed to Millicom Tchad, for failing to meet their previously stated quality of service commitments. OTRT alleged various breaches following a regulator-backed study. Our Chad operation contested the fine on the basis of, among other things, the way the fine was calculated and the process by which the penalties were determined. The decision is being contested in court. Despite this ongoing matter, in 2013, OTRT issued our Chad operation with another quality of service penalty of XAF300m ($600,000) for 2012, applying the same allegations being contested. We are contesting this fine in court on the same basis as our previous appeal. These penalties have not been paid.
Democratic Republic of Congo (DRC)
In DRC, telecommunications regulation dates back to 1956 with the introduction of Ordonnance Loi 64/378, which reportedly centered on telecommunications categorization. Twelve years later, the Office Congolais des Postes et Télécommunications (OCPT), the fixed line incumbent, was established in 1968 by Ordonnance Loi 68/475. Since there have been intermitten updates to the regulatory regime, most recently in 2002, with Loi 013/2002, which concerned the development of the telecommunications industry as a whole and mandated the creation of a universal service fund (USF), and Loi 014/2002, which detailed the establishment of an independent regulator for the sector, namely the Autorité de Régulation de la Poste et des Télécommunications (ARPTC). The legislation also created a new telecommunications operating company from the merger of Réseau National des Télécommunications par Satellite (Renatelsat, the country’s international satellite network operator) with the telecommunications operations of OCPT. Since then the ARPTC has made some progress towards the establishment of the USF, implementing a fee of 2% of annual sales on all telelcommunications operators (fixed and wireless) in 2006.
Ghana
The National Communications Authority Act, 2008 (Act 769) established the National Communication Authority (NCA) as the central body to license and regulate communications activities and services. The NCA was originally created to act as an independent regulator and is responsible for setting technical standards, licensing, overseeing tariffs, monitoring services, assigning spectrum and resolving disputes between operators. There are no limits on foreign ownership of companies; however the NCA’s application guidelines for certain licenses (such as the broadband wireless access license) require applicants to have, at least, thirty percent Ghanaian ownership.
In February 2010, in an attempt to protect mobile users, the NCA began a SIM registration scheme, which aims to identify all SIM users and subscribers of mobile networks. Under the new policy, so-called “already active” SIMs will no longer be available to buy, and instead SIM activation will be delayed until the customer has provided personal details backed by an official
134 national identity document. Existing mobile phone owners must also follow this procedure, and any phone or device with an unregistered SIM will be unable to send or receive calls or data. Once users are registered, if their phone is stolen or lost they can get a new SIM card issued to them with the same number. Following the March 3, 2012 deadline, the NCA confirmed that more than 1.5 million mobile SIM cards had been deactivated and approximately 16 million cards were registered correctly.
Mauritius
The Information and Communication Technology Authority (ICTA) is the telecommunications regulator in Mauritius. It was established in 2001 by the Information and Communication Technologies Act. The ICTA regulates the telecommunications sector through a series of directives that it is empowered to enforce. The ICTA’s main duties in the telecommunications sector are to ensure industry compliance with standards and to determine technical standards, including the protection of public health and safety. In May 2008, the ICTA implemented the Telecommunications Directive (1 of 2008) to reduce interconnect tariffs to the state owned fixed- line infrastructure.
Rwanda
The enabling framework for the liberalization of the telecommunications sector in Rwanda was put in place by the current Telecommunications Law, which was passed in 2001. The Telecommunications Law established RURA, the regulator, granting it the authority to regulate telecommunications and setting up a regulatory board to carry out that function. Rwanda currently has three GSM licenses in force. The overall aim of the telecom reform policy was to increase universal affordable access to telecommunications in the interests of social and economic development.
In February 2013, Rwanda introduced mandatory SIM card registration as an anti-crime measure. The registration period runs from February 4, 2013 until July 31, 2013, during which time all prepaid mobile subscribers in Rwanda are required to register their SIM card. Those who have not registered their SIM card by the deadline will be disconnected.
Senegal
The Agence de Régulation des Télécoms et Postes is responsible for licensing, spectrum management, tariff approval, interconnection rates and frequency allocation. The 2001 legislation that created the agency also paved the way for opening up the rural telephone market to private investment as a means of achieving universal service and connecting villages beyond the reach of Sonatel the incumbent operator. It also articulated a series of guiding principles for the sector, namely transparency, fair competition, equal treatment of end users, operators’ contributions to the Universal Access Fund, and obligations on network interconnection.
In October 2011, then-President Abdoulaye Wade proposed a new law that, if passed, appeared to require that the state have a minimum 35% share in all telecommunications companies operating in the country. President Wade’s proposed law, which came in the wake of his August threat to renationalize Sonatel by buying out FT-Orange seemed to evaporate following the president’s ousting in the March 2012 election.
Tanzania
The Tanzania Communications Regulatory Authority (TCRA) is the country’s communications regulator. Tanzania’s telecommunications markets are governed under the broad remit of the Electronic and Postal Communications Act, 2010 (Act No. 3/10) as amended, (the EPCA) enacted in March 2010. The EPCA is designed to provide a comprehensive regulatory regime for electronic communications service providers and postal communications service providers; to establish the
135 Central Equipment Identification Register for registration of detachable SIM cards and built-in SIM cards in mobile phones; to provide for duties of electronic communications and postal licensees, agents and customers, content regulation, to regulate competition and practices; to provide for offenses relating to electronic communications and postal communications; and to provide for transitional provisions, consequential amendments and other related matters.
Under the EPCA, domestic telecommunications companies will (theoretically) be forced to offer shares to the public and will also be required to list with the Dar es Salaam Stock Exchange (DSE) within three years of it entering into force; however, regulations setting forth listing procedures and minimum shareholding requirements have yet to be promulgated.
The Electronic and Postal Communications (Interconnection) Regulations are applicable to all network service providers wishing to terminate traffic onto operators’ networks. Under these rules adopted in 2011, interconnect agreements are required to be transparent and non- discriminatory, must be formulated on cost-based interconnection charges, and must provide an adequate level of quality of service. New interconnection rates and a glide path for five years became effective on March 1, 2013. In addition, the government has been carrying out preparations activities for implementing further privatization.
In 2008, the state announced plans to register all mobile phone numbers to curb mobile phone theft and related crime. Tanzania launched a mobile SIM registration scheme in 2009, under which mobile phone users in the country must register their SIM card and provide documents confirming their identity before they can buy a SIM card. By March 2010, approximately 10.2 million people had successfully registered their SIM cards. SIM card registration is now a mandatory legal requirement.
136 Major shareholders and related party transactions Principal shareholders and corporate structure
As of March 31, 2013, the principal shareholders with an interest in the shares of MIC S.A. were as follows:
Number of Percentage Name of Shareholder shares of Shares (unaudited) Investment AB Kinnevik ...... 37,835,438 37% Stenbeck Family ...... 874,542 1%
MIC S.A. is not aware that any person other than the holders listed above have voting and investment power with respect to these shares. The holders listed above have the same voting rights as all other holders of MIC S.A.’s common shares.
Related party transactions
Millicom Group
The Millicom Group conducts transactions with its principal shareholder, Investment AB Kinnevik and subsidiaries, and with tower companies in which it holds equity interests in Ghana, DRC, Tanzania and Colombia, as discussed below under “Helios Towers and American Towers.” Transactions with related parties are conducted on normal commercial terms and conditions. There are no loans made by the Millicom Group to or for the benefit of these related parties.
Kinnevik
MIC S.A.’s principal shareholder is Investment AB Kinnevik, which is a Swedish holding company with interests in seven comprehensive business sectors: Telecom & Services, Online, Media, Microfinancing, Paper & Packaging, Agriculture and Renewable Energy. During 2010, 2011 and 2012, Kinnevik did not purchase any MIC S.A. shares.
During 2010, 2011 and 2012, the Millicom Group purchased services from Kinnevik subsidiaries including fraud detection, procurement and professional services, for an aggregate amount of $4.0 million, $6.0 million and $8.0 million, respectively.
Subsidiaries of MIC S.A.
Certain of the Millicom Group’s operating companies, including its operations in DRC, Ghana, Senegal and Tanzania, have entered into support services agreements with MIC S.A. under which the Millicom Group provides the operating companies with financing and certain technical and management services, such as business support services (including human resources support and legal, IT and marketing services) and advisory services related to the construction, installation, operation, management and maintenance of its networks. The operating companies pay a fee under these agreements derived from MIC S.A.’s cost of providing the services and are not all on terms that could be obtained from independent third parties.
Additionally, under trademark license agreements, our operations in Honduras, El Salvador, Bolivia, DRC, Ghana, Senegal and Tanzania pay a trademark license fee of up to 5% of their monthly net sales or monthly revenue to MIC S.A. for a non-exclusive license to use the Tigo trademark and/or Millicom name. The Indenture permits us to, and we plan to, enter into similar agreements in respect of our Ghana and Chad operations. For more information, see “Description of the Notes—Certain Covenants—Transactions with Affiliates.” These licenses are non-transferable and continue for an indefinite period unless terminated pursuant to the terms of the agreement.
137 Helios Towers and American Towers
Overview
In 2010, we determined that, in certain markets, owning passive infrastructure, such as mobile telecommunications towers, no longer conferred a competitive advantage. We decided, where possible, to outsource or share towers with other operators in order to bring additional benefits to our customers in the form of an even higher quality of service and coverage, while also improving the return on invested capital for our shareholders. In 2010 and 2011, we signed sale and lease-back agreements with associate tower management companies in DRC, Ghana, Tanzania and Colombia whereby we sold a significant amount of our towers in those countries and leased back a dedicated portion of each tower to house our network equipment in exchange for cash and investments in the tower companies (e.g., tower operation and management services). Most of the tower transfers under these agreements have been completed, with the remaining towers expected to be transferred during 2013, for which we will receive a small number of additional tower company shares. The initial terms of the leases are 12 years (with options to renew for four further periods of five years each).
In January 2010, our operation in Ghana signed a sale and purchase agreement, as well as a lease-back agreement in June 2010, with the associate tower company Helios Towers Ghana, for most of its tower sites. The agreement marked our first outsourcing of passive infrastructure and is consistent with our strategy of improving both our capital and operating efficiency by focusing on our core activities. The Ghana agreement was followed by similar arrangements with associate tower companies in Tanzania and DRC in December 2010 and in Colombia in July 2011. Together with the lease-back agreements, our operations in Ghana, DRC, Tanzania and Colombia entered into “build-to-suit” agreements to accommodate our growth and to enable the construction of additional equipment and towers. The transferred towers may be shared with networks other than the Millicom Group’s in each country (except in Ghana, as provided under the terms of the lease).
The Millicom Group retained an approximate 40% equity interest in each of the tower companies.
The Millicom Group has future finance lease commitments in respect of the tower companies (see “Description of Other Indebtedness—Indebtedness by Operation”). Annual payments under the finance lease agreements depend on the timing of the transfer of towers to the tower companies.
The following is a description of the material terms of the agreements with respect to the sale and lease-back of the tower assets by country.
Ghana
In January 2010, Millicom Ghana signed a sale and purchase agreement, as well as a lease-back agreement in June 2010, with Helios Towers Ghana, a direct subsidiary of Helios Towers Africa, for most of its tower assets, almost all of which were transferred to Helios Towers Ghana during 2010 and 2011. Approximately 272 towers were transferred in June 2010. As of April 2, 2013, Millicom Ghana had transferred approximately 706 sites to Helios Towers Ghana.
The sale and purchase agreement in Ghana entitles Millicom Ghana to a total of $50 million in consideration for the sale of towers to Infraco, comprising $30 million in cash and 200,000 shares in the tower company (representing approximately 40%). The agreement provides that upon transfer of a tower site, Millicom Ghana must pay to the tower company the rent remaining payable on the site for that calendar quarter. Millicom Ghana has the right to appoint at least one director to the tower company, so long as Millicom Ghana’s shareholding in the tower company remains above 10%. The agreement may not be assigned without consent, except for a transfer to one of Millicom Ghana’s subsidiaries or an assignment within the tower companies group.
138 A Master Lease Agreement governs the lease-back of the towers. Millicom Ghana may withdraw from the lease agreement with respect to a tower site either: (i) for cause (failure to obtain or maintain a government approval necessary for it to conduct its operations at the relevant tower site) or (ii) if it decides that it no longer wishes to use a non-shareable tower site (in which case there are restrictions on the aggregate number of towers from which it may withdraw), by providing 120 days’ prior written notice. Further, upon withdrawal with respect to any non- shareable tower sites, Millicom Ghana must pay the tower company the net present value of the rent payments due under the underlying lease for the relevant tower site for the remaining portion of the then-current term.
DRC
In December 2010, Oasis signed a sale and purchase agreement and a lease-back agreement with Helios Towers DRC, a direct subsidiary of Helios Towers Africa, to transfer 729 of its tower sites, of which 685 were transferred by April 2, 2013. The remaining sites are expected to be transferred in 2013.
The sale and purchase agreement in DRC entitles Oasis to a total of $71.5 million in consideration for the sale of towers to Infraco, comprising $41.5 million in cash and 30,000 shares in the tower company (representing approximately 40%). This represents consideration of $159,243 for each tower site that is subject to the agreement. The agreement provides that upon transfer of a tower site, Oasis must pay to the tower company the rent remaining payable on the site for that calendar quarter. The agreement may not be assigned without consent, except for a transfer to one of Oasis’s affiliates or an assignment within the tower companies group.
A Master Lease Agreement governs the lease-back of the towers. Oasis may withdraw from the lease agreement with respect to a tower site either: (i) for cause (failure to obtain or maintain a government approval necessary for it to conduct its operations at the relevant tower site) or (ii) if it decides that it no longer wishes to use the tower site (in which case there are restrictions on the aggregate number of towers from which it may withdraw), by providing 120 days’ prior written notice.
In addition, on October 18, 2011, Oasis extended a $38 million financing facility to Helios Towers DRC (of which $30 million represents principal). Helios Towers Africa has guaranteed this financing facility, which is secured by a pledge of Helios Towers Africa’s shares in Helios Towers DRC. Outstanding amounts under this financing facility bear interest at LIBOR + 7.5% per annum until October 17, 2012; thereafter, interest increases by 100bps each year until the maturity date of October 17, 2015. Interest is either repayable semi-annually or capitalized.
Tanzania
In December 2010, MIC Tanzania signed a sale and purchase back agreement with Helios Towers Tanzania, a direct subsidiary of Helios Towers Africa, for 1,020 of its tower sites, of which 518 were transferred to Helios Towers Tanzania in September 2011 and 989 sites had been transferred as of April 2, 2013. The remaining sites are expected to be transferred during 2013. A lease agreement between the same parties was signed in September 2011.
The sale and purchase agreement in Tanzania entitles MIC Tanzania to a total of $134.5 million in consideration for the sale of towers to Infraco, comprising $81 million in cash and 53,800,200 shares in the tower company (representing approximately 40%). This represents consideration of $166,050 for each tower site that is subject to the agreement. At each closing, as defined in the agreement, the tower company must pay six times the annualized net rent payable on each transferred lease. The agreement provides that upon transfer of a tower site, MIC Tanzania must pay to the tower company the rent remaining payable on the site for that calendar quarter. The agreement may not be assigned without consent, except as security under a lien by Infraco, or a transfer within the tower companies group.
139 A Master Lease Agreement governs the lease-back of the towers. MIC Tanzania may withdraw from the lease agreement with respect to a tower site either: (i) for cause (failure to obtain or maintain a government approval necessary for it to conduct its operations at the relevant tower site) or (ii) if it decides that it no longer wishes to use the tower site (in which case there are restrictions on the aggregate number of towers from which it may withdraw), by providing 120 days’ prior written notice.
In addition to the 1,020 tower sites sold to Helios Towers Tanzania and leased back by MIC Tanzania, pursuant to the agreements described above, MIC Tanzania is in the process of selling 138 “early build-to-suit” sites to Helios Towers Tanzania. These are sites that Helios Towers Tanzania agreed to build for MIC Tanzania pursuant to a build-to-suit agreement; however, as Helios Towers Tanzania was not ready to build the towers by early 2012, MIC Tanzania agreed to build the sites, sell them to Helios Towers Tanzania at cost (approximately $20 million) and lease them back from Helios Towers Tanzania. 115 of these sites were transferred in 2012, with the remaining sites expected to be transferred in 2013. Helios Towers Tanzania has not yet paid for the sites. The sale agreement allows payment to be delayed (with interest) until the tower company obtains access to local financing. We expect to receive payment by the end of the second quarter of 2013.
Colombia
In July and December 2011, Colombia Móvil signed a sale and purchase agreement and lease- back agreement, respectively, with American Tower International, Inc., a subsidiary of American Towers, to transfer most of its tower sites. By April 2, 2013, approximately 68% of the towers under this agreement had been transferred and the remaining towers are expected to be transferred by mid-2013.
The sale and purchase agreement in Colombia entitles Colombia Móvil to a total of COP$317 billion (approximately $178 million) in cash in consideration for the sale of towers to Infraco and 12,000 shares in the tower company (representing approximately 40%). This represents consideration of COP$149.3 million (approximately $84,000) for each tower site that is subject to the agreement. Cash consideration is to be held in an escrow account until the transfer of each tower site, when the consideration due for that transfer will be released. At each closing, Infraco is liable to pay the cost of converting the agreement. The agreement may not be assigned without consent, except that Infraco may assign to an affiliate of the tower company or, if Colombia Móvil (or its affiliates) elect not to take shares in the tower company, to any other affiliate, provided that such affiliate agrees in writing to be bound by the terms of the agreement. After any assignment, Infraco will remain liable under the agreement. At the same time as the purchase agreement, Colombia Móvil offered its local partners a call option giving them the opportunity to acquire up to half of Colombia Móvil’s shareholding in the new tower company. The option expires in July 2013.
A Master Lease Agreement governs the lease-back of the towers including withdrawal, permitted assignments of the leases and swap rights of up to 2% of leased sites. Colombia Móvil may withdraw from the lease agreement with respect to a tower site for cause (failure to obtain or maintain a government approval necessary for it to conduct its operations at the relevant tower site), by providing 60 days’ prior written notice. If a withdrawal is carried out before the twelfth anniversary of the agreement, the rent due through the twelfth anniversary will still be payable.
Tower asset leases to UNE EPM Telecom
Colombia Móvil leases a portion of its tower assets to its shareholder and our partner, UNE EPM Telecom, under standard finance leases.
140 The following transactions were conducted with related parties during 2010, 2011 and 2012:
2010 2011 2012 (U.S. dollars in millions) Purchases of goods and services (Kinnevik) ...... 4 6 8 Lease of towers and related services (Associates) ...... 9 22 107 Gain on sale of towers (Associates) ...... 7 54 16 Revenue from lease of towers (UNE) ...... – – 11 Interest income (Helios Towers DRC loan) ...... – – 2 Total ...... 20 82 144
As of December 31, 2010, 2011 and 2012, the Millicom Group had the following balances with related parties:
2010 2011 2012 (U.S. dollars in millions) Finance lease payables ...... 41 127 188 Other accounts payable ...... 1 10 12 Total ...... 42 137 200 Receivables from sale of towers ...... – 77 – Loan to Helios Towers DRC ...... – – 32 Total ...... –7732
141 Management Board of directors
MIC S.A.‘s directors are as follows:
Year first Name Position Elected Age Mr. Allen Sangines-Krause(1)(2) ...... Chairman 2008 53 Ms. Mia Brunell Livfors(2) ...... Member 2007 47 Ms. Donna Cordner ...... Member 2004 56 Mr. Paul Donovan ...... Member 2009 54 Mr. Omari Issa ...... Member 2010 66 Mr. Kim Ignatius ...... Member 2011 56 Mr. Dionisio Romero Paoletti ...... Member 2012 47 Mr. Anders Kronborg(2) ...... Member 2012 49 (1) Appointed as Chairman on May 25, 2010. (2) Not independent from major shareholders (Investment AB Kinnevik).
MIC S.A. has announced the nomination of three new non-executive directors for election to MIC S.A.’s board of directors at the general meeting of shareholders scheduled for May 28, 2013. The director-nominees are Mr. Ariel Eckstein, Mr. Lorenzo Grabau and Mr. Alejandro Santo Domingo, with Messrs. Kronborg and Paoletti and Ms. Cordner announcing that they will not stand for re- election as directors.
Mr. Allen Sangines-Krause, Chairman, Non-executive Director and Chairman of the Compensation Committee. Mr. Sangines-Krause was elected to the Board of MIC S.A. in May 2008 and appointed as Chairman in May 2010. He worked for Goldman Sachs between 1993 and 2007, working in a variety of senior positions from Chief Operating Officer for Latin America based in Mexico City and New York and most recently as Managing Director out of London. Prior to joining Goldman Sachs, Mr. Sangines-Krause was with Casa de Bolsa Inverlat, in Mexico, and before that he was a Founding Partner of Fidem, S.C., a Mexican investment bank, which was acquired by Casa de Bolsa Inverlat in 1991. Mr. Sangines-Krause currently sits on the Board of Investment AB Kinnevik and is Chairman of Rasaland, a real estate investment fund. He is a member of the Council of the Graduate School of Arts and Sciences of Harvard University. He has a Ph.D. in Economics from Harvard University and a degree in Economics from the Autonomous Technological Institute of Mexico.
Ms. Mia Brunell Livfors, Non-executive Director, Member of the Compensation Committee and Chairman of the CR Committee. Ms. Brunell Livfors was elected to the Board of MIC S.A. in May 2007. From August 2006, Ms. Brunell Livfors has been President and Chief Executive Officer of Investment AB Kinnevik, a Swedish public company managing a portfolio of long-term investments in a number of public companies such as the Millicom Group. Ms. Brunell Livfors joined Kinnevik-owned company Modern Times Group MTG AB in 1992, and was appointed Chief Financial Officer in 2001. As Chief Financial Officer, Ms. Brunell played a central role in MTG’s development. Currently, Ms. Brunell Livfors is a member of the board of directors of Korsnäs AB, Tele2 AB, CDON AB, Metro International S.A., Modern Times Group (MTG), Hennes & Mauritz AB (H&M) and BillerudKorsnäs AB. She studied Business Administration at Stockholm University.
Ms. Donna Cordner, Non-executive Director and Member of the Audit Committee and CR Committee. Ms. Cordner was elected to the Board of MIC S.A. in May 2004. She was formerly a Managing Director and Global Head of Telecommunications and Media Structured Finance at Citigroup. She has also held senior management positions at Société Générale and ABN Amro Bank N.V. in the United States and Europe, including as Director of ABN’s Latin American Telecommunications Project Finance and Advisory Group. Until July 2005, Ms. Cordner was the Chief Executive Officer of HOFKAM Limited, which is the largest rural microfinance company in Uganda, and continues to advise HOFKAM as a consultant. From March 2007 until July 2009, she held senior positions at Tele2 AB, including Executive Vice President of Corporate Finance and
142 Treasury for Tele2 AB and Chief Executive Officer for Tele2 Russia. Ms. Cordner currently serves on the boards of Carlsberg Group and Vosges Chocolate. She has a B.S. in Foreign Service from Georgetown University and a Master’s degree in International Political Economy from the University of South Carolina.
Mr. Paul Donovan, Non-executive Director and Member of the Audit Committee. Mr. Donovan was elected to the Board of MIC S.A. in May 2009. From July 2009 to October 2012, he was Chief Executive Officer of Eircom Group Ltd. Prior to that, Mr. Donovan was Chief Executive, EMAPA Region for the Vodafone Group until 2008. Mr. Donovan’s background includes a decade in fast- moving consumer goods before he moved into the technology sector, principally with BT and Vodafone. His career with Vodafone began in 1999 and from 2004 he oversaw Vodafone’s operations in subsidiaries in Eastern Europe, the Middle East and Asia Pacific. Africa, the United States, India and China were added to his remit in 2006. As part of his role, he sat on the boards of numerous subsidiaries and joint ventures during this period. He holds a B.A. (with Honors) from University College, London and an MBA from the Bradford University Management Centre with a specialization in Finance and Business Policy.
Mr. Omari Issa, Non-executive Director and Member of the Audit Committee and Compensation Committee. Mr. Issa was elected to the Board of MIC S.A. in May 2010 and is the CEO of Investment Climate Facility for Africa. He is a Tanzanian citizen and is responsible for managing the ICF’s seven-year program to improve Africa’s investment climate and remove barriers to growth. Mr. Issa has extensive business experience in the public and private sectors, having worked in both Africa and abroad. He has firsthand experience of the realities of doing business in Africa, having previously worked as Executive Director and Chief Operating Officer of Celtel International, where he played an instrumental role in managing the company’s growth and expansion across the continent. Prior to working at Celtel, Mr. Issa spent 14 years with the IFC and six years with the World Bank. He has a B.S. (with Honors) from the Polytechnic of Central London, and an MBA from Columbia University, New York.
Mr. Kim Ignatius, Non-executive Director and Chairman of the Audit Committee. Mr. Ignatius was elected to the Board of MIC S.A. in May 2011. He is the Chief Financial Officer of Sanoma Corporation, the European media group, which he joined in 2008. Previously, Mr. Ignatius was Executive Vice President and Chief Financial Officer of TeliaSonera AB between 2003 and 2008 and Executive Vice President and Chief Financial Officer of Sonera Oyj between 2000 and 2002. Before joining Sonera, Mr. Ignatius was Group CFO and a member of the Executive Board of Tamro Oyj, a leading Swedish pharmaceutical distributor, between 1997 and 2000. From 1984 to 1996 he worked for Amer Group in a variety of finance and general management roles in both North America and Europe. He started his career with Oy Hanke-Palsbo Ab and Fruehauf Corporation in a series of finance roles. Mr. Ignatius is currently on the board of Fortnum Corporation, where he serves as Chairman of the Audit and Risk Committee. He has a B.Sc Economics from the Aalto University School of Business in Helsinki.
Mr. Dionisio Romero Paoletti, Non-executive Director. Mr. Paoletti was elected to the Board of MIC S.A. in May 2012. He is Chairman and President of the Romero Group, a Peruvian business group founded in the late 1800s and today comprising numerous companies across a wide range of sectors from consumer products to textiles, logistics, infrastructure, trading and services. The Romero Group also has a controlling interest in Credicorp (BAP), the largest financial conglomerate in Peru which is listed on the New York and Lima Stock Exchanges. Mr. Paoletti developed his executive career within several companies in the Romero Group and succeeded his father as Chairman of the Romero Group in 2001. He has served as a Board Member of Credicorp and Banco de Crédito del Peru since 2003 and as Chairman since 2009. He holds a Bachelor’s degree in Economics from Brown University and an MBA from Stanford University.
Mr. Anders Kronborg, Non-executive Director and Member of the Audit Committee. Mr. Kronborg was elected to the Board of MIC S.A. in December 2012. He started his career with the Kinnevik group in 2007 when he was appointed Chief Financial Officer of Metro International S.A., an international free newspaper group. Mr. Kronborg has been the Chief
143 Operating Officer of Investment AB Kinnevik since May 2012, where his focus has been on the operating and financial development of Kinnevik’s portfolio of companies. Prior to joining Metro, Mr. Kronborg gained extensive experience from working in the financial operations of media businesses, including serving as the Chief Financial Officer of Danish Broadcaster TV2, as well as numerous executive positions with Danish newspaper group Berlingske Media A/S. Mr. Kronborg serves on a number of boards of unlisted Kinnevik subsidiaries and unlisted Metro subsidiaries. Mr. Kronborg has a Master’s degree in Economics from the University of Copenhagen.
Board practices
MIC S.A.‘s board of directors has developed and continuously evaluates its work procedures in line with the corporate governance rules of the Swedish Code regarding reporting, disclosure and other requirements applicable to listed companies.
MIC S.A.‘s board of directors has adopted procedures to divide work between MIC S.A.‘s board of directors and the President and Chief Executive Officer. The Chairman has discussions with each director regarding the work procedures and the evaluation of MIC S.A.‘s board of directors’ work. The other members of MIC S.A.‘s board of directors evaluate the performance of the Chairman each year. MIC S.A.‘s board of directors also evaluates yearly the performance of the CEO. The main task of MIC S.A.‘s board of directors, committees (Audit, Compensation and CR) is to work on behalf of MIC S.A.‘s board of directors within their respective areas of responsibility. From time to time, MIC S.A.‘s board of directors delegates authority to an “ad hoc” committee so that it may resolve a specific matter on its own without having to go before the full board for approval.
The Nomination Committee was previously a committee of MIC S.A.‘s board of directors; however, in order to remain compliant with the Swedish Code, MIC S.A.‘s shareholders decided on a new procedure to appoint the members of the Nomination Committee. The majority of the members of the Nomination Committee now may not be directors or employees of MIC S.A. A Nomination Committee comprised of significant shareholders of MIC S.A. was formed in October 2012 in accordance with the resolution adopted by the 2012 Annual General Meeting. The Nomination Committee must consist of at least three members, with a majority representing the significant shareholders of MIC S.A. and is currently comprised of Cristina Stenbeck, on behalf of Investment AB Kinnevik, Annika Andersson, on behalf of Swedbank Robur funds, and Bill Miller, on behalf of J.M. Hartwell L.P. No remuneration is paid to the members of the Nomination Committee; however, MIC S.A. bears the committee’s reasonable expenses.
MIC S.A.‘s board of directors has adopted a corporate policy manual, the Millicom Group’s central reference for all matters relating to its corporate governance policy. Regional policies that are more stringent or detailed than those set out in the corporate policy manual are adopted as necessary. The Millicom Group’s Code of Ethics is a part of the corporate policy manual. All senior managers and members of MIC S.A.‘s board of directors must sign a statement acknowledging that they have read, understood and will comply with the Code of Ethics.
The work of MIC S.A.‘s board of directors is divided between the board and its principal committees:
• the Audit Committee;
• the Compensation Committee;
• the Corporate Responsibility (CR) Committee; and
• the Nomination Committee.
Directors’ Service Agreements. None of MIC S.A.‘s directors have entered into service agreements with the Millicom Group or any of its subsidiaries providing for benefits upon termination of their respective directorships.
144 Remuneration of directors The remuneration of the members of MIC S.A.‘s board of directors comprises an annual fee. Between May 2006 and May 2010, directors’ remuneration also included share-based compensation (restricted shares) and until May 2006, directors were issued share options. Director remuneration is proposed by the Nomination Committee and approved annually by the shareholders. Total director remuneration, including remuneration paid to the Chairman, in 2010, 2011 and 2012 was $521,000, $900,000 and $997,257, respectively. Remuneration paid to the Chairman in 2010, 2011 and 2012 was $77,000, $203,000 and $209,599, respectively. Remuneration figures include cash and share-based compensation. Cash compensation was converted from Euros to U.S. dollars at average exchange rates for each year. The number of shares and share options beneficially owned by MIC S.A.‘s directors on December 31, 2012 was as follows: 2,318 shares by the Chairman, 18,950 shares by the other members of the board and 10,000 share options by the other members of the board.
Senior management and employees The Millicom Group’s senior management are as follows: Name Position Age Hans-Holger Albrecht ...... President and CEO 49 Mario Zanotti ...... Senior Executive Vice President of Operations 51 François-Xavier Roger ...... Senior Executive Vice President and CFO 50 Regis Romero ...... Executive Vice President Africa and South America 42 Jo Leclère ...... Executive Vice President of Human Resources 47 Xavier Rocoplan ...... Executive Vice President and CTO 39 Marc Zagar ...... Executive Vice President Controlling and Analytics 47 Anders Nilsson ...... Executive Vice President Commerce and Services 45 Martin Lewerth ...... Executive Vice President Cable and Digital Media 39 Pierre-Yves Bredel ...... Director Treasury and Corporate Finance 44
Hans-Holger Albrecht, President and Chief Executive Officer. Hans-Holger Albrecht was appointed President and Chief Executive Officer in July 2012 with effect from October 31, 2012. He was a member of MIC S.A.‘s board of directors from May 2010 until July 2012. Before joining the Millicom Group, he was the President and CEO of Modern Times Group MTG AB, a position he held starting in August 2000. During this period, MTG’s broadcasting operations expanded strongly from its core Nordic and Baltic regions to become one of the leading commercial broadcasters in Europe. Before joining MTG in 1997, he worked for Daimler-Benz and for the Luxembourg-based media group CLT, where he was responsible for all television activities and for business development in Germany and Eastern Europe. Hans-Holger Albrecht has been co- Chairman of the board of directors of CTC Media, Inc., the largest commercial television broadcaster in Russia, of which MTG is the largest shareholder, and is also a member of the board of directors of the International Academy of Television Arts & Sciences. Hans-Holger Albrecht studied at the University of Freiburg in Germany, and at the University of Bochum, Germany, where he received a Master of Laws degree (LL.M). He also graduated with a Ph.D from Yale University in the USA. Mario Zanotti, Senior Executive Vice President of Operations. Mario Zanotti was appointed Senior Executive Vice President of Operations in December 2012. Previously, he served as COO of Categories and Global Sourcing from January 2012, Chief of Latin America from 2008 and Head of Central America from 2002. Mr. Zanotti joined the Millicom Group in 1992 as a General Manager of Telecel in Paraguay. In 1998, he became Managing Director of Tele2 Italy and in 2000 he was appointed Chief Executive Officer of YXK Systems. Before joining the Millicom Group he worked as an electrical engineer at the Itaipu Hydroelectric Power Plant and later as Chief Engineer of the largest electrical contractor company in Paraguay. He has a degree in Electrical Engineering from the Pontificia Universidade Catolica in Porto Alegre, Brazil and an MBA from INCAE and the Universidad Catolica de Asuncion, Paraguay.
145 François-Xavier Roger, Senior Executive Vice President and Chief Financial Officer. François-Xavier Roger joined the Millicom Group in September 2008 from Groupe Danone where he served as Vice President Corporate Finance from 2006 and previously as Chief Financial Officer for Danone Asia from 2000 to 2005. Prior to that, he worked at Sanofi Aventis and at Hoechst Marion Roussel (now Sanofi) where he held finance positions for Hoechst in Asia, Africa and Latin America. He has an MBA from the Ohio State University, with a specialization in Marketing, and has a Master’s degree in Major Accounting from Audencia Business School in France.
Regis Romero, Executive Vice President Africa and South America. Regis Romero was appointed Executive Vice President Africa and South America in December 2012. Previously, he served as COO Global Markets from January 2012 and Chief of Africa from 2008. He has been with the Millicom Group since 1998, serving first as Commercial Manager in Bolivia, then as Chief Operating Officer in Paraguay and as Co-Head of Africa from 2006. Prior to joining the Millicom Group, Mr. Romero worked as investment consultant for Interamerican Development Bank in Paraguay. He has a Bachelor’s degree in Business Administration from National University, California. He also holds a Master’s degree in Business Management from EDAN in Asuncion, Paraguay.
Jo Leclère, Executive Vice President of Human Resources. Jo Leclère was appointed Executive Vice President of Human Resources in December 2012. Previously, he served as Chief HR Officer of the Millicom Group from 2011. He joined the Millicom Group in February 2009 as Head of Reward & Performance, having previously been VP Operations Europe at NorthgateArinso, a global HR consulting and outsourcing provider. Prior to that, he was HR Services Director at PricewaterhouseCoopers. He has a Master’s degree in Law from KU Leuven in Belgium, a postgraduate degree in Tax from Fiscale Hogeschool in Belgium and a Bachelor’s degree in Economics from KU Leuven.
Xavier Rocoplan, Executive Vice President and Chief Technical Officer. Xavier Rocoplan was appointed Executive Vice President and Chief Technical & IT Officer in December 2012. Previously, he served as Chief Global Networks Officer from April 2012. Mr. Rocoplan joined the Millicom Group in 2000 as CTO in Vietnam and then became CTO for the South East Asian cluster (Cambodia, Laos and Vietnam). In 2004, he was appointed CEO of Paktel in Pakistan, a role he held until 2007. During this time, he launched Paktel’s GSM operations and led the process that ended with the disposal of the business in 2007. After the Millicom Group’s exit from Asia, Mr. Rocoplan was appointed to head the New Corporate Business development unit where he managed the Tower Assets Monetization program, which led to the creation of tower companies in Ghana, DRC, Tanzania and Colombia. He has Master’s degrees from Ecole Nationale Supérieure des Télécommunications de Paris and from Université Paris IX Dauphine.
Marc Zagar, Executive Vice President Controlling and Analytics. Marc Zagar was appointed EVP of Controlling and Analytics in December 2012, with effect from February 2013. Prior to joining the Millicom Group, Mr. Zagar was EVP Finance at MTG, a role he held since October 2011. He joined MTG in 2001 as Business Area Controller of Viasat broadcasting. In March 2006, he was appointed Chief Operating Officer for MTG’s broadcasting businesses. Prior to joining MTG, Mr. Zagar worked for over 10 years in various financial management positions within Vivendi Universal, having started his career with Steelcase Strafor. He has a Bachelor’s degree from CESEM Business School in Reims, France and a Master’s degree from Université Dauphine in Paris.
Anders Nilsson, Executive Vice President Commerce and Services. Anders Nilsson was appointed EVP of Commerce and Services in December 2012, with effect from January 2013. He oversees the Mobile Financial Services business and the newly created Online division. Prior to joining the Millicom Group, Mr. Nilsson was EVP of Central European Broadcasting at MTG, responsible for free- and pay-TV operations in the Baltics and free-TV operations in the Czech Republic, Bulgaria and Hungary. Mr. Nilsson joined MTG in 1992 and successfully headed the group’s Radio and Publishing businesses before serving as MTG’s COO and Head of MTG Sweden. Between 2008 and 2010, Mr. Nilsson was also CEO of MTG’s Online business area which was spun off in 2010 into what is now CDON.
146 Martin Lewerth, Executive Vice President Cable and Digital Media. Martin Lewerth was appointed EVP of Cable and Digital Media in December 2012. Previously, he was Executive Vice President Pay TV and Technology at MTG. Mr. Lewerth joined MTG in 2001 where he served in various management positions including CTO for MTG, CEO for the IPTV distribution, business area manager for the Pay TV business and manager responsible for the group’s online strategy and operations. Before joining MTG, Mr. Lewerth worked for the management consulting firm Applied Value and the Swedish company SKF Group. He holds a M.Sc. from Chalmers University of Technology in Sweden.
Pierre-Yves Bredel, Director Treasury and Corporate Finance. Pierre-Yves Bredel joined the Millicom Group in October 2010. Prior to joining the Millicom Group, he held various management positions during his 17 years at Procter & Gamble in France, Belgium and Switzerland. His last position was Finance Director of Snacks and Pet Care for Procter & Gamble’s Europe, Middle East and Africa businesses. Mr. Bredel holds a Master’s degree in Engineering from École Centrale Paris and a Master of Science in Economics from the London School of Economics.
Remuneration of Officers
The remuneration of MIC S.A.‘s officers comprises an annual base salary, an annual bonus, share- based compensation, social security contributions, pension contributions and other benefits. The bonus and share-based compensation plans are based on actual performance (including individual and Millicom Group performance). Until May 2006, officers were issued share options. Since May 2006, officers have been issued restricted shares. Share-based compensation is granted once a year by the Compensation Committee. The annual base salary and other benefits of the Chief Executive Officer and the Chief Financial Officer are proposed by the Compensation Committee and approved by the board of directors.
Employees
The total number of permanent employees as of March 31, 2013 was 10,550.
Long-term incentive plans
2012 long-term incentive plans
Long-term incentive awards for 2012 (“2012 LTIPs”) were approved by MIC S.A.‘s board of directors on January 27, 2012. The 2012 LTIPs consist of a deferred share awards plan and a performance shares plan, the mechanisms and performance conditions of which are the same as the 2011 LTIPs (as further described below).
Shares granted under the deferred share awards plan are based on past performance and vest 16.5% on each of January 1, 2013 and January 1, 2014 and 67% on January 1, 2015.
Shares granted under the performance shares plan vest at the end of the three-year period ended January 1, 2015.
In the three-month period ended March 31, 2013, 23,893 shares were issued under the deferred share awards plan.
The total charge for the 2012 LTIPs was estimated at $23 million as of March 31, 2013, and is being recorded over the service period of 2012 to 2014.
2011 Long-term incentive plans
Long-term incentive awards for 2011 (“2011 LTIPs”) were approved by MIC S.A.‘s board of directors on February 1, 2011. The 2011 LTIPs consist of a deferred share awards plan and a performance shares plan.
147 Shares granted under the deferred share awards plan are based on past performance and vest 16.5% on each of January 1, 2012 and January 1, 2013 and 67% on January 1, 2014.
Shares granted under the performance shares plan vest at the end of the three-year period ended January 1, 2014, subject to performance conditions, 50% based on return on invested capital (“ROIC”) and 50% based on earnings per share (“EPS”). Prior to September 2011, the vesting conditions were based 50% on EPS and 50% on a market condition that was based on the ranking of the total shareholder return (“TSR”) of the Millicom Group compared to the FTSE Global Telecoms Index adjusted to add three peer companies (“Adjusted Global Telecoms Index”). As this index was discontinued during 2011, the Compensation Committee approved the replacement of this condition with the ROIC condition.
In the three-month period ended March 31, 2013, 19,067 shares were issued under the deferred share awards plan.
The total charge for the 2011 LTIPs was estimated at $19 million as of March 31, 2013, and is being recorded over the service period of 2011 to 2013.
2010 Long-term incentive plans
Long-term incentive awards for 2010 (“2010 LTIPs”) were approved by MIC S.A.‘s board of directors on November 27, 2009. The 2010 LTIPs consist of a deferred share awards plan and a performance shares plan, the mechanisms of which are the same as the 2009 LTIPs (as further described below).
In the three-month period ended March 31, 2013, 38,820 shares were issued under the performance shares plan and 81,482 shares were issued under the deferred share awards plan.
The total charge for the 2010 LTIPs of $16 million was recorded over the service period of 2010 to 2012.
2009 Long-term incentive plans
Long-term incentive awards for 2009 (“2009 LTIPs”) were approved by MIC S.A.‘s board of directors on June 16, 2009. The 2009 LTIPs consist of a deferred share awards plan and a performance shares plan.
Shares granted under the deferred share awards plan are based on past performance and vested 16.5% on each of January 1, 2010 and January 1, 2011 and 67% on January 1, 2012.
Shares granted under the performance shares plan vested at the end of the three-year period ended January 1, 2012 and were 50% subject to a market condition based on the TSR of the Millicom Group compared to the TSR of a peer group of companies during the three-year period of the plan, and 50% subject to a performance condition, based on EPS. A fair value per share subject to the market condition was determined and applied to the total potential number of shares under the plan and expensed over the vesting period.
In the three-month period ended March 31, 2013, no shares were issued under either the performance shares plan or the deferred share awards plan.
The total charge for the 2009 LTIPs of $12 million was recorded over the service period of 2009 to 2011.
2008 Long-term Incentive plans
Long-term incentive awards for 2008 (“2008 LTIPs”) were approved by MIC S.A.‘s board of directors on December 4, 2007. The awards consisted of a performance shares plan and a matching share award plan. Shares granted under the performance share plan vested at the end
148 of a three-year period, on meeting a performance condition related to EPS. The achievement of a certain level of this condition, measured at the end of the three-year period, resulted in the vesting of a specific percentage of shares to each employee in the plan.
The matching share award plan required employees to invest in shares of MIC S.A. in order to be eligible for matching shares. Shares awarded under this plan vested at the end of a three-year period, on meeting market conditions based on the TSR of MIC S.A.‘s shares compared to the TSR of a peer group of companies during the three-year period of the plan. A fair value per share was determined and applied to the total potential number of matching shares and was expensed over the vesting period.
In 2011, 148,585 shares were issued under the 2008 performance shares plan and 28,795 shares were issued under the matching share award plan.
The total charge for the 2008 LTIPs of $25 million was recorded over the service period of 2008 to 2010, including $20 million in 2010 when conditions connected to the plan previously not expected to be met, were fulfilled.
Vesting of share awards
The number of share awards expected to vest under the long-term incentive plans is as follows:
Fiscal 2010 Fiscal 2011 Fiscal 2012 Three months 2013 Deferred Deferred Deferred Deferred Performance Share Performance Share Performance Share Performance Share Shares awards Shares awards Shares awards Shares awards
Plan share awards ...... 81,862 153,960 106,947 146,556 105,284 161,798 173,586 208,979 Share awards granted(1) ...... 9,368 15,274 6,640 7,727 3,763 5,658 – – Revision for actual and expected forfeitures ...... (25,556) (32,020) (21,205) (21,505) (23,126) (11,777) – – Revision for expectations in respect of performance conditions ...... – – – – – – – – Shares vested ..... (65,674)(137,214) (20,303) (46,061) (7,453) (25,415) – – Share awards expected to vest ...... – – 72,079 86,717 78,468 129,264 173,586 208,979
(1) Additional shares granted including consideration for the impact of the special dividends paid in 2010, 2011 and 2012 (see Note 29 of the Millicom Group’s annual consolidated financial statements), and vest at the end of the performance and deferred share plans.
149 Description of other indebtedness The following summary of certain provisions of our indebtedness does not purport to be complete and is subject to, and qualified in its entirety by reference to, the underlying documents.
Overview
We finance our operations on a country-by-country basis aimed at locating debt at the operational level to improve our tax efficiency and to mitigate country risk. As our local operations become more established and local financial markets become more developed, we have been able to finance at the level of our operations, increasingly in local currency on a non- recourse basis. As of March 31, 2013 and December 31, 2012, 91% of our debt was at the operational level, and 51% and 50%, respectively, of this debt was denominated in local currency.
The Millicom Group’s total consolidated debt as of March 31, 2013 and December 31, 2012 was $3,303 million and $3,259 million, respectively, and its total consolidated net debt (representing total consolidated debt after deducting cash, cash equivalents, restricted cash and pledged deposits) was $2,031 million and $1,991 million, respectively. The Millicom Group’s interest expense for the three months ended March 31, 2013 and the year ended December 31, 2012 was $66 million and $220 million, respectively. As of March 31, 2013, the amount of the Millicom Group’s debt guaranteed by MIC S.A. was $776 million.
The agreements under which we borrow funds contain a number of different covenants that impose operating and financial restrictions on us. Some of these covenants relate to our financial performance, such as the level of earnings, debt, assets and shareholders’ equity. Other covenants limit, and in some cases prohibit, us from, among other things, incurring additional indebtedness, creating liens on assets, entering into business combinations or engaging in certain activities with companies within our group. A failure to comply with these covenants would constitute a default under the relevant agreements and could trigger cross payment default or cross acceleration provisions under these agreements. In the event of such a default, the debtor’s obligations under one or more of these agreements could, under certain circumstances, become immediately due and payable, which could have a material adverse effect on our business, our liquidity and our shareholders’ equity.
150 Indebtedness by operation The Millicom Group’s share of total other debt and financing, excluding indebtedness to, or for the benefit of, other members of the Millicom Group, analyzed by operation is as follows:
As of As of December 31, March 31, 2010 2011 2012 2013 (U.S. dollars in thousands, unaudited) MIC S.A...... – – 304,262 304,262 Chad ...... 107,227 107,767 97,542 92,458 DRC ...... 94,151 96,343 124,496 108,011 Ghana ...... 158,183 118,426 76,068 97,042 Rwanda ...... 60,749 112,717 145,644 147,298 Senegal ...... 10,012 32,320 138,040 130,000 Tanzania ...... 207,086 197,270 183,446 182,431 Bolivia ...... 99,085 70,831 197,556 199,758 Cable Central America ...... 140,135 143,794 172,425 177,802 Colombia ...... 522,994 543,412 546,612 601,405 El Salvador ...... 435,279 436,679 440,452 440,724 Guatemala ...... 163,631 221,364 218,890 214,562 Honduras ...... 207,277 258,383 229,031 221,671 Paraguay ...... 105,700 98,222 378,832 378,674 Other* ...... 40,527 750 5,145 5,986 Total MIC S.A. consolidated other debt and financing ...... 2,352,036 2,438,278 3,258,441 3,302,085 of which: Due after more than 1 year ...... 1,796,572 1,816,852 2,565,348 2,541,946 Due within 1 year ...... 555,464 621,426 692,993 760,139 * “Other” represents indebtedness of the Millicom Group’s other operations that are not specifically identified and central treasury functions unallocated to any specific operation.
MIC S.A. On October 23, 2012, MIC S.A. issued a SEK2 billion (approximately $310 million) 5-year bond, of which SEK1.75 billion (approximately $270 million) has a floating rate coupon of three months STIBOR +3.50% and SEK0.25 billion (approximately $40 million) has a fixed coupon of 5.125%. MIC S.A. subsequently swapped the floating portion to a fixed interest rate of 4.64 and swapped its SEK exposure for U.S. dollars at an average rate of 6.67. The SEK bonds were listed on NASDAQ OMX Stockholm in November 2012 and are unsecured and unsubordinated obligations of MIC S.A. If MIC S.A. experiences a Change of Control Event, defined as an event resulting in anyone other than the Kinnevik group acquiring or otherwise establishing control over 50% of MIC S.A.‘s shares and/or votes, or if MIC S.A.‘s shares cease to be listed on a regulated market, each holder of the SEK bonds will have the right to require repurchase of its SEK bonds at 101% of their nominal amount plus accrued and unpaid interest. MIC S.A. may redeem the SEK bonds in full at any time prior to the final maturity date, at 100% of the nominal amount plus accrued and unpaid interest plus the applicable premium or, if the redemption is financed at least 80% by way of another issuance of debt instruments, anytime from and including the date falling 60 business days prior to the final maturity date, at 100% of the nominal amount plus accrued and unpaid interest. MIC S.A. may not incur any new financial indebtedness (which includes the issuance of any subsequent notes and guarantees for financial indebtedness of other companies within the Millicom Group) unless: (i) the net leverage ratio is below 2.3x, tested on a pro forma basis to include the new financial indebtedness and calculated as per a testing date falling no more than one month prior to the incurrence of the new financial indebtedness, and (ii) the maturity date is
151 after the final maturity date of the SEK bonds, except if the new debt instrument is not denominated in Swedish Kronor and is not quoted, listed or otherwise traded on the same regulated market as the SEK bonds.
MIC S.A. may not allow any other Millicom Group company to incur any new financial indebtedness if and to the extent that such financial indebtedness would cause or result in a consolidated net leverage ratio of 2.0x or more, excluding any interest-bearing obligations that have recourse only against MIC S.A. and any EBITDA generated by MIC S.A.
MIC S.A. used approximately €85 million (approximately $114 million) of the proceeds from the SEK bonds to finance the investment in two subsidiaries of Rocket Internet, Latin America Internet Holding and Africa Internet Holding (as further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Acquisitions—Rocket Internet Agreement”) and plans to use the remainder of the proceeds for general corporate purposes.
Chad
In December 2009, Millicom Tchad entered into a XAF 9.25 billion (approximately $19 million) 5-year, 8% financing facility with IFC, which is guaranteed by MIC S.A. As of March 31, 2013, approximately $18 million was outstanding. We do not currently intend to prepay this facility with the proceeds of this offering.
Under this facility, an event of default occurs if the facility fails to rank at least pari passu in right of payment and in right of security with Millicom Tchad’s other financial debt.
Millicom Tchad must maintain the following financial ratios on a consolidated basis: a current debt service coverage ratio of 1.1x (which is calculated as available cash flow for the previous four quarters divided by all principal and interest payments over the same period, excluding voluntary prepayments), a debt-to-EBITDA ratio of 2.0x and a debt-to-equity ratio of 2.0x.
This facility contains a number of negative covenants which restrict Millicom Tchad’s ability to make payments out of share capital, incur capital expenditures other than those related to the expansion of its mobile network, acquire additional debt, enter into guarantees, make pre- payments on other loans, and incorporate subsidiaries.
In particular, restricted payments, including dividend payments, are only permitted if no event of default would result therefrom, the debt-to-EBITDA ratio is less than 2.0x and the current debt service coverage ratio exceeds 1.5x. Millicom Tchad is not permitted to enter into any agreement or arrangement to guarantee or assume or become obligated for any financial or other obligation of another person, including Millicom Tchad’s affiliates. Millicom Tchad may not incur any financial debt which violates the ratio tests and matures earlier than the facility’s maturity date.
In July 2010, Millicom Tchad entered into a XAF 6.0 billion (approximately $12.25 million) 4-year, 8% facility with the Société de Promotion et de Participation pour la Coopération Economique S.A. (Proparco) and a XAF 2.0 billion (approximately $4.1 million) 4-year facility with the Banque Internationale du Cameroun pour l’Epargne et le Credit (BICEC). These facilities are guaranteed by MIC S.A. As of March 31, 2013, approximately $10 million was outstanding under both facilities. We intend to prepay these facilities in full with the proceeds of this offering within 90 days after the completion of this offering.
In December 2009, Millicom Tchad entered into a $50 million 4-year deferred payment agreement with Huawei Tech. Investment Co. Ltd, which was subsequently transferred to the Export-Import Bank of China, bearing interest at LIBOR plus 3.75% per annum and guaranteed by MIC S.A. This deferred payment agreement includes a one-year grace period for repayment. As of March 31, 2013, approximately $12 million was outstanding. We intend to prepay this deferred payment agreement in full with the proceeds of this offering within 90 days after the completion of this offering.
152 In May 2009, Millicom Tchad entered into a XAF 6.2 billion (approximately $12.7 million) 5-year, 7% facility co-arranged by Société Générale de Banques au Cameroun and Financial Bank Tchad, which is fully guaranteed by MIC S.A. As of March 31, 2013, approximately $8 million was outstanding. We intend to prepay this facility in full with the proceeds of this offering within 90 days after the completion of this offering.
Also in May 2009, Millicom Tchad entered into a XAF 21 billion (approximately $43 million) 1-year (renewable four times at the lender’s discretion) subordinated facility with Société Générale Tchad. Interest on this facility accrues at the public procurement contract interest rate published by the BEAC (the regional central bank) plus 1.85% per annum. This facility is guaranteed by a standby letter of credit issued by Nordea Bank Finland plc in the amount of EUR 33 million (approximately $44 million), which is secured by a pledged deposit of EUR 33 million provided by Millicom International Operations S.A. As of March 31, 2013, approximately $41 million was outstanding. We intend to prepay this facility in full with the proceeds of this offering within 90 days after the completion of this offering.
Democratic Republic of Congo (DRC)
In October 2011, Oasis completed a sale and lease-back arrangement with HT DRC INFRACO, relating to tower companies (as further described under “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers”). As of March 31, 2013, approximately $25 million was outstanding on the finance lease as part of the lease-back agreement.
In August 2011, Oasis entered into a $37 million 3-year facility with the China Development Bank Corporation to finance equipment purchases from Huawei Technologies Co. Ltd., bearing interest at LIBOR plus 2.6% per annum and guaranteed by MIC S.A. No amounts have been drawn under this facility, and we intend to cancel this facility.
In September and December 2009, Oasis entered into an $80 million 7-year financing facility with IFC, comprising a $50 million per annum A Loan and a $30 million B Loan, bearing interest at LIBOR plus 5% and guaranteed by MIC S.A. As of March 31, 2013, approximately $78 million was outstanding. We intend to prepay this facility in full with the proceeds of this offering within 90 days after the completion of this offering.
In January 2006, Oasis entered into a 10-year 6.5% finance lease for its offices in Kinshasa with IMMOTEX. Total payments under this finance lease are approximately EUR 4.5 million.
Our DRC operation also has an overdraft facility of up to $5 million.
Ghana
In December 2012, Millicom Ghana entered into a $25 million short-term loan bridge facility with J.P. Morgan Europe Limited, bearing interest at LIBOR plus 1.95% per annum and guaranteed by MIC S.A. As of March 31, 2013, approximately $25 million was outstanding. We intend to repay this facility on or before its June 28, 2013 maturity date.
In June 2012, Millicom Ghana entered into a $50 million 9-month term loan bridge facility with the Standard Bank of South Africa Limited, bearing interest at USD LIBOR plus 1.95% per annum and guaranteed by MIC S.A. As of March 31, 2013, approximately $50 million was outstanding. We intend to prepay this financing in full with the proceeds of this offering on or before its May 28, 2013 maturity date.
In June 2010, Millicom Ghana entered into a master lease agreement with Helios Towers Ghana, relating to tower companies (as further described under “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers”). As of March 31, 2013, approximately $18 million was outstanding on the finance lease as part of the lease-back agreement.
153 In December 2009, Millicom Ghana entered into a $22 million 3.5-year financing with Nordea, bearing interest at USD LIBOR plus 0.85% per annum and guaranteed by MIC S.A. As of March 31, 2013, approximately $4 million was outstanding. We intend to prepay this financing in full with the proceeds of this offering within 90 days after the completion of this offering.
Rwanda
In April 2013, Millicom Mauritius amended and restated a term loan facility with DNB Bank ASA, which is guaranteed by MIC S.A. and Tigo Rwanda, the purpose of which is to enable Millicom Mauritius to make loans to Tigo Rwanda. This facility provides for one five-year term loan of up to $50 million (Term Loan A) and a second five-year term loan of up to $30 million (Term Loan B). The term loans bear interest at a rate of LIBOR plus 2.35% per annum plus any mandatory costs. Term Loan A matures in December 2016, and Term Loan B matures in April 2018.
In June 2010, Millicom Mauritius entered into a $55 million dual-tranche term loan facility with Standard Bank Plc, guaranteed by Tigo Rwanda, to enable Millicom Mauritius to make loans to Tigo Rwanda. The facilities are repayable in instalments. Facility A bears interest at a rate of LIBOR plus 5.00% per annum plus any mandatory costs, due in April 2017 and facility B bears interest at a rate of LIBOR plus 4.75% per annum plus any mandatory costs, due in April 2015. As of March 31, 2013, approximately $50 million was outstanding under this facility.
In February 2010, Millicom Mauritius entered into a $56 million financing arrangement with KfW IPEX-bank GmbH, which is guaranteed by MIC S.A. and Tigo Rwanda, to enable Millicom Mauritius make loans to Tigo Rwanda. The loan bears interest at rate of 4% per annum, repayable in instalments through April 2017. As of March 31, 2013, approximately $45 million was outstanding under this financing arrangement.
Senegal
In October 2012, Sentel GSM S.A. entered into a $130 million dollar term facility with DNB Bank ASA, Sweden Branch, bearing interest at LIBOR plus 0.75% per annum and guaranteed by MIC S.A. We intend to repay this facility on or before its June 30, 2013 maturity date.
Tanzania
In December 2010, Millicom Tanzania entered into a sale and lease-back arrangement with Helios Towers Tanzania, relating to tower companies (as further described under “Major Shareholders and Related Party Transactions—Related Party Transactions—Millicom Group—Helios Towers and American Towers”). As of March 31, 2013, $79 million was outstanding on the finance lease as part of the lease-back agreement.
In December 2008, Millicom Tanzania entered into facilities totaling $228 million, comprising a TZS 95 billion 5-year local currency syndicated tranche at the 180 days treasury bill rate plus 3% per annum, a $116 million 7-year EKN guaranteed financing with 45% of the facility fixed at 4.1% and 55% of the facility at USD LIBOR plus 0.665% per annum and a $40 million 7-year tranche with Proparco at USD LIBOR plus 2.5% per annum, all of which are guaranteed by MIC S.A. As of March 31, 2013, approximately $104 million was outstanding. We intend to prepay this financing in full with the proceeds of this offering within 90 days after the completion of this offering.
Bolivia
In April 2012, Telefonica Celular de Bolivia S.A. (Telecel Bolivia), the Millicom Group’s Bolivian operation, issued a 1.36 billion Bolivian peso (approximately $195 million) 8-year bond with a fixed coupon of 4.75% per annum (paid semi-annually). The effective interest rate is 4.79%. Telecel Bolivia applied the proceeds to repay indebtedness for capital expenditures. Telecel Bolivia may partially or fully redeem these notes prior to the final maturity date, at 100% of the principal amount, plus accrued and unpaid interest and the applicable premium, which ranges between 0% to 2.5%, depending on the remaining maturity of the notes.
154 During 2011, Telecel Bolivia repaid supplier financing from Huawei at interest rates of U.S. dollar plus 2% and FPLT amounting to $13 million. In December 2007, Telecel Bolivia signed a $40 million financing agreement with the Nederlandse Financieringsmaatschappij Voor Ontwikkelingslanden, N.V. (FMO or the Netherlands Development Finance Company). The $20 million A tranche was provided directly by FMO, is repayable over 7 years and bears interest at U.S. dollar plus 2.25%. The $20 million B tranche is provided equally by Nordea and Standard Bank, is repayable over 5 years and bears interest at U.S. dollar plus 2%. Both tranches are guaranteed by Millicom Group companies. As of March 31, 2013, $7 million of this financing agreement was outstanding.
Cable Central America In 2010, the Millicom Group’s cable businesses in Honduras and Costa Rica obtained financing in Honduras under a $30 million 7-year bilateral fixed rate financing from Banco Industrial, bearing interest at 7%, and in Costa Rica under a $105 million 7-year club deal fixed rate facility with HSBC, Bancocolombia and Citibank, bearing interest at 6.7%. This financing is fully guaranteed by MIC S.A. As of March 31, 2013, $26 million was outstanding under the financing in Honduras, and $90 million was outstanding under the facility in Costa Rica.
Colombia In April 2013, Colombia Móvil entered into a COP50 billion (approximately $21 million) one-year facility with Bancolombia with an interest rate of IBR plus 1.85%. The proceeds of this facility were used to repay a five-year COP393 billion term loan and to fund capital expenditures of approximately COP19 billion (approximately $8 million). As of March 31, 2013, Móvil S.A. E.S.P, the Millicom Group’s operation in Colombia, had $237 million in outstanding local currency loans from its non-controlling shareholders. These loans bear interest at a benchmarked rate plus 4.15% and mature between 2014 and 2015. In March 2008, Colombia Móvil entered into a COP393 billion (approximately $165 million) 5-year facility with a club of Colombian banks, bearing interest at a benchmarked rate plus 4.5%, half of the principal amount of which is guaranteed by Millicom Group companies. This facility was repaid in full with the proceeds of the April 2013 Bancolombia facility and the guarantee was released. In addition, as of March 31, 2013, Colombia Móvil had $263 million of other debt and financing in U.S. dollars and local currency as well as finance lease payables of $85 million relating to lease of tower space from ATC Infraco S.A.S.
El Salvador On September 23, 2010, Telemóvil Finance Co. Ltd., a Cayman Islands finance subsidiary, issued $450 million of 8% senior unsecured guaranteed notes due 2017. The El Salvador senior notes were issued for $444 million, representing 98.64% of the aggregate principal amount. The El Salvador senior notes are guaranteed by Telemóvil El Salvador, S.A., another Millicom Group subsidiary. If any of the Millicom Group, Telemóvil Finance Co. Ltd. or Telemóvil El Salvador, S.A. experience a Change of Control Triggering Event, defined as a rating decline resulting from a change in control of Telemóvil El Salvador, S.A., each holder will have the right to require repurchase of its notes at 101% of their principal amount plus accrued and unpaid interest and all other amounts due, if any. The El Salvador senior notes may be redeemed at par plus the applicable redemption price premium amount.
Guatemala As of March 31, 2013, Comcel had a credit facility for $16 million (the Millicom Group’s share of outstanding debt) with Citibank bearing a fixed rate of 4.40%.
155 On June 24, 2012, Internacom, S.A., a Millicom Group subsidiary in Guatemala, entered into a Q 400 million (approximately $51 million) credit facility with Banco G&T Continental, S.A., bearing interest at a fixed rate of 6.75%, maturing in 2018 and fully guaranteed by Navega.com, S.A., another Millicom Group subsidiary in Guatemala. The Millicom Group’s share of the facility as of March 31, 2013 amounted to $7 million.
On October 26, 2011, Comcel and its sister companies Asesoria en Telecomunicaciones S.A. (Asertel), Distribuidora Central de Comunicaciones, S.A. (COCENSA), Distribuidora Internacional de Comunicaciones, S.A. (INTERNACOM) and Distribuidora de Comunicaciones de Occidente, S.A. (COOCSA) entered into a $215 million syndicated loan with Citibank, Scotiabank, Banco General, RBC and HSBC which was fully disbursed in 2011. The Millicom Group’s share of the facility as of March 31, 2013 amounted to $129 million.
On April 16, 2010, Comcel entered into a $100 million credit facility with Bancolombia (Panama) S.A., bearing interest at LIBOR plus 5% and maturing in 2017. The Millicom Group’s share of the facility as of March 31, 2013 amounted to $41 million.
Honduras
In March 2013, Telefonica Celular S.A. entered into a revolving credit facility for up to Lempiras 120 million (approximately $6.2 million) with Banco Ficohsa for an indefinite term. The interest rate on amounts drawn under the facility is variable and is reviewed every 180 days. As of March 31, 2013, $6 million was outstanding under this facility.
Telefonica Celular S.A. de C.V., the Millicom Group’s operation in Honduras, has facilities with several local and international banks maturing between 2012 and 2020. These facilities are in dollars and in Lempiras and are unsecured. Interest rates are either fixed or variable, ranging as of March 31, 2013 between 4.0% and 15.5%. As of March 31, 2013 the amount of outstanding debt under these facilities was $216 million.
Paraguay
In December 2012, Tigo Paraguay, a subsidiary of MIC S.A., issued a 10-year, $300 million bond with a fixed coupon of 6.75%, part of the proceeds of which were used to fund the acquisition of Rocket Internet. The bond is listed on the Euro MTF market of the Luxembourg Stock Exchange.
In July 2008, Tigo Paraguay entered into a $107 million 8-year loan with the European Investment Bank (EIB), bearing interest at rates between U.S. dollar plus 0.234% and U.S. dollar plus 0.667% and guaranteed for commercial risks by a group of banks. The commission guarantee fee is 1.25% per annum. The outstanding amount on this loan as of March 31, 2013 was $85 million.
Guarantees In the normal course of business, the Millicom Group has issued guarantees to secure certain obligations of some of its operations under bank financing agreements. As of March 31, 2013, the Millicom Group had issued $776 million of guarantees, with a maximum exposure of $1,056 million.
Pledged assets As of March 31, 2013, the Millicom Group’s share of total debt and financing secured by either pledged assets, pledged deposits issued to cover letters of credit or guarantees issued by the Millicom Group was $1,405 million. The assets pledged by the Millicom Group for this debt and financing at the same date amounted to $146 million.
Foreign currency forward contracts As of March 31, 2013, the Millicom Group held a foreign currency forward contract to sell Colombian Pesos in exchange for U.S. dollars for a total nominal amount of $43 million. This
156 contract matures in July 2013. Gain under the contract amounted to $1 million for the three-month period ended March 31, 2013. MIC S.A. also entered into a foreign currency and forward swap contract to U.S. dollars for Swedish Krona in connection with the Swedish Kronor Bond, which is described above under “—Indebtedness by Operation—MIC S.A.”
Interest-rate swap contracts
As of March 31, 2013, the Millicom Group was party to several interest rate swap contracts to manage its interest rate exposure to several external lending facilities and internal borrowing arrangements. In October 2010, the Millicom Group’s subsidiaries in Honduras and Costa Rica entered into separate interest rate swaps to hedge the interest rate risks on their floating rate debts. The interest rate swap in Honduras was issued for a nominal amount of $30 million, with maturity in 2015. The interest rate swap in Costa Rica was issued for a nominal amount of $105 million with maturity in 2017. In January 2010, Millicom International Operations S.A. entered into a $100 million interest rate swap which matured in January 2013 to hedge the interest rate risk of the floating rate debt for its subsidiaries loans in DRC, Ghana and Tanzania. This swap contract was not extended at maturity. MIC S.A. also entered into an interest-rate swap contract to manage its interest rate exposure under the Swedish Kronor Bond, which is described above under “—Indebtedness by Operation—MIC S.A.”
Pushdown of Note proceeds
The Issuer intends to pushdown the net proceeds of this offering to its operating subsidiaries in Chad, DRC, Ghana, Senegal and Tanzania. The pushdown structure may include related party loans or lending arrangements through financial intermediaries.
157 Description of the Notes In this “Description of the Notes,” “Issuer” refers to Millicom International Cellular S.A. and not to any of its Subsidiaries except for the purposes of financial data determined on a consolidated basis. The definitions of certain other terms used in this description are set forth throughout the text or under “—Certain Definitions.” Certain defined terms used in this description but not defined below have the meanings assigned to them in the Indenture.
The Issuer will issue the notes offered hereby (the “Notes”) under an indenture (the “Indenture”) among, inter alios, the Issuer and Citibank, N.A., London Branch as trustee (the “Trustee”). The terms of the Notes include those set forth in the Indenture. The Notes will not be registered under the U.S. Securities Act of 1933 (the “U.S. Securities Act”) and will be subject to certain transfer restrictions.
The following description is a summary of the material terms of the Indenture. It does not, however, restate the Indenture in its entirety and, where reference is made to a particular provision of the Indenture, such reference, including the definitions of certain terms, is qualified in its entirety by reference to all of the provisions of the Notes and the Indenture. You should read the Indenture because it contains additional information and because it, and not this description, defines your rights as a holder of the Notes. After the Notes have been issued, copies of the Indenture and the form of Note may be obtained by requesting it from the Issuer at the address indicated under “Listing and General Information” or, if and so long as the Notes are listed on the Official List of the Luxembourg Stock Exchange and trading on the Euro MTF Market and to the extent that the rules and regulations of the Luxembourg Stock Exchange so require, from the office of the paying agent in London.
The Indenture will not be qualified under the U.S. Trust Indenture Act of 1939, as amended (the “TIA”). Consequently, the Holders generally will not be entitled to the protections provided under such TIA to holders of debt securities issued under a qualified indenture, including those requiring the Trustee to resign in the event of certain conflicts of interest and to inform the Holders of certain relationships between it and the Issuer.
The Issuer has made an application to list the Notes on the Official List of the Luxembourg Stock Exchange and to admit the Notes for trading on the Euro MTF Market. The Issuer can provide no assurance that this application will be accepted.
The registered holder of a Note will be treated as the owner of it for all purposes. Only registered holders will have rights under the Indenture.
Brief description of the structure and ranking of the Notes The Notes
The Notes will:
(a) be the general obligations of the Issuer;
(b) mature on May 22, 2020;
(c) rank equally in right of payment with all of the Issuer’s existing and future obligations that are not subordinated in right of payment to the Notes;
(d) be senior in right of payment to any of the Issuer’s existing and future Debt that is subordinated in right of payment to the Notes;
(e) be effectively subordinated to any existing and future obligations of the Issuer that are secured by property or assets that do not secure the Notes, to the extent of the value of property and assets securing such obligations; and
(f) be structurally subordinated to all existing and future obligations of Subsidiaries of the Issuer.
158 General The Issuer is a holding company without operations and, therefore, depends on the cash flow of its Subsidiaries to meet its obligations, including its obligations under the Notes. The Notes will be effectively subordinated in right of payment to all Debt and other liabilities and commitments (including trade payables and lease obligations) of each of the Issuer’s Subsidiaries. Any right of the Issuer to receive assets of any of the Issuer’s Subsidiaries upon the Subsidiary’s liquidation or reorganization (and the consequent right of the Holders to participate in those assets) will be effectively subordinated to the claims of that Subsidiary’s creditors, except to the extent that the Issuer is itself recognized as a creditor of the Subsidiary, in which case the claims of the Issuer would still be subordinate in right of payment to any security in the assets of the Subsidiary and any Debt of the Subsidiary senior to that held by the Issuer. As of March 31, 2013, on an “as adjusted” basis after giving effect to the issuance of the Notes and the application of the net proceeds as described under “Use of Proceeds”, the Issuer’s Subsidiaries would have had $2,319 million of third-party debt and $861 million of trade payables and other liabilities outstanding. Although the Indenture will contain limitations on the amount of additional Debt that the Issuer, and its Subsidiaries may Incur, the amount of such additional Debt could be substantial. Principal, maturity and interest The Notes will mature on May 22, 2020 unless redeemed prior thereto as described herein. The Issuer will issue the Notes in the aggregate principal amount of $500 million in this Offering. Subject to the covenant described under “—Certain Covenants—Limitation on Debt,” the Issuer is permitted to issue additional Notes under the Indenture from time to time after the Issue Date (the “Additional Notes”). Any issuance of Additional Notes is subject to the covenants in the Indenture. The Notes and any Additional Notes that are issued will be treated as a single class for all purposes of the Indenture, including, without limitation, those with respect to waivers, amendments, redemptions and offers to purchase. Unless the context otherwise requires, references to the “Notes” for all purposes of the Indenture and in this “Description of the Notes” include references to any Additional Notes that are issued. Interest on the Notes will accrue at the rate of 4.750% per annum. Interest on the Notes will be payable semi-annually in arrears on May 22 and November 22 commencing on November 22, 2013. Interest will be payable to Holders of record on each Note in respect of the principal amount thereof outstanding as at the immediately preceding May 7 or November 7, as the case may be. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Interest on overdue principal and interest will accrue at a rate that is 1% higher than the then applicable interest rate on the Notes. In no event will the rate of interest on the Notes be higher than the maximum rate permitted by applicable law. Form of Notes The Notes will be issued on the Issue Date only in fully registered form without coupons and only in denominations of $200,000 and integral multiples of $1,000 in excess thereof. The Notes will be initially in the form of one or more global notes (the “Global Notes”). The Global Notes will be deposited with a custodian for DTC in the case of the Notes sold pursuant to Rule 144A under the U.S. Securities Act (“Rule 144A”), and a common depositary for Euroclear and Clearstream or a nominee of such common depositary, in the case of Notes sold pursuant to Regulation S under the U.S. Securities Act (“Regulation S”). Ownership of interests in the Global Notes, referred to as “book-entry interests,” will be limited to Persons that have accounts with DTC, Euroclear and Clearstream or their respective participants. Book-entry interests will be shown on, and transfers thereof will be affected only through, records maintained in book-entry form by DTC and its participants, in the case of the Notes sold pursuant to Rule 144A, or by Euroclear and Clearstream and their respective participants, in the case of Notes sold pursuant to Regulation S. The terms of the Indenture will provide for the issuance of definitive registered Notes in certain circumstances. Please see the section of this Offering Memorandum entitled “Book-Entry, Delivery and Form.”
159 Transfer The Notes may be transferred in accordance with the Indenture, which will provide for, among other things, the transfer of the Notes by the transfer agent in London. All transfers of book- entry interests between participants in DTC, Euroclear or Clearstream will be effected by DTC, Euroclear or Clearstream, as the case may be, pursuant to customary procedures and subject to applicable rules and procedures established by DTC, Euroclear and Clearstream and their respective participants. Please see the section of this Offering Memorandum entitled “Book-Entry, Delivery and Form.”
The Notes will be subject to certain restrictions on transfer and certification requirements, as described under “Important Information About this Offering Memorandum.”
Payments on the Notes; paying agent and registrar The Issuer will make all payments, including principal of, and premium, if any, and interest on, the Notes, at its office or through an agent in London that it will maintain for these purposes. Initially, Citibank, N.A., London Branch, will act as paying agent in London.
The Issuer will also maintain one or more registrars for so long as the Notes are listed on the Luxembourg Stock Exchange and its rules so require. The Issuer will also maintain a transfer agent. The initial registrar will be Citigroup Global Markets Deutschland AG. The initial transfer agent will be Citibank, N.A., London Branch. The registrar will maintain a register reflecting ownership of Definitive Registered Notes (as defined under “Book-Entry, Delivery and Form”) outstanding from time to time and will make payments on and facilitate transfer of Definitive Registered Notes on behalf of the Issuer.
Title of ownership to the Notes will be evidenced through registration in the relevant register as described in the preceding paragraph, as reflected or respectively consolidated from time to time in the register of notes to be held at the registered office of the Issuer, and such registration, or respectively consolidation of registration, is a means of evidencing of title to the Notes for the purposes of Luxembourg law.
The Issuer may change any paying agent, registrar or transfer agent without prior notice to the holders of the Notes. In addition, the Issuer or any of its Subsidiaries may act as paying agent in connection with the Notes other than for the purposes of effecting a redemption described under “—Optional Redemption” or an offer to purchase the Notes described under either of “—Change of Control” and “—Certain Covenants—Limitation on Asset Dispositions.” The Issuer will make all payments in same-day funds. Payments on the Global Notes will be made to the custodian for DTC as the registered holder of the Global Notes sold pursuant to Rule 144A and to the common depositary for Euroclear and Clearstream as the registered holder of the Global Notes sold pursuant to Regulation S or to a nominee of such common depositary.
The Issuer undertakes that it will maintain a paying agent in an EU Member State that is not obliged to withhold or deduct tax pursuant to the European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive.
No service charge will be made for any registration of transfer, exchange or redemption of the Notes, but the Issuer may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection with any such registration of transfer or exchange.
Additional amounts The Issuer with respect to payments under or with respect to the Notes agrees that, if any deduction or withholding of any present or future taxes, levies, imposts or charges whatsoever imposed by or for the account of any jurisdiction in which the Issuer is organized, engaged in business or resident for tax purposes, or from or through which payment on the Notes is made by
160 or on behalf of the Issuer (including the jurisdiction of any paying agent) or any political subdivision or taxing authority thereof or therein having the power to tax (each, a “Relevant Taxing Jurisdiction”) and any interest, penalties and other liabilities with respect thereto (collectively, “Taxes”) shall be required, the Issuer will (subject to the limitations described below) pay such additional amounts (“Additional Amounts”) in respect of principal (and premium, if any) and interest as may be necessary in order that the net amounts received pursuant to the Notes after such deduction or withholding (including any withholding or deduction from such Additional Amounts) shall equal the respective amounts of principal (and premium, if any) and interest specified in the Notes that would have been received if such Taxes had not been required to be withheld or deducted; provided, however, that the Issuer shall not be required to make any payment of Additional Amounts for or on account of (i) any Taxes imposed by or for the account of a Relevant Taxing Jurisdiction which would not be payable but for the fact that the holder or beneficial owner of a Note (or a fiduciary, settlor, beneficiary, partner of, member or shareholder of, or possessor of a power over, the relevant holder, if the relevant holder is an estate, trust, nominee, partnership, limited liability company or corporation) is a citizen, domiciliary, national or resident of, incorporated in, or engaging in business or maintaining a permanent establishment or being physically present in, such Relevant Taxing Jurisdiction or otherwise having some present or former connection with such Relevant Taxing Jurisdiction other than the holding or ownership of such Note or the receipt of principal of (and premium, if any) and interest on such Note or the exercise of rights under or the enforcement of such Note; (ii) any Tax that would not have been imposed but for the presentation of a Note (where presentation is required) for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later, except to the extent that the holder or beneficial owner would have been entitled to such Additional Amounts on presenting the same for payment on any day (including the last day) within such 30-day period; (iii) any Tax deducted, withheld or imposed on a payment to an individual and required to be made pursuant to European Council Directive 2003/48/EC or any other Directive on the taxation of savings implementing the conclusions of the European Council of Economic and Finance Ministers (ECOFIN) meeting of June 3, 2003 or any law implementing or complying with, or introduced in order to conform to, such Directive; (iv) any Tax that would not have been imposed but for a failure by the relevant holder or beneficial owner of the Note to comply with any applicable certification, information, identification, documentation or other reporting requirements, whether required by status, treaty, regulation or administrative practice, of a Relevant Taxing Jurisdiction, if such compliance is legally required as a precondition to relief or exemption from such Tax (including without limitation a certification that such holder or beneficial owner is not resident in the Relevant Taxing Jurisdiction); provided, however, that this clause (iv) shall not apply if the Issuer shall not have provided the holder of the Note with written notice of the applicable requirement at least 60 days prior to the date that the holder or beneficial owner of the Note is required to comply with such applicable requirement; (v) any estate, inheritance, gift, sale, transfer, personal property or similar Taxes; (vi) any Taxes imposed on or with respect to a payment made to a holder or beneficial owner of any Note presented for payment (where presentation is required) by or on behalf of a holder of Notes who would have been able to avoid such withholding or deduction by presenting the relevant Note to another paying agent in a member state of the European Union; (vii) any Taxes payable other than by deduction or withholding from payments under, or with respect to, the Notes; (viii) any Taxes imposed or withheld by reason of the failure of the holder or beneficial owner of the Note to comply with the requirements of Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), as of the date hereof (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), the U.S. Treasury Regulations issued thereunder or any official interpretation thereof or any agreement entered into pursuant to Section 1471 of the Code; or (ix) any combination of clauses (i) through (viii) above.
In addition, the Issuer shall not have any obligation to pay Additional Amounts to a holder that is a fiduciary or partnership or an entity that is not the sole beneficial owner of the payment of the
161 principal or interest on a Note if the laws of the Relevant Taxing Jurisdiction require the payment to be included in the income of a beneficiary or settlor for tax purposes with respect to such fiduciary or a member of such partnership or a beneficial owner who would not have been entitled to the Additional Amounts had it been the holder of such Note.
The Issuer will also make or cause to be made such withholding or deduction of Taxes required by law and will remit the full amount of Taxes so deducted or withheld to the relevant taxing authority in accordance with all applicable laws. The Issuer will use its reasonable efforts to obtain tax receipts from each such tax authority evidencing the payment of any Taxes so deducted or withheld. The Issuer will, upon request, make available to the Trustee, within 30 days after the date on which the payment of any Taxes so deducted or withheld is due pursuant to applicable law, copies of tax receipts evidencing such payment by the Issuer or if, notwithstanding the Issuer’s efforts to obtain such receipts, the same are not obtainable, other evidence reasonably satisfactory to the Trustee of such payment by the Issuer. Upon reasonable request, copies of tax receipts or other evidence of payments, as the case may be, will be made available by the Trustee to the holders of the Notes.
In addition to the foregoing, the Issuer will pay, and agrees to indemnify any holder for any present or future stamp, issue, registration, transfer, documentation, court, excise or property taxes imposed in connection with the execution, issue, delivery, registration or enforcement of the Notes, the Indenture.
The foregoing provisions will survive any termination, defeasance or discharge of the Indenture and will apply mutatis mutandis to any jurisdiction in which any successor Person to the Issuer is organized, engaged in business or resident for tax purposes.
Whenever in the Indenture, this Offering Memorandum or this “Description of the Notes” there is mentioned, in any context, the payment of principal (and premium, if any), Redemption Price, interest or any other amount payable under or with respect to any Note, such mention will be deemed to include mention of the payment of Additional Amounts to the extent that, in such context, Additional Amounts are or would be payable in respect thereof.
Optional redemption
Except as described below, the Notes are not redeemable at the Issuer’s option. The Issuer is not, however, prohibited from acquiring the Notes by means other than a redemption, whether pursuant to a tender offer, open market purchase or otherwise, so long as the acquisition does not otherwise violate the terms of the Indenture.
Optional redemption prior to May 22, 2016 upon equity offerings
At any time prior to May 22, 2016, upon not less than 30 nor more than 60 days’ notice, the Issuer may on any one or more occasions redeem up to 35% of the aggregate principal amount of Notes at a redemption price of 104.750% of their principal amount, plus accrued and unpaid interest, if any, to the redemption date, with the proceeds from one or more Equity Offerings or any sale of Qualified Capital Stock of any Subsidiary of the Issuer. The Issuer may only do this, however, if:
(a) at least 65% of the aggregate principal amount of Notes that were initially issued would remain outstanding immediately after the proposed redemption; and
(b) the redemption occurs within 90 days after the closing of such Equity Offering.
Optional redemption prior to May 22, 2016 upon Specified Subsidiary Sale
At any time prior to May 22, 2016, upon not less than 30 nor more than 60 days’ notice, the Issuer may on any one or more occasions redeem up to 35% of the aggregate principal amount of Notes at a redemption price of 104.750% of their principal amount, plus accrued and unpaid
162 interest, if any, to the redemption date, with the Net Available Proceeds from one or more Specified Subsidiary Sales. The Issuer may only do this, however, if:
(a) at least 65% of the aggregate principal amount of Notes that were initially issued would remain outstanding immediately after the proposed redemption; and
(b) the redemption occurs within 365 days from the later of the date of such Specified Subsidiary Sale or the receipt of such Net Available Proceeds.
Optional redemption prior to May 22, 2017
At any time prior to May 22, 2017, upon not less than 30 nor more than 60 days’ notice, the Issuer may also redeem all or part of the Notes at a redemption price equal to 100% of the principal amount thereof plus the Applicable Redemption Premium and accrued and unpaid interest and Additional Amounts, if any, to the date of redemption, subject to the rights of Holders on the relevant record date to receive interest due on the relevant interest payment date.
Optional redemption on or after May 22, 2017
At any time on or after May 22, 2017 and prior to maturity, upon not less than 30 nor more than 60 days’ notice, the Issuer may redeem all or part of the Notes. These redemptions will be in amounts of $200,000 or integral multiples of $1,000 in excess thereof at the following redemption prices (expressed as percentages of their principal amount at maturity), plus accrued and unpaid interest and Additional Amounts, if any, to the redemption date, if redeemed during the 12-month period commencing on May 22 of the years set forth below.
Redemption Year price 2017 ...... 102.375% 2018 ...... 101.188% 2019 and thereafter ...... 100.000%
Redemption upon changes in withholding taxes
The Issuer may redeem the Notes, in whole but not in part, at its option, at 100% of the outstanding principal amount thereof plus accrued and unpaid interest to the date of redemption and any Additional Amounts (as defined under “—Additional Amounts”) payable with respect thereto, if (1) as a result of (x) any change in, or amendment to, the laws or treaties (or any regulations or rulings promulgated thereunder) of any Relevant Taxing Jurisdiction (as defined above under “—Additional Amounts”) affecting taxation which is publicly announced and becomes effective on or after the Issue Date or, if such Relevant Taxing Jurisdiction has become a Relevant Taxing Jurisdiction after the Issue Date, on or after the date on which such Relevant Taxing Jurisdiction became a Relevant Taxing Jurisdiction under the Indenture or (y) any change in, or amendment to, the existing official published position (including any such change or amendment occurring as a result of the introduction of an official position) regarding the application, administration or interpretation of the laws or treaties (or any regulations or rulings promulgated thereunder) of any Relevant Taxing Jurisdiction (including any such change or amendment occurring as a result of a holding, judgment or order by a court of competent jurisdiction or a change in published practice), which change or amendment is publicly announced and becomes effective on or after the Issue Date or, if such Relevant Taxing Jurisdiction has become a Relevant Taxing Jurisdiction after the Issue Date, on or after the date on which such Relevant Taxing Jurisdiction became a Relevant Taxing Jurisdiction under the Indenture (either, a “Change in Tax Law”), the Issuer has or will become obligated to pay Additional Amounts and (2) such obligation cannot be avoided by the Issuer taking reasonable measures available to it; provided, however, that for this purpose reasonable measures shall not include any change in the Issuer’s jurisdiction of organization or the location of its principal
163 executive office, or the incurrence of material out of pocket costs by it. No such notice of redemption will be given earlier than 90 days prior to the earliest date on which the Issuer would be obligated to pay such Additional Amounts if a payment in respect of the Notes were then due.
Prior to the publication or mailing of any notice of redemption of the Notes as described below, the Issuer must deliver to the Trustee (i) an Officers’ Certificate stating that the Issuer is entitled to effect such redemption and (ii) an opinion of legal counsel of recognized standing stating that the Issuer has or will become obligated to pay Additional Amounts due to a Change in Tax Law. The Trustee will accept this certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent set forth in clauses (1) and (2) above, upon which it will be conclusive and binding on the holders.
For the avoidance of doubt, the implementation of European Council Directive 2003/48/EC or any other directive implementing the conclusions of the ECOFIN Council meetings of 26 and 27 November 2000 on the taxation of savings income or any law implementing or complying with or introduced in order to conform to, such directive will not be a change or amendment for such purposes.
Redemption procedures
If fewer than all of the Notes are being redeemed, the Trustee will select the Notes to be redeemed in compliance with the requirements of the principal securities exchange, if any, on which that series of Notes are listed, or if the Notes are not so listed or such exchange prescribes no method of Selection, on a pro rata basis (or, in the case of Notes issued in global form as described under “Book-Entry, Delivery and Form,” based on a method that most nearly approximates pro rata selection as the Trustee deems fair and appropriate in accordance with the procedures of Euroclear, Clearstream and/or the DTC) in denominations of $1,000 principal amount and integral multiples thereof. Upon surrender of any Note redeemed in part, the holder will receive a new Note equal in principal amount to the unredeemed portion of the surrendered Note. Once notice of redemption is sent to the holders, Notes called for redemption become due and payable at the redemption price on the redemption date, and, commencing on the redemption date, Notes redeemed will cease to accrue interest.
Notice of redemption shall be mailed by first class mail at least 30 but not more than 60 calendar days before the redemption date to each holder of Notes to be redeemed at its registered address. The Issuer will cause a copy of such notice to be published in a daily newspaper with general circulation in New York City (which is expected to be the Wall Street Journal), London (which is expected to be the Financial Times) and, for so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, Luxembourg (which is expected to be the Luxemburger Wort) or, to the extent and in the manner permitted by such rules, posted on the official website of the Luxembourg Stock Exchange (www.bourse.lu). If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption so long as the Issuer has deposited with the paying agent for the Notes funds in satisfaction of the redemption price pursuant to the Indenture. Notes called for redemption become due on the date fixed for redemption. In connection with any redemption, the Issuer will notify the Luxembourg Stock Exchange of any change in the principal amount of Notes outstanding.
Upon presentation of any Note redeemed in part only, the Issuer will execute and the Trustee will authenticate and deliver to the Issuer on the order of the holder thereof, at the Issuer’s expense, a new Note or Notes, of authorized denominations, in principal amount equal to the unredeemed portion of the Note so presented.
164 Any Notes that are redeemed pursuant to the terms of the Notes will be cancelled. Any Notes that are purchased by the Issuer in the open market or otherwise may be cancelled, held or resold by the Issuer as it may determine, provided that any such resales are conducted in compliance with all applicable securities laws.
No mandatory redemption or sinking fund
There will be no mandatory redemption or sinking fund payments for the Notes.
Change of control
Within 60 days of the occurrence of a Change of Control Triggering Event, the Issuer will be required to make an Offer to Purchase all Outstanding Notes at a purchase price equal to 101% of their principal amount plus accrued interest and any additional amounts thereon to the date of purchase.
A“Change of Control Triggering Event” will be deemed to have occurred if a Change of Control has occurred and a Rating Decline occurs.
A“Change of Control” will be deemed to have occurred at such time as:
(a) any Person (other than a Permitted Holder) becomes the Beneficial Owner, directly or indirectly, of more than 50% of the Voting Stock of the Issuer, measured by voting power rather than number of shares;
(b) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Issuer and its respective subsidiaries taken as a whole to any Person;
(c) the adoption of a plan relating to the liquidation or dissolution of the Issuer; or
(d) the first day on which a majority of the members of the Board of Directors of the Issuer are no longer Continuing Directors.
A“Rating Decline” will be deemed to have occurred if at any time within the earlier of (i) 90 days after the date of public notice of a Change of Control, or of the Issuer’s intention or the intention of any Person to effect a Change of Control and (ii) the occurrence of the Change in Control (which period shall in either event be extended so long as the rating of the Notes is under publicly announced consideration for possible downgrade by a Rating Agency), a Rating Agency withdraws its rating of the Notes or the rating of the Notes is decreased by a Rating Agency as follows:
(a) if the Notes are not rated Investment Grade by both Rating Agencies on the Rating Date, by one or more Gradations; or
(b) if the Notes are rated Investment Grade by both Rating Agencies on the Rating Date, either (i) by two or more Gradations or (ii) such that the Notes are no longer rated Investment Grade.
In the event that the Issuer makes an Offer to Purchase the Notes, the Issuer intends to comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act.
Certain covenants
The Indenture will contain, among others, the covenants described below with respect to the Issuer and its Subsidiaries. The accounting terms used in such covenants shall have the meanings assigned to them in accordance with IFRS, which is the accounting standard used by the Issuer in presenting its consolidated financial statements.
165 Limitation on debt
The Issuer may not, and may not permit any of its Subsidiaries to, directly or indirectly, Incur any Debt; provided that the Issuer and any of its Subsidiaries may Incur Debt if at the time of such Incurrence and after giving effect to the Incurrence of such Debt and the application of the proceeds thereof, on a pro forma basis, the Net Leverage Ratio is less than 2.5 to 1.
Notwithstanding the foregoing limitation, the following Debt (“Permitted Debt”) may be Incurred:
(i) the Incurrence by the Issuer of Debt pursuant to the Notes (other than Additional Notes);
(ii) any Debt of the Issuer or any of its Subsidiaries outstanding on the Issue Date after giving effect to the use of proceeds of the Notes;
(iii) Debt owed by the Issuer to any of its Subsidiaries or Debt owed by any Subsidiary of the Issuer to the Issuer or any other Subsidiary of the Issuer; provided, however, that (A) if the Issuer is the obligor on such Debt and the payee is not the Issuer, such Debt must be unsecured and expressly subordinated to the prior payment in full in cash of all obligations then due with respect to the Issuer’s obligations under the Notes, and (B) either (x) the transfer or other disposition by the Issuer or such Subsidiary of any Debt so permitted to a Person (other than to the Issuer or any of its Subsidiaries) or (y) such Subsidiary ceasing to be a Subsidiary of the Issuer, will at the time of such transfer or other disposition, in each case, be deemed to be an Incurrence of such Debt not permitted by this clause (iii);
(iv) the Guarantee by the Issuer or any of its Subsidiaries of Debt of any of the Issuer’s Subsidiaries to the extent that the Guaranteed Debt was permitted to be Incurred by another provision of this covenant;
(v) Acquired Debt;
(vi) Debt consisting of Permitted Interest Rate, Currency or Commodity Price Agreements;
(vii) the Incurrence by the Issuer or any of its Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds of which are used to refund, replace or refinance, Debt Incurred by it pursuant to, or described in, the first paragraph of this “Limitation on Debt” covenant and clauses (i), (ii), (v) and (vii) of this definition of Permitted Debt, as the case may be;
(viii) Debt of the Issuer or any of its Subsidiaries represented by letters of credit in order to provide security for workers’ compensation claims, health, disability or other employee benefits, payment obligations in connection with self-insurance or similar requirements of the Issuer or any of its Subsidiaries in the ordinary course of business;
(ix) customary indemnification, adjustment of purchase price or similar obligations, in each case, incurred in connection with the disposition of any assets of the Issuer or any of its Subsidiaries, and earn-out provisions or contingent payments in respect of purchase price or adjustment of purchase price or similar obligations in acquisition agreements other than Guarantees of Debt incurred by any Person acquiring all or any portion of such assets for the purpose of financing such acquisition; provided that the maximum aggregate liability in respect of each such Incurrence of such Debt will at no time exceed the gross proceeds actually received by the Issuer or any of its Subsidiaries in connection with the related disposition;
(x) obligations in respect of (i) customs, VAT or other tax guarantees, (ii) bid, performance, completion, guarantee, surety and similar bonds, including guarantees or obligations of the Issuer or any of its Subsidiaries with respect to letters of credit
166 supporting such obligations, and (iii) the financing of insurance premiums, in each case in the ordinary course of business and not related to Debt for borrowed money; (xi) Debt of the Issuer or any of its Subsidiaries arising from the honoring by a bank or other financial institution of a check, draft or similar instrument including, but not limited to, electronic transfers, wire transfers, netting services and commercial card payments, drawn against insufficient funds; provided that such Debt is extinguished within 30 days of Incurrence; (xii) the Incurrence by the Issuer or any of its Subsidiaries of Debt and letters of credit under revolving credit facilities for working capital purposes in an aggregate principal amount at any one time outstanding under this clause (xii) (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Issuer and its Subsidiaries thereunder), including all Debt Incurred to renew, refund, refinance, replace, defease or discharge any Debt Incurred pursuant to this clause (xii), not to exceed $75 million; and (xiii) the Incurrence by the Issuer or any of its Subsidiaries of Debt not otherwise permitted to be Incurred pursuant to clauses (i) through (xii) above, which, together with any other outstanding Debt Incurred pursuant to this clause (xiii), including all Debt Incurred to renew, refund, refinance, replace, defease or discharge any Debt Incurred pursuant to this clause (xiii), has an aggregate principal amount at any time outstanding not in excess of $125 million. Notwithstanding the foregoing, the Issuer will not permit any of its Subsidiaries to Guarantee any Debt of the Issuer. The Issuer will not incur any Debt (including Permitted Debt) that is contractually subordinated in right of payment to any other Debt of the Issuer unless such Debt is also contractually subordinated in right of payment to the Notes on substantially identical terms; provided, however, that no Debt will be deemed to be contractually subordinated in right of payment to any other Debt of the Issuer solely by virtue of being unsecured or by virtue of being secured with different collateral or by virtue of being secured on a junior priority basis or by virtue of the application of waterfall or other payment ordering provisions affecting different tranches of Debt. For the purposes of determining compliance with this covenant, in the event that an item of Debt meets the criteria of more than one of the types of Permitted Debt or is entitled to be Incurred pursuant to the first paragraph of this “Limitation on Debt” covenant, the Issuer in its sole discretion may classify and from time to time reclassify such item of Debt or any portion thereof and only be required to include the amount of such Debt as one of such types. For the purposes of determining compliance with any covenant in the Indenture or whether an Event of Default has occurred, in each case, where Debt is denominated in a currency other than U.S. Dollars, the amount of such Debt will be the U.S. Dollar Equivalent determined on the date of such Incurrence; provided, however, that if any such Debt that is denominated in a different currency is subject to an Interest Rate, Currency or Commodity Price Agreement with respect to U.S. Dollars covering principal and premium, if any, payable on such Debt, the amount of such Debt expressed in U.S. Dollars will be adjusted to take into account the effect of such an agreement.
Limitation on Liens securing debt The Issuer may not, and may not permit any of its Subsidiaries to, directly or indirectly, Incur, suffer to exist or become effective any Lien (other than Permitted Liens) to secure any Debt on or with respect to any property or assets now owned or hereafter acquired unless the Notes are equally and ratably secured by such Lien; provided that, if the Debt secured by such Lien is subordinated or junior in right of payment to the Notes, then the Lien securing such Debt shall be subordinated or junior in right of payment to the Lien securing the Notes.
167 Any Lien created for the benefit of the Holders pursuant to this covenant will provide by its terms that such Lien will be automatically and unconditionally released and discharged upon the release and discharge of the initial Lien other than as a consequence of an enforcement action with respect to the assets subject to such Lien.
Limitation on asset dispositions
The Issuer may not, and may not permit any of its Subsidiaries to, make any Asset Disposition in one or more related transactions unless:
(a) the consideration the Issuer or such Subsidiary receives for such Asset Disposition is not less than the Fair Market Value of the assets sold (as determined by the Issuer’s Board of Directors); and
(b) at least 75% of the consideration the Issuer or such Subsidiary receives in respect of such Asset Disposition consists of:
(i) cash or Cash Equivalents;
(ii) the assumption of the Issuer’s or any of its Subsidiaries’ Debt or other liabilities (other than contingent liabilities or Debt or liabilities that are subordinated to the Notes) or Debt or other liabilities of such Subsidiary relating to such assets and, in each case, the Issuer or the Subsidiary, as applicable, is released from all liability on the Debt assumed;
(iii) any Capital Stock or assets of the kind referred to in clauses (c)(iv) or (v) of this “Limitation on Asset Dispositions” covenant; or
(iv) a combination of the consideration specified in clauses (i) through (iii) of this clause (b); and
(c) within 365 days of such Asset Disposition, the Net Available Proceeds are applied (at the Issuer or applicable Subsidiary’s option):
(i) to repay, redeem, retire or cancel outstanding Senior Secured Debt;
(ii) first, to redeem Notes or purchase Notes pursuant to an offer to all Holders at a purchase price equal to at least 100% of the principal amount thereof, plus accrued and unpaid interest and second, to the extent any Net Available Proceeds from such Asset Disposition remain, to any other use as determined by the Issuer or the applicable Subsidiary that is not otherwise prohibited by the Indenture;
(iii) to repurchase, prepay, redeem or repay Pari Passu Debt; provided that the Issuer makes an offer to all Holders on a pro rata basis to purchase their Notes in accordance with the provisions set forth below for an Excess Proceeds Offer;
(iv) to acquire all or substantially all of the assets of, or any Capital Stock of, another Related Business, if, after giving effect to any such acquisition of Capital Stock, the Related Business is or becomes a Subsidiary of the Issuer;
(v) to make a capital expenditure or acquire other assets (other than Capital Stock and cash or Cash Equivalents), rights (contractual or otherwise) and properties, whether tangible or intangible (including ownership interests) that are used or intended for use in connection with a Related Business;
(vi) to the extent permitted, to redeem Notes as provided under “—Optional Redemption”;
(vii) any combination of the foregoing clauses (i) through (vi) of this clause (c); or
(viii) enter into a binding commitment to apply the Net Available Proceeds pursuant to clauses (iv) or (v) of this clause (c); provided that such binding commitment (or any subsequent binding commitment replacing the initial binding commitment that is
168 entered into within 180 days following the aforementioned 365-day period) shall be treated as a permitted application of the Net Available Proceeds from the date of such commitment until the earlier of (X) the date on which such acquisition or expenditure is consummated and (Y) the 180th day following the expiration of the aforementioned 365-day period.
For purposes of this paragraph, any securities, notes or other obligations received by the Issuer or any such Subsidiary from such transferee that are promptly converted by the recipient thereof into cash, Cash Equivalents or readily marketable securities (to the extent of the cash, Cash Equivalents or readily marketable securities received in that conversion), shall be deemed cash.
The amount of such Net Available Proceeds not so used as set forth in the paragraph above constitutes “Excess Proceeds.” Pending the final application of any such Net Available Proceeds, the Issuer may temporarily reduce revolving credit borrowings or otherwise use such Net Available Proceeds in any manner that is not prohibited by the terms of the Indenture.
When the aggregate amount of Excess Proceeds exceeds $75 million, the Issuer will, within 15 Business Days of the end of the applicable period in clause (c) of this “Limitation on Asset Dispositions” covenant, make an offer to purchase (an “Excess Proceeds Offer”) from all Holders and from the holders of any Pari Passu Debt, to the extent required by the terms thereof, on a pro rata basis, in accordance with the procedures set forth in the Indenture or the agreements governing any such Pari Passu Debt, the maximum principal amount (expressed as a minimum amount of $200,000 and integral multiples of $1,000 in excess thereof) of the Notes and any such Pari Passu Debt that may be purchased with the amount of the Excess Proceeds. The offer price as to each Note and any such Pari Passu Debt will be payable in cash in an amount equal to (solely in the case of the Notes) 100% of the principal amount of such Note and (solely in the case of Pari Passu Debt) no greater than 100% of the principal amount (or accreted value, as applicable) of such Pari Passu Debt, plus, in each case, accrued and unpaid interest, if any, to the date of purchase.
To the extent that the aggregate principal amount of Notes and any such Pari Passu Debt tendered pursuant to an Excess Proceeds Offer is less than the aggregate amount of Excess Proceeds, the Issuer may use the amount of such Excess Proceeds not used to purchase Notes and Pari Passu Debt for purposes that are not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and any such Pari Passu Debt validly tendered and not withdrawn by holders thereof exceeds the aggregate amount of Excess Proceeds, the Notes and any such Pari Passu Debt to be purchased will be selected by the Registrar or the paying agent in London on a pro rata basis (based upon the principal amount of Notes and the principal amount or accreted value of such Pari Passu Debt tendered by each holder as provided or calculated by the Issuer). Upon completion of each such Excess Proceeds Offer, the amount of Excess Proceeds will be reset to zero.
If the Issuer is obliged to make an Excess Proceeds Offer, the Issuer will purchase the Notes and Pari Passu Debt, at the option of the holders thereof, in whole or in part in a minimum amount of $200,000 and integral multiples of $1,000 in excess thereof on a date that is not later than 60 days from the date the notice of the Excess Proceeds Offer is given to such holders, or such later date as may be required under the Exchange Act.
If the Issuer is required to make an Excess Proceeds Offer, the Issuer will comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act and any other applicable securities laws and regulations, including the requirements of any applicable securities exchange on which Notes are then listed. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this “Limitation on Asset Dispositions” covenant, the Issuer will comply with such securities laws and regulations and will not be deemed to have breached its obligations described in this “Limitation on Asset Dispositions” covenant by virtue thereof.
169 Existence and maintenance of properties
The Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect the Issuer’s existence, rights (charter and statutory) and franchises; provided, however, that (a) the Issuer will not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the Issuer’s business and that the loss thereof is not disadvantageous in any material respect to the Holders and (b) the foregoing shall not apply to a transaction permitted under “—Merger, Consolidations and Certain Sales of Assets of the Issuer.”
The Issuer will cause all material properties used or useful in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and will cause to be made all necessary repairs thereof, all in the Issuer’s judgment; provided, however, that nothing in this paragraph shall prevent the Issuer or any of its Subsidiaries from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the Issuer’s judgment, desirable in the conduct of its business or the business of the Issuer or such Subsidiary and not disadvantageous in any material respect to the Holders. The Issuer shall, and shall cause its Subsidiaries to, keep at all times all of their properties which are of an insurable nature insured against loss or damage with insurers believed by the Issuer to be responsible to the extent that property of a similar character is usually so insured by corporations similarly situated and owning like properties in accordance with good business practice.
Payments for consent
The Issuer will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder or beneficial holder of Notes for or as an inducement to any consent, waiver or amendment of any of the terms of the provisions of the Indenture or the Notes unless such consideration is offered to be paid and is paid to all Holders and beneficial holders of Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Notwithstanding the foregoing, the Issuer and its Subsidiaries shall be permitted, in any offer or payment of consideration for, or as an inducement to, any consent, waiver or amendment of any of the terms or provisions of the Indenture, to exclude Holders and beneficial holders of Notes in any jurisdiction where (i) the solicitation of such consent, waiver or amendment, including in connection with an offer to purchase for cash, or (ii) the payment of the consideration therefor would require the Issuer or any of its Subsidiaries to file a registration statement, prospectus or similar document under any applicable securities laws (including, but not limited to, the United States federal securities laws and the laws of the European Union or its member states), which the Issuer in its sole discretion determines (acting in good faith) (A) would be materially burdensome (it being understood that it would not be materially burdensome to file the consent document(s) used in other jurisdictions, any substantially similar documents or any summary thereof with the securities or financial services authorities in such jurisdiction); or (B) such solicitation would otherwise not be permitted under applicable law in such jurisdiction.
Payment of taxes
The Issuer will pay or discharge or cause to be paid or discharged, before the same becomes delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Issuer or any of its Subsidiaries, or the Issuer’s or any of its Subsidiaries’ income, profits or property, and (2) all material lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the Issuer’s property, or its Subsidiaries’ property; provided, however, that the Issuer shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which adequate reserves have been established.
170 Provision of financial information
The Issuer will furnish to the Trustee:
(a) within 120 days after the end of the Issuer’s fiscal year, as applicable, beginning with the fiscal year ended December 31, 2013, annual reports containing: (i) a discussion of the Issuer’s financial results including information similar to that in the section in this Offering Memorandum entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (ii) the audited consolidated statement of financial position of the Issuer as at the end of the most recent two fiscal years and audited consolidated income statements and statements of cash flow of Issuer for the most recent three fiscal years, including notes to such financial statements, for and as at the end of such fiscal years and the report of the independent auditors on the financial statements; and (iii) if required under IFRS, a pro forma income statement and a statement of financial position information of the Issuer, together with explanatory footnotes, for any acquisitions, dispositions or recapitalizations that have occurred since the beginning of the most recently completed fiscal year as to which such annual report relates (unless such pro forma information has been provided in a previous report pursuant to clause (b) or (c) below); provided that such pro forma financial information will be provided only to the extent available without unreasonable expense, in which case the Issuer will provide, in the case of a material acquisition, acquired company financials to the extent available without unreasonable expense;
(b) within 60 days after the end of each of the first three fiscal quarters of the Issuer’s fiscal year, as applicable, beginning with the quarter ended June 30, 2013, quarterly reports containing the following information: (i) the unaudited condensed consolidated statement of financial position of the Issuer as at the end of such quarter and unaudited condensed consolidated income statements and statements of cash flow of each of the Issuer for the most recent quarter and year to date periods ending on the unaudited condensed consolidated statement of financial position date and the comparable prior period (as determined by the IFRS standard on preparation of interim condensed consolidated financial statements) and (ii) a copy of the related operating and financial review included in the quarterly earnings release of the Issuer for the applicable fiscal quarter; and within 90 days after the end of each of the first three fiscal quarters of each of the Issuer’s fiscal year, as applicable, if required under IFRS, a pro forma interim condensed consolidated income statement and a statement of financial position of the Issuer, together with explanatory footnotes, for any acquisitions, dispositions or recapitalizations that have occurred since the beginning of the most recently completed fiscal year as to which such quarterly report relates; provided that such pro forma financial information will be provided only to the extent available without unreasonable expense, in which case the Issuer will provide, in the case of a material acquisition, acquired company financial statements to the extent available without unreasonable expense; and
(c) promptly after the occurrence of any material acquisition, disposition or restructuring of the Issuer and its Subsidiaries taken as a whole, or any changes of the Chief Executive officer or Chief Financial Officer at the Issuer, or a change in the auditors of the Issuer, or any other material event that the Issuer announces publicly, a press release or report containing a description of such event.
In addition, so long as the Notes remain outstanding and during any period during which the Issuer is not subject to Section 13 or 15(d) of the Exchange Act nor exempt therefrom pursuant to Rule 12g3-2(b), the Issuer will furnish to Holders, holders of beneficial owners and prospective purchasers of the Notes upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
The Issuer will also make available copies of all reports furnished to the Trustee (i) on the Issuer’s website, and (ii) for so long as the Notes are listed on the Luxembourg Stock Exchange and
171 admitted to trading on the Euro MTF Market and to the extent that the rules and regulations of the Luxembourg Stock Exchange so require, copies of such reports will be available during normal business hours at the offices of the paying agent in London.
So long as any Notes are outstanding, the Issuer will also:
(i) hold a conference call (X) within 10 Business Days after furnishing to the Trustee the quarterly reports required of the Issuer by clauses (a) and (b) of the first paragraph of this covenant (the “Noteholder Reports”) to discuss the Noteholder Reports and the results of operations of the Issuer for the relevant reporting period or (Y) for so long as the Issuer has its common equity shares listed on the NASDAQ OMX Stockholm and remains subject to their listing rules and reporting requirements and such reporting requirements require that the Issuer provide annual and quarterly reports to its common equity shareholders (the “Equityholder Reports”) within the applicable period required by such reporting requirements, to discuss the Equityholder Reports and the results of operations of the Issuer for the relevant reporting period; and
(ii) issue a press release to an internationally recognized wire service or provide notice on the Issuer’s website on which Noteholder Reports are posted, in each case no fewer than three Business Days prior to the date of the conference call required by the foregoing clause (i), announcing the time and date of such conference call and either including all information necessary to access the call or directing Holders, beneficial owners of the Notes, prospective investors, broker dealers and securities analysts to contact the appropriate person at the Issuer to obtain such information.
Maintenance of listing
The Issuer will use its commercially reasonable efforts to obtain and maintain the listing of the Notes on the Luxembourg Stock Exchange for so long as any Notes remain Outstanding; provided that if the Issuer is unable to obtain admission to listing of the Notes on the Luxembourg Stock Exchange or if at any time the Issuer determines that it will not maintain such listing, it will use its commercially reasonable efforts to obtain and maintain a listing of the Notes on another recognized stock exchange.
Limitation on lines of business
The Issuer, together with its Subsidiaries, will not primarily engage in any business other than in a Related Business.
Suspension of certain covenants when notes rated investment grade
If on any date following the Issue Date:
(a) the Notes are rated Investment Grade by both Rating Agencies; and
(b) no Default or Event of Default shall have occurred and be continuing on such date, then, the Issuer will notify the Trustee and beginning on that day and continuing until such time, if any, at which the Notes cease to be rated Investment Grade by either Rating Agency (such period, the “Suspension Period”), the covenants specifically listed under the following captions in this “Description of the Notes” will no longer be applicable to the Notes and any related default provisions of the Indenture will cease to be effective and will not be applicable to the Issuer and its Subsidiaries:
(i) “—Limitation on Asset Dispositions”;
(ii) “—Limitation on Debt”; and
(iii) clause (c) of the first paragraph of the covenant described under “—Merger, Consolidations or Certain Sales of Assets of the Issuer”.
172 Such covenants will not, however, be of any effect with regard to the actions of Issuer and its Subsidiaries properly taken during the continuance of the Suspension Period; provided that all Debt Incurred during the Suspension Period will be classified to have been Incurred pursuant to clause (ii) of the definition of Permitted Debt. Upon the occurrence of a Suspension Period, the amount of Excess Proceeds shall be reset at zero.
There can be no assurance that the Notes will ever achieve or maintain an Investment Grade Status.
Merger, consolidations and certain sales of assets of the Issuer The Issuer may not, in a single transaction or a series of related transactions, (i) consolidate with or merge into any other Person, or (ii) directly or indirectly, convey, transfer, sell, lease or otherwise dispose of all or substantially all of the its assets to any other Person, unless:
(a) Either (i) the Issuer is the surviving corporation; or (ii) the Person formed by or surviving any such consolidation or merger or to which such sale, assignment, transfer, conveyance or other disposition has been made (A) shall expressly assume, by a supplemental indenture executed and delivered to the Trustee in form satisfactory to the Trustee, all of the Issuer’s obligations under the Indenture and (B) is organized under the laws of any member state of the European Union, Norway, Switzerland, Canada, Jersey, Guernsey, Mauritius, Cayman Islands, British Virgin Islands, any state of the United States of America or the District of Columbia;
(b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing;
(c) with respect to a consolidation, merger, conveyance, transfer, sale, lease or other disposal of the Issuer, immediately after giving effect to such transaction and treating any Debt which becomes the Issuer’s or any of its Subsidiaries’ obligation, as applicable, or that of the Person formed by or surviving any such consolidation or merger (if other than the Issuer), as a result of such transaction as having been Incurred at the time of the transaction, the Issuer (including any successor Person) could Incur at least $1.00 of additional Debt pursuant to the first paragraph under the heading “—Certain Covenants—Limitation on Debt”; provided, however, that this clause (c) will not apply if, in the good faith determination of the Issuer’s Board of Directors the principal purpose of such transaction is to change the Issuer’s jurisdiction of incorporation; and
(d) the Issuer delivers to the Trustee an Officer’s Certificate stating that such consolidation, merger or transfer and such supplemental indenture comply with this covenant.
The Indenture will provide that upon any consolidation or merger in which the Issuer is not the continuing corporation or any transfer (excluding any lease) of all or substantially all of the assets of the Issuer in accordance with the foregoing, the successor Person shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under the Indenture with the same effect as if such successor Person had been named as such.
Events of default The following will be Events of Default under the Indenture:
(a) failure to pay principal of, or premium, if any, on, any Note when due (at maturity, upon redemption or otherwise);
(b) failure to pay any interest (including Additional Amounts) on any Note when due, which failure continues for 30 days;
(c) default in the payment of principal and interest on Notes required to be purchased pursuant to an Offer to Purchase as described under “—Change of Control” and “—Certain Covenants—Limitation on Asset Dispositions” when due and payable;
173 (d) failure to perform or comply with the provisions described under “—Merger, Consolidations and Certain Sales of Assets of the Issuer”;
(e) failure of the Issuer to perform any other of the covenants or agreements under the Indenture or the Notes, which failure continues for 60 days after written notice to the Issuer by the Trustee or Holders of at least 25% in aggregate principal amount of Outstanding Notes;
(f) default under the terms of any instrument evidencing or securing Debt for money borrowed by the Issuer or any of its Subsidiaries, if that default:
(i) results in the acceleration of the payment of such Debt prior to its Stated Maturity; or
(ii) is caused by the failure to pay such Debt at its Stated Maturity after giving effect to the expiration of any applicable grace periods (and other than by regularly scheduled required prepayment) and such failure to make any payment has not been waived or the Stated Maturity of such Debt has not been extended,
and, in each case, the outstanding principal amount of any such Debt under which there has been a failure to pay at Stated Maturity thereof or the payment of which has been so accelerated, aggregates $100 million or more;
(g) failure by the Issuer or any of its Subsidiaries to pay final judgments entered by a court or courts of competent jurisdiction aggregating in excess of $100 million (exclusive of any amounts that a solvent insurance company has acknowledged liability for), which judgments shall not have been discharged or waived and there shall have been a period of 60 consecutive days during which a stay of enforcement of such judgment or order, by reason of an appeal, waiver or otherwise, shall not have been in effect; and
(h) certain events of bankruptcy, insolvency or reorganization affecting the Issuer or any of its Subsidiaries that is a Significant Subsidiary or group of its Subsidiaries that, taken together, would constitute a Significant Subsidiary.
Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of the Holders, unless such Holders shall have offered to the Trustee indemnity reasonably satisfactory to it.
The Issuer will be required to furnish to the Trustee annually a statement as to its performance of certain of their respective obligations under the Indenture and as to any default in such performance.
Acceleration of the Notes If an Event of Default specified in clause (h) above shall occur, the maturity of all Outstanding Notes shall automatically be accelerated and the principal amount of the Notes, together with any premium, accrued interest or Additional Amounts thereon, shall be immediately due and payable. If any other Event of Default shall occur and be continuing, the Trustee or the Holders of not less than 25% of the aggregate principal amount of the Notes then Outstanding may, by written notice to the Issuer (and to the Trustee if given by Holders), declare the principal amount of the Notes, together with accrued interest thereon, immediately due and payable. The right of the Holders to give such acceleration notice shall terminate if the event giving rise to such right shall have been cured before such right is exercised. Any such declaration may be annulled and rescinded by written notice from the Trustee or the Holders of a majority of the aggregate principal amount of the Notes then outstanding to the Issuer if all amounts then due with respect to the Notes are paid (other than amount due solely because of such declaration) and all other defaults with respect to the Notes are cured.
Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of its
174 rights or powers under the Indenture at the request or direction of any Holders, unless such Holders have offered to the Trustee indemnity reasonably satisfactory to it. The Holders of a majority in aggregate principal amount of the Outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, to the extent such action does not conflict with the provisions of the Indenture or applicable law.
No Holder of any Note will have any right to institute any proceeding with respect to the Indenture or the Notes or for any remedy thereunder, unless (i) such Holder has previously given to the Trustee written notice of a continuing Event of Default, (ii) the Holders of at least 25% in aggregate principal amount of the Outstanding Notes shall have made a written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee, such Holder or Holders have offered to the Trustee indemnity reasonably satisfactory to it, the Trustee for 60 days after receipt of such notice has failed to institute any such proceeding and (ii) no direction inconsistent with such request shall have been given to the Trustee during such 60 day-period by the Holders of a majority in principal amount of the Outstanding Notes. However, such limitations do not apply to a suit individually instituted by a Holder of a Note for enforcement of payment of the principal of, or interest on, such Note on or after respective due dates expressed in such Note.
Modification and waivers
The Issuer and the Trustee may, without the consent of the Holders of the Notes, amend, waive or supplement the Indenture for certain specific purposes, including, among other things, curing ambiguities, defects or inconsistencies, or making any other provisions with respect to matters or questions arising under the Indenture or the Notes or making any other change that will not adversely affect the interest of any Holder of the Notes in any material respect.
Modifications and amendments of the Indenture may be made by the Issuer and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Notes; provided, however, that no such modification or amendment may, without the consent of the Holders of 90% of the aggregate principal amount of then Outstanding Notes affected thereby:
(a) change the Stated Maturity or the principal of, or any installment of interest on, any Note;
(b) reduce the principal amount of, (or premium) or interest on (or rate thereof), any Note;
(c) change the place or currency of payment of principal of (or premium), or interest on, any Note;
(d) impair the right to institute suit for the enforcement of any payment on or with respect to any Note;
(e) reduce the above stated percentage of Outstanding Notes necessary to modify or amend the Indenture;
(f) reduce the percentage of aggregate principal amount of Outstanding Notes necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults; or
(g) following the mailing of any Offer to Purchase, modify any Offer to Purchase for the Notes required under the “—Certain Covenants—Limitation on Asset Dispositions” and the “—Change of Control” covenants contained in the Indenture in a manner adverse to the Holders thereof.
The Holders of a majority in aggregate principal amount of the Outstanding Notes, on behalf of all Holders of Notes, may waive compliance by the Issuer with certain restrictive provisions of the
175 Indenture. Subject to certain rights of the Trustee, as provided in the Indenture, the Holders of a majority in aggregate principal amount of the Outstanding Notes, on behalf of all Holders of the Notes, may waive any past default under the Indenture, except a default in the payment of principal, premium or interest or a default arising from failure to purchase any Note tendered pursuant to an Offer to Purchase.
Satisfaction and discharge of the Indenture The Indenture will be discharged and will cease to be of further effect as to all Notes issued thereunder, when:
(a) either:
(i) all Notes that have been authenticated, except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has been deposited in trust and thereafter repaid to the Issuer, have been delivered to the Trustee for cancellation; or
(ii) all Notes that have not been delivered to the Trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or will become due and payable within one year and the Issuer has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust solely for the benefit of the holders, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non-callable Government Securities, in each case, in amounts as will be sufficient, without consideration of any reinvestment of interest, to pay and discharge the entire Debt on the Notes not delivered to the Trustee for cancellation for principal, premium and Additional Amounts, if any, and accrued interest to the date of maturity or redemption;
(b) the Issuer has paid or caused to be paid all sums payable by it under the Indenture; and
(c) the Issuer has delivered irrevocable instructions to the Trustee under the Indenture to apply the deposited money toward the payment of the Notes at maturity or on the redemption date, as the case may be.
In addition, the Issuer must deliver an Officer’s Certificate and an opinion of counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied; provided that any such counsel may rely on any Officer’s Certificate as to matters of fact (including as to compliance with the foregoing clauses (a), (b) and (c)).
Defeasance The Issuer may at any time, at the option of its Board of Directors evidenced by a resolution set forth in an Officer’s Certificate, elect to have all of its obligations discharged with respect to the outstanding Notes (“Legal Defeasance”) except for:
(a) the rights of Holders of Outstanding Notes to receive payments in respect of the principal of, or interest (including Additional Amounts) or premium, if any, on, such Notes when such payments are due from the trust referred to below;
(b) the Issuer’s obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust;
(c) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuer’s obligations in connection therewith; and
(d) the Legal Defeasance and Covenant Defeasance provisions of the Indenture.
In addition, the Issuer may, at its option and at any time, elect to have the obligations of the Issuer released with respect to certain covenants (including its obligation to make an Offer to
176 Purchase all Outstanding Notes upon the occurrence of a Change of Control Triggering Event and Excess Proceeds Offers) that are described in the Indenture (“Covenant Defeasance”) and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, all Events of Default described under “—Events of Default” (except those relating to payments on the Notes or, solely with respect to the Issuer, bankruptcy or insolvency events) will no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non-callable Government Securities, in each case, in amounts as will be sufficient, in the opinion of an internationally recognized investment bank, appraisal firm or firm of independent public accountants, to pay the principal of, or interest (including Additional Amounts and premium, if any) on the outstanding Notes on their Stated Maturity or on the applicable redemption date, as the case may be, and the Issuer must specify whether the Notes are being defeased to such stated date for payment or to a particular redemption date;
(b) in the case of Legal Defeasance, the Issuer must deliver to the Trustee an opinion reasonably acceptable to the Trustee of United States counsel confirming that (i) the Issuer has received from, or there has been published by, the U.S. Internal Revenue Service a ruling or (ii) since the Issue Date, there has been a change in the applicable U.S. federal income tax law, in either case to the effect that, and based thereon such opinion of counsel will confirm that, the Holders of the Outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred;
(c) in the case of Covenant Defeasance, the Issuer must deliver to the Trustee an opinion reasonably acceptable to the Trustee of United States counsel confirming that the Holders of the Outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred;
(d) the Issuer must deliver to the Trustee an Officer’s Certificate stating that the deposit was not made by the Issuer with the intent of preferring the Holders of Notes over the other creditors of the Issuer with the intent of defeating, hindering, delaying or defrauding any creditors of the Issuer or others; and
(e) the Issuer must deliver to the Trustee an Officer’s Certificate and an opinion of counsel, subject to customary assumptions and qualifications, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with.
No liability of directors, officers, employees, incorporators, members and stockholders
None of the directors, officers, employees, incorporators, members or stockholders, as such, of the Issuer, will have any liability for any of the Issuer’s obligations under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such obligations. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. This waiver may not be effective to waive liabilities under applicable securities laws.
177 Notices Notice regarding the redemption of or an Offer to Purchase the Notes will be (1) if Global Notes are outstanding, provided to the depositary for such global Notes as the registered owner thereof and published in a leading newspaper having a general circulation in New York City (which is expected to be the Wall Street Journal) and London (which is expected to be the Financial Times) or (2) in the case of definitive Notes, mailed to holders of such definitive Notes by first class mail at their respective addresses as they appear on the registration books of the Registrar. In addition to the foregoing, all notices to Holders of the Notes will, if and so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of such stock exchange so require, be published in a daily newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or, to the extent and in the manner permitted by such rules, posted on the official website of the Luxembourg Stock Exchange (www.bourse.lu) and be provided to the Luxembourg Stock Exchange. If and so long as the Notes are listed on any other securities exchange, notices will also be given in accordance with any applicable requirements of such securities exchange. If and for so long as any Notes are represented by one or more Global Notes and ownership of book-entry interests therein are shown on the records of DTC, Euroclear or Clearstream, or any successor or other clearing agency appointed by the book-entry depositary at the Issuer’s request, notices will also be delivered to each such clearing agency for communication to the owners of such book-entry interests. Notices given by publication will be deemed given on the first date on which publication is made and notices given by first class mail, postage prepaid, will be deemed given five calendar days after mailing.
Concerning the trustee Except during the continuance of an Event of Default, the Trustee need perform only those duties that are specifically set forth in the Indenture and no others, and no implied covenants or obligations will be read into the Indenture against the Trustee. In case an Event of Default has occurred and is continuing, the Trustee shall exercise those rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of the Indenture will require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties thereunder, or in the exercise of its rights or powers, unless it receives indemnity satisfactory to it against any loss, liability or expense.
Prescription Claims against the Issuer for the payment of principal or Additional Amounts, if any, on the Notes will be prescribed ten years after the applicable due date for payment thereof. Claims against the Issuer for the payment of interest on the Notes will be prescribed five years after the applicable due date for payment of interest.
Governing law The Indenture and the Notes shall be governed by and construed in accordance with the laws of the State of New York.
Submission to jurisdiction; waivers The Issuer will irrevocably and unconditionally: (1) submit itself and its property in any legal action or proceeding relating to the Indenture to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the general jurisdiction of the Courts of the State of New York, sitting in the Borough of Manhattan, The City of New York, the courts of the United States of America for the Southern District of New York, appellate courts from any thereof and courts of its own corporate domicile, with respect to actions brought against it as defendant;
178 (2) consent that any such action or proceeding may be brought in such courts and waive any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (3) waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to the Indenture, the Notes or the transactions contemplated hereby; and (4) appoint CT Corporation System, currently having an office at 111 Eighth Avenue, New York, New York 10011, as its agent to receive on its behalf service of all process in any such action or proceeding, such service being hereby acknowledged by the Issuer to be effective and binding in every respect.
Certain definitions “Acquired Debt” means Debt of any Person at the time it becomes a Subsidiary of the Issuer or is merged, consolidated, amalgamated or otherwise combined with or into a Subsidiary of the Issuer (other than Debt Incurred in connection with, or in contemplation of, such Person becoming a Subsidiary of the Issuer, or merging, consolidating, amalgamating or otherwise combining with or into a Subsidiary of the Issuer); provided that the Net Leverage Ratio, after giving pro forma effect to the transaction or transactions by which such Person becomes a Subsidiary of the Issuer or is merged, consolidated, amalgamated or otherwise combined with or into a Subsidiary of the Issuer, would be not more than such ratio before giving effect to such transaction or transactions. “Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing. “Applicable Redemption Premium” means, with respect to any Note on any redemption date, the greater of: (a) 1.0% of the principal amount of the Note; and (b) the excess of: (i) the present value at such redemption date of: (x) the redemption price of such Note at May 22, 2017 (such redemption price being set forth in the table appearing below the caption “—Optional Redemption—Optional Redemption on or after May 22, 2017”); plus (y) all required interest payments that would otherwise be due to be paid on such Note during the period between the redemption date and May 22, 2017 (excluding accrued but unpaid interest), computed using a discount rate equal to the Treasury Rate at such redemption date plus 50 basis points; over (ii) the outstanding principal amount of the Note. For the avoidance of doubt, the calculation of the Applicable Redemption Premium shall not be a duty or obligation of the Trustee or the paying agents. “Asset Disposition” means any transfer, conveyance, sale, lease or other disposition by the Issuer or any of its Subsidiaries (including a consolidation or merger or other sale of any such Subsidiary with, into or to another Person in a transaction in which such Subsidiary ceases to be a Subsidiary of the Issuer, but excluding a disposition by a Subsidiary of the Issuer to the Issuer or a Subsidiary of the Issuer which is an 80% or more owned Subsidiary of the Issuer) of (i) shares of Capital Stock (other than directors’ qualifying shares and shares to be held by third parties to satisfy applicable legal requirements) or other ownership interests of a Subsidiary of the Issuer, (ii) substantially all of the assets of the Issuer or any of its Subsidiaries representing a division or
179 line of business or (iii) other assets or rights of the Issuer or any of its Subsidiaries outside of the ordinary course of business; provided that the term “Asset Disposition” shall not include: (a) any dispositions of assets in a single transaction or series of transactions with an aggregate Fair Market Value in any calendar year of not more than $25 million; (b) any disposition of Tower Equipment; provided that any cash or Cash Equivalents received in connection with such disposition must be applied in accordance with the covenant described under the heading “—Certain Covenants—Limitation on Asset Dispositions”; (c) a transfer of assets between or among the Issuer and any of its Subsidiaries; (d) the issuance of Capital Stock by a Subsidiary to the Issuer or to another Subsidiary of the Issuer; (e) the sale, lease or other transfer of products, services, accounts receivable, inventory or other assets in the ordinary course of business and any sale or other disposition of damaged, surplus, worn-out or obsolete assets; (f) licenses and sublicenses of the Issuer or any of its Subsidiaries in the ordinary course of business; (g) any surrender or waiver of contract rights or settlement, release, recovery on or surrender of contract, tort or other claims in the ordinary course of business; (h) the disposition of receivables in connection with the compromise, settlement or collection thereof in the ordinary course of business or in bankruptcy or similar proceedings; (i) the granting of Liens not prohibited by the covenant described under the heading “—Certain Covenants—Limitation on Liens Securing Debt”; (j) a transfer or disposition of assets that is governed by the provisions of the Indenture described under the heading “—Merger, Consolidations and Certain Sales of Assets of the Issuer”; (k) the sale or other disposition of cash or Cash Equivalents; and (l) the foreclosure, condemnation or any similar action with respect to any property or other assets. “Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular “person” (as that term is used in Section 13(d)(3) of the Exchange Act), such “person” will be deemed to have beneficial ownership of all securities that such “person” has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only after the passage of time. The terms “Beneficially Owns” and “Beneficially Owned” have a corresponding meaning. “Board of Directors” means: (a) with respect to any corporation, the board of directors or managers of the corporation (which, in the case of any corporation having both a supervisory board and an executive or management board, shall be the executive or management board) or any duly authorized committee thereof; (b) with respect to any partnership, the board of directors of the general partner of the partnership or any duly authorized committee thereof; (c) with respect to a limited liability company, the managing member or members (or analogous governing body) or any controlling committee of managing members thereof; and (d) with respect to any other Person, the board or any duly authorized committee thereof or committee of such Person serving a similar function.
180 “Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, London or Luxembourg, are authorized or obligated by law or executive order to close. “Capital Lease Obligation” of any Person means the obligation to pay rent or other payment amounts under a lease of real or personal property of such Person which is required to be classified and accounted for as a capital lease on the face of a statement of financial position of such Person in accordance with IFRS. The Stated Maturity of such obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. The principal amount of Debt represented by such obligation shall be the capitalized amount thereof that would appear on the face of a statement of financial position of such Person in accordance with IFRS. “Capital Stock” of any Person means any and all shares, interests, participation or other equivalents (however designated) of corporate stock or other equity participation, including partnership interests, whether general or limited, of such Person. “Cash Equivalents” means, with respect to any Person: (a) Government Securities; (b) deposit accounts, certificates of deposit and Eurodollar time deposits and money market deposits, bankers’ acceptances and overnight bank deposits, in each case issued by or with (i) BNP Paribas, J.P. Morgan Securities plc, Standard Bank Plc or any of their Affiliates, (ii) a bank or trust company which is organized under the laws of the United States of America, any state thereof, Switzerland, Canada, Australia or any member state of the European Union, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $100 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated “A” (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act), or (iii) any money market fund sponsored by a U.S. registered broker dealer or mutual fund distributor; (c) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i) and (ii) entered into with any financial institution meeting the qualifications specified in clause (ii) above; (d) commercial paper having one of the two highest ratings obtainable from Fitch or Moody’s and in each case maturing within 365 days after the date of acquisition; (e) money market funds mutual funds at least 95% of the assets of which constitute Cash Equivalents of the types described in clauses (a) through (d) of this definition; and (f) with respect to any Person organized under the laws of, or having its principal business operations in, a jurisdiction outside the United States, those investments that are of the same type as investments in clauses (a), (c) and (d) of this definition except that the obligor thereon is organized under the laws of the country (or any political subdivision thereof) in which such Person is organized or conducting business. “Clearstream” means Clearstream Banking, société anonyme. “Consolidated EBITDA” means, for any period, with respect to the Issuer, the following amount calculated on a consolidated basis in accordance with IFRS: (i) revenues; less (ii) cost of sales (excluding depreciation and amortization); less (iii) sales and marketing expenses; less (iv) general and administrative expenses; plus (v) other operating income,
181 in each case as specified in the consolidated income statement of the Issuer and its Subsidiaries for the applicable period; provided that, in the event the Issuer has made Investments, Asset Dispositions or acquisitions of assets not in the ordinary course of business (including acquisitions of other Persons by merger, consolidation or purchase of Capital Stock) during or after such period, Consolidated EBITDA shall be calculated on a pro forma basis as if the Investments, Asset Dispositions or acquisitions had taken place on the first day of such period.
“Consolidated Interest Expense” means for any period the consolidated interest expense included in the consolidated income statement (without deduction of interest income) of the Issuer and its Subsidiaries for such period prepared in accordance with IFRS, excluding the interest component of any Capital Lease Obligation existing on the Issue Date, and calculated without double counting any obligations described in clauses (i), (ii) or (viii) of the first paragraph of the definition of Debt that are Incurred by any Subsidiary of the Issuer and any obligations described in paragraph (a) of the definition of Debt.
“Consolidated Net Assets” means, as of any date of determination, the total assets shown on the consolidated statement of financial position of the Issuer as of the most recent date for which such a statement of financial position is available, determined on a consolidated basis in accordance with IFRS, less all goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expenses, organization expenses and any other amounts classified as intangible assets in accordance with IFRS.
“Consolidated Net Debt” means, with respect to the Issuer as of any date of determination, the sum without duplication of (1) the total amount of Debt of the Issuer and its Subsidiaries on a consolidated basis, minus (2) the sum without duplication of (x) (i) the amount of cash and Cash Equivalents (other than cash or Cash Equivalents received from the Incurrence of Debt by the Issuer or any of its Subsidiaries to the extent such cash or Cash Equivalents has not been subsequently applied or used for any purpose not prohibited by the Indenture) of the Issuer and its Subsidiaries on a consolidated basis that would be stated on the statement of financial position of the Issuer as of such date in accordance with IFRS, plus (ii) deposits pledged to secure indebtedness, as such amount is recorded under the line item “pledged deposits” under non- current assets on the Issuer’s statement of financial position, less (y) Restricted Cash.
“Continuing Directors” means, as of any date of determination, any member of the Board of Directors of the Issuer who:
(a) was a member of such Board of Directors on the Issue Date; or
(b) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election.
“Debt” means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent:
(i) the principal of and premium, if any, in respect of every obligation of such Person for money borrowed;
(ii) the principal of and premium, if any, in respect of every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses;
(iii) every reimbursement obligation of such person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such Person (but only to the extent such obligations are not reimbursed within 30 days following receipt by such Person of a demand for reimbursement);
(iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business and
182 excluding purchase price holdbacks in respect of a portion of the purchase price of an asset to satisfy warranty or other unperformed obligations of the applicable seller or, in connection with the purchase by the Issuer or any of its Subsidiaries of any business, any post-closing payment adjustments to which the seller may become entitled to the extent such payment is determined by a final closing statement of financial position or such payment depends on the performance of such business after the closing);
(v) every Capital Lease Obligation of such Person;
(vi) all Redeemable Stock issued by such Person;
(vii) the net obligation of such Person under Interest Rate, Currency or Commodity Price Agreements of such Person; and
(viii) every obligation of the type referred to in clauses (i) through (vii) of another Person and all dividends of another Person the payment of which, in either case, such Person has Guaranteed or is responsible or liable for, directly or indirectly, as obligor, guarantor or otherwise.
The “amount” or “principal amount” of Debt at any time of determination as used herein represented by (a) any Debt issued at a price that is less than the principal amount at maturity thereof, shall be the amount of the liability in respect thereof determined in accordance with IFRS, and (b) any Redeemable Stock, shall be the maximum fixed redemption or repurchase price in respect thereof. Notwithstanding anything else to the contrary, for all purposes under the Indenture, the amount of Debt Incurred, repaid, redeemed, repurchased or otherwise acquired by a Subsidiary of the Issuer shall equal the liability in respect thereof determined in accordance with IFRS and reflected on the Issuer’s consolidated statement of financial position.
The term “Debt” shall not include:
(a) obligations described in clauses (i), (ii) or (viii) of the first paragraph of this definition of Debt that are Incurred by a Subsidiary of the Issuer (the “Proceeds Recipient”) and owed to a bank or other lending institution (the “On-Lend Bank”) to facilitate the substantially concurrent on-lending of proceeds (the “Proceeds On-Loan”) from Debt Incurred by the Issuer or any of its Subsidiaries (other than the Proceeds Recipient) as permitted by the covenant described under the heading “—Certain Covenants—Limitation on Debt” (the “Initial Debt”) to the extent (i) the principal obligations in respect of the Proceeds On-Loan are secured by security over cash granted in favor of the On-Lend Bank or any of its affiliates in an amount not less than the principal amount of the Proceeds On-Loan, (ii) the Proceeds On-Loan is put in place substantially concurrently with a loan by the Issuer or any of its Subsidiaries (other than the Proceeds Recipient) to the On-Lend Bank (the “On-Lend Bank Borrowing”) pursuant to which the Proceeds Recipient is entitled to reduce the principal amount of the Proceeds On-Loan by an amount equal to the principal amount of the On-Lend Bank Borrowing if a default or acceleration occurs with respect to such On-Lend Bank Borrowing or (iii) the substantial risks and rewards of the Proceeds On-Loan are transferred, using a synthetic instrument or any other arrangement or agreement, from the On-Lend Bank to the Issuer or any of its Subsidiaries (other than the Proceeds Recipient) in exchange for an amount not less than (x) the amount of cash granted in favor of the On-Lend Bank or any of its affiliates or (y) the outstanding amount of the On-Lend Bank Borrowing, as applicable, in each case as at the effective date of such transfer;
(b) any liability of the Issuer or any of its Subsidiaries (other than the Proceeds Recipient) attributable to a synthetic instrument or any other arrangement or agreement described in paragraph (a) (iii) above to the extent such obligation under the relevant instrument, arrangement or agreement has not come due but is classified as a financial liability in accordance with IFRS and recorded as a current liability on the Issuer’s consolidated statement of financial position;
(c) any Restricted MFS Cash;
183 (d) any liability of the Issuer attributable to the put option granted by the Issuer in respect of the put option holder’s interest in Telefonica Celular S.A. de C.V. (Celtel) and any liability of the Issuer attributable to a put option or similar instrument, arrangement or agreement entered into after the Issue Date granted by the Issuer relating to an interest in any other entity, in each case to the extent such option has not been exercised or such obligation under the relevant instrument, arrangement or agreement has not come due but is classified as a financial liability in accordance with IFRS, and recorded as a current liability on the Issuer’s consolidated statement of financial position; and (e) any standby letter of credit, performance bond or surety bond provided by the Issuer or any Subsidiary that are customary in the Related Business to the extent such letters of credit or bonds are not drawn upon or, if and to the extent drawn upon, are honored in accordance with their terms. “Default” means an event that with the passing of time or the giving of notice, or both would constitute an Event of Default. “DTC” means The Depository Trust Company. “Equity Investor” means Investment AB Kinnevik. “Equity Offering” means a sale of Qualified Capital Stock of the Issuer or a Holding Company of the Issuer pursuant to which the net cash proceeds are contributed to the Issuer in the form of a subscription for, or a capital contribution in respect of, Qualified Capital Stock of the Issuer. “Euroclear” means Euroclear Bank SA/NV. “European Union” means the European Union as of January 1, 2004, including the countries of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom, but not including any country which became or becomes a member of the European Union after January 1, 2004. “Fair Market Value” means, with respect to any asset or property, the sale value that would be obtained in an arm’s length free market transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Issuer’s Chief Executive Officer, Chief Financial Officer or responsible accounting or financial officer. “Fitch” means Fitch Rating, Ltd. and its successors. “Government Securities” means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which obligations or guarantee the full faith and credit of the United States is pledged and which have a remaining weighted average life to maturity of not more than one year from the date of Investment therein. “Gradation” means a gradation within a Rating Category or a change to another Rating Category, which shall include: (i) “+” and “—” in the case of Fitch’s current Rating Categories (e.g., a decline from BB+ to BB would constitute a decrease of one gradation), (ii) 1, 2 and 3 in the case of Moody’s current Rating Categories (e.g., a decline from Ba1 to Ba2 would constitute a decrease of one gradation), or (iii) the equivalent in respect of successor Rating Categories of Fitch or Moody’s or Rating Categories used by Rating Agencies other than Fitch and Moody’s. “Guarantee” by any Person means any obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guaranteeing, any Debt of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person: (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Debt; (ii) to purchase property, securities or services for the purpose of assuring the holder of such Debt of the payment of such Debt; or
184 (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt (and “Guaranteed” and “Guaranteeing” shall have meanings correlative to the foregoing); provided, however, that the Guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business.
“Holder” means the Person in whose name a Note is recorded on the Registrar’s books.
“Holding Company” means any Person (other than a natural person) which legally and Beneficially Owns more than 50% of the Voting Stock and/or Capital Stock of another Person, either directly or through one or more Subsidiaries.
“IFRS” means the International Financial Reporting Standards promulgated by the International Accounting Standards Board or any successor board or agency as adopted by the European Union, as in effect on the Issue Date.
“Incur” means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Debt or other obligation, including by acquisition of Subsidiaries (the Debt of any other Person becoming a Subsidiary of such Person being deemed for this purpose to have been incurred at the time such other Person becomes a Subsidiary), or the recording, as required pursuant to IFRS or otherwise, of any such Debt or other obligation on the statement of financial position of such Person (and “Incurrence,” “Incurred,” “Incurrable” and “Incurring” shall have meanings correlative to the foregoing); provided, however, that a change in IFRS that results in an obligation of such Person that exists at such time becoming Debt shall not be deemed an Incurrence of such Debt.
“Interest Rate, Currency or Commodity Price Agreement” of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements) relating to, or the value of which is dependent upon, interest rates, currency exchange rates or commodity prices or indices (excluding contracts for the purchase or sale of goods in the ordinary course of business).
“Investment” by any Person means any direct or indirect loan, advance or other extension of credit or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person, including any payment on a Guarantee of any obligation of such other Person, together with all items that are or would be classified as Investments on a statement of financial position (excluding the footnotes thereto) prepared in accordance with IFRS, but shall not include (a) trade accounts receivable in the ordinary course of business on credit terms made generally available to the customers of such Person, or (b) commission, travel, payroll, entertainment, relocation and similar advances to officers and employees and profit sharing and other employee benefit plan contributions made in the ordinary course of business. Except as otherwise provided in the Indenture, the amount of an Investment will be determined at the time the Investment is made and without giving effect to a subsequent change in value and, to the extent applicable, shall be determined based on the equity value of such Investment.
“Investment Grade” means (i) BBB— or above in the case of Fitch (or its equivalent under any successor Rating Categories of Fitch), (ii) Baa3 or above, in the case of Moody’s (or its equivalent under any successor Rating Categories of Moody’s), and (iii) the equivalent in respect of the Rating Categories of any Rating Agencies.
“Issue Date” May 22, 2013.
“Lien” means, with respect to any property or assets, any mortgage, pledge, security interest, lien, charge, encumbrance, priority or other security agreement or preferential arrangement of
185 any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing.
“Moody’s” means Moody’s Investor Service, Inc. and its successors.
“Net Available Proceeds” from any Asset Disposition means cash or readily marketable cash equivalents received (including by way of sale or discounting of a note, installment receivable or other receivable, but excluding any assets described in clauses (iv) and (v) of the second paragraph under the heading “—Certain Covenants—Limitation on Asset Dispositions” and other consideration received in the form of assumption by the acquiror of Debt or other obligations relating to such properties or assets) therefrom by the Issuer or any of its Subsidiaries, net of:
(i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, including, without limitation, legal, consultant, accounting and investment banking fees, sales commissions, discounts and brokerage costs, and all federal, state, provincial, foreign and local taxes required to be accrued as a liability as a consequence of such Asset Disposition;
(ii) all payments made by the Issuer or any of its Subsidiaries, on any Debt which is secured by such assets in accordance with the terms of any Lien upon or with respect to such assets or which must by the terms of such Debt or Lien, or in order to obtain a necessary consent to such Asset Disposition or by applicable law, be repaid out of the proceeds from such Asset Disposition;
(iii) all distributions and other payments made to other equity holders in the Issuer’s Subsidiaries or joint ventures as a result of such Asset Disposition; and
(iv) appropriate amounts to be provided by the Issuer or any of its Subsidiaries, as the case may be, as a reserve in accordance with IFRS, against any liabilities associated with such assets and retained by the Issuer or any of its Subsidiaries, as the case may be, after such Asset Disposition, including, without limitation, liabilities under any indemnification obligations, relocation costs and severance and other employee termination costs associated with such Asset Disposition, in each case as determined by the Issuer’s Board of Directors, in its reasonable good faith judgment.
“Net Leverage Ratio” means, with respect to the Issuer as of any date of determination when used in connection with any Incurrence (or deemed Incurrence) of Debt by the Issuer, the ratio of (1) the Consolidated Net Debt (excluding Debt incurred under clause (vi) of the definition of Permitted Debt) outstanding on such date to (2) the Consolidated EBITDA of the Issuer for the four most recent full fiscal quarters ending immediately prior to such date for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred, or such other Debt had been repaid, redeemed or repurchased, as applicable, at the beginning of such four fiscal quarter period. For the avoidance of doubt, in determining Net Leverage Ratio, no cash or Cash Equivalents shall be included that are the proceeds of Debt in respect of which the pro forma calculation is to be made.
“Offer to Purchase” means a written offer (the “Offer”) sent by the Issuer by first class mail, postage prepaid, to each holder at his address appearing in the Note register on the date of the Offer offering to purchase up to the principal amount of Notes specified in such Offer at the purchase price specified in such Offer (as determined pursuant to the Indenture). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the “Expiration Date”) of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date (the “Purchase Date”) for purchase of Notes within five Business Days after the Expiration Date. The Issuer shall notify the Trustee at least 15 Business Days (or such shorter period as is acceptable to the Trustee) prior to the mailing of the Offer of the Issuer’s obligation to make an Offer to Purchase, and the Offer shall be mailed by the Issuer or, at the Issuer’s
186 request, by the Trustee in the name and at the expense of the Issuer. The Offer shall contain all instructions and materials necessary to enable such holders to tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(i) the Section of the Indenture pursuant to which the Offer to Purchase is being made;
(ii) the Expiration Date and the Purchase Date;
(iii) the aggregate principal amount of the Outstanding Notes offered to be purchased by the Issuer pursuant to the Offer to Purchase (including, if less than 100%, the manner by which such has been determined pursuant to the Section of the Indenture requiring the Offer to Purchase) (the “Purchase Amount”);
(iv) the purchase price to be paid by the Issuer for each $1,000 aggregate principal amount of Notes accepted for payment (as specified pursuant to the Indenture) (the “Purchase Price”);
(v) that the holder may tender all or any portion of the Notes registered in the name of such holder and that any portion of a Note tendered must be tendered in minimum amounts of $200,000 and integral multiples of $1,000 in excess thereof;
(vi) the place or places where Notes are to be surrendered for tender pursuant to the Offer to Purchase;
(vii) that interest on any Note not tendered or tendered but not purchased by the Issuer pursuant to the Offer to Purchase will continue to accrue;
(viii) that on the Purchase Date the Purchase Price will become due and payable upon each Note being accepted for payment pursuant to the Offer to Purchase and that interest thereon shall cease to accrue on and after the Purchase Date;
(ix) that each holder electing to tender a Note pursuant to the Offer to Purchase will be required to surrender such Note at the place or places specified in the Offer prior to the close of business on the Expiration Date (such Note being, if the Issuer or the Trustee so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the holder thereof or his attorney duly authorized in writing);
(x) that holders will be entitled to withdraw all or any portion of Notes tendered if the Issuer (or their paying agent) receives, not later than the close of business on the Expiration Date, telex, facsimile transmission or letter setting forth the name of the holder, the principal amount of the Note the holder tendered, the certificate number of the Security the holder tendered and a statement that such holder is withdrawing all or a portion of his tender;
(xi) that (a) if Notes in an aggregate principal amount less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Issuer shall purchase all such Notes and (b) if Notes in an aggregate principal amount in excess of the Purchase Amount are tendered and not withdrawn pursuant to the Offer to Purchase, the Issuer shall purchase Notes having an aggregate principal amount equal to the Purchase Amount on a pro rata basis (with such adjustments as may be deemed appropriate so that only Notes in denominations of $1,000 or integral multiples thereof shall be purchased and provided that Notes of $200,000 or less may only be redeemed in whole but not in part); and
(xii) that in the case of any holder whose Note is purchased only in part, the Issuer shall execute, and the Trustee shall authenticate and deliver to the holder of such Note without service charge, a new Note or Notes, of any authorized denomination as requested by such holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Note so tendered.
187 Any Offer to Purchase shall be governed by and effected in accordance with the Offer for such Offer to Purchase. The Issuer will publish notices relating to the Offer to Purchase in a leading newspaper having a general circulation in New York City (which is expected to be the Wall Street Journal), London (which is expected to be the Financial Times) and, for so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, Luxembourg (which is expected to be the Luxemburger Wort) or, to the extent and in the manner permitted by such rules, posted on the official website of the Luxembourg Stock Exchange (www.bourse.lu). “Officer’s Certificate” means a certificate signed by the Chairman of the Board, any Vice Chairman of the Board, any Director, the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, any Senior Vice President, or the Secretary of the Board of the Issuer, and delivered to the Trustee. “Outstanding,” when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under the Indenture, except: (i) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee in trust or any paying agent (other than the Issuer) or set aside and segregated in trust by the Issuer (if the Issuer shall act as its own paying agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to the Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Notes which have been paid or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to the Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands such Notes are valid obligations of the Issuer; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Issuer or any other obligor upon the Notes or any Affiliate of the Issuer or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Notes and that the pledgee is not the Issuer or any other obligor upon the Notes or any Affiliate of the Issuer or of such other obligor. “Pari Passu Debt” means any Debt of the Issuer that ranks pari passu in right of payment to the Notes. “Permitted Holders” means the Equity Investor and its Related Parties. “Permitted Interest Rate, Currency or Commodity Price Agreement” of any Person means any Interest Rate, Currency or Commodity Price Agreement entered into with one or more financial institutions in the ordinary course of business that is designed to protect such Person against fluctuations in interest rates or currency exchange rates or with respect to Debt Incurred and which shall have a notional amount no greater than the payments due with respect to the Debt being hedged thereby, or in the case of currency or commodity protection agreements against currency exchange or commodity price fluctuations in the ordinary course of business relating to then existing financial obligations and not for purposes of speculation.
188 “Permitted Liens” means:
(a) Liens for taxes, assessments or governmental charges or levies on the property of the Issuer or any of its Subsidiaries if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceeds promptly instituted and diligently concluded; provided that any reserve or other appropriate provision that shall be required in conformity with IFRS shall have been made therefor;
(b) Liens imposed by law, such as statutory Liens of landlords’, carriers’, materialmen’s, repairmen’s, construction, warehousemen’s and mechanics’ Liens and other similar Liens, on the property of the Issuer or any of its Subsidiaries arising in the ordinary course of business or Liens arising solely by virtue of any statutory or common law provisions relating to attorney’s liens or bankers’ liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depositary institution;
(c) Liens on the property of the Issuer or any of its Subsidiaries Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance bids, trade contracts, letters of credit, performance or return-of-money bonds, surety bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property and which do not in the aggregate impair in any material respect the use of property in the operation of the business of the Issuer and its Subsidiaries taken as a whole;
(d) Liens on property at the time the Issuer or any of its Subsidiaries acquired such property, including any acquisition by means of a merger or consolidation with or into the Issuer or any of its Subsidiaries; provided, however, that any such Lien may not extend to any other property of the Issuer or any of its Subsidiaries; provided further, however, that such Liens shall not have been Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such property was acquired by the Issuer or any of its Subsidiaries;
(e) Liens on the property of a Person at the time such Person becomes a Subsidiary; provided, however, that any such Lien may not extend to any other property of the Issuer or any other Subsidiary that is not a direct or, prior to such time, indirect Subsidiary of such Person; provided further, however, that any such Lien was not Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Person became a Subsidiary;
(f) pledges or deposits by the Issuer or any of its Subsidiaries under workmen’s compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which the Issuer or any of its Subsidiaries is party, or deposits to secure public or statutory obligations of the Issuer or any of its Subsidiaries or deposits for the payment of rent, in each case Incurred in the ordinary course of business;
(g) utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character;
(h) any provision for the retention of title to any property by the vendor or transferor of such property which property is acquired by the Issuer or a Subsidiary in a transaction entered into in the ordinary course of business of the Issuer or a Subsidiary and for which kind of transaction it is customary market practice for such retention of title provision to be included;
189 (i) Liens arising by means of any judgment, decree or order of any court, to the extent not otherwise resulting in a Default hereunder so long as any appropriate legal proceedings which may have been duly initiated for the review of such judgment, decree or order have not been fully terminated or the period within which such proceedings may be initiated has not expired and any Liens that are required to protect or enforce rights in any administrative, arbitration or other court proceeding in the ordinary course of business;
(j) any Lien securing Debt permitted to be Incurred under any Permitted Interest Rate, Currency or Commodity Price Agreements pursuant to clause (vi) of the definition of Permitted Debt;
(k) mortgages, liens, security interests, restrictions, encumbrances or any other matters of record that have been placed by any developer, landlord or other third party on property over which the Issuer or any of its Subsidiaries has easement rights or on any real property leased by the Issuer or any of its Subsidiaries or similar agreements relating thereto and (ii) any condemnation or eminent domain proceedings or compulsory purchase order affecting real property;
(l) Liens existing on the Issue Date;
(m) Liens in favor of the Issuer;
(n) Liens on insurance policies and the proceeds thereof, or other deposits, to secure insurance premium financings in respect of the Issuer or any of its Subsidiaries;
(o) Liens arising from financing statement filings (or other similar filings in any applicable jurisdiction) regarding operating leases entered into by any Subsidiary of the Issuer in the ordinary course of business;
(p) Liens on goods (and the proceeds thereof) and documents of title and the property covered thereby securing Debt in respect of commercial letters of credit issued to facilitate the purchase, shipment or storage of such inventory or other goods;
(q) Liens on property of any Subsidiary of the Issuer to secure Debt Incurred by such Subsidiary pursuant to the first paragraph of the covenant described under the heading “—Certain Covenants—Limitations on Debt” or clauses (xii) or (xiii) of the definition of Permitted Debt;
(r) Liens on the property of the Issuer or any of its Subsidiaries to replace in whole or in part, any Lien described in the foregoing clauses (a) through (r); provided that any such Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which the original Lien arose, could secure) the Debt being refinanced or in respect of property that is the security for a Permitted Lien hereunder;
(s) Liens on any escrow account used in connection with pre-funding a refinancing of Debt otherwise permissible by the Indenture;
(t) Liens on the Issuer’s and any of its Subsidiaries’ deposits in favor of financial institutions arising from any netting or set-off arrangement substantially consistent with its current practice for the purpose of netting debt and credit balances substantially consistent with the Issuer’s or the Subsidiaries’ existing cash pooling arrangements;
(u) Liens incurred in the ordinary course of business of the Issuer or any of its Subsidiaries with respect to obligations that do not exceed the greater of $150 million or 3% of the consolidated net assets of the Issuer (being the total assets shown on the consolidated statement of financial position of the Issuer as of the most recent date for which such statement of financial position is available, determined on a consolidated basis in accordance with IFRS, less all goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expenses, organization expenses and any other amounts classified as intangible
190 assets in accordance with IFRS) at any one time outstanding and that do not in the aggregate materially detract from the value of the property of the Issuer, or materially impair the use thereof in the operation of business by the Issuer and its Subsidiaries;
(v) Liens over cash or other assets that secure collateralized obligations described in clause (a) of the third paragraph of the definition of Debt; provided that the amount of cash collateral does not exceed the principal amount of the Proceeds On-Loan; and
(w) Liens on Restricted MFS Cash in favor of the customers or dealers of, or third parties in relation to, one or more of the Issuer’s Subsidiaries engaged in the provision of mobile financial services, in each case who provided such Restricted MFS Cash to the relevant Subsidiary.
“Permitted Refinancing Debt” means any renewals, extensions, substitutions, defeasances, discharges, refinancings or replacements (each, for purposes of this definition and clause (vii) of the definition of Permitted Debt, a “refinancing”) of any Debt of the Issuer or a Subsidiary of the Issuer or pursuant to this definition, including any successive refinancings, as long as:
(a) such Permitted Refinancing Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of: (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value plus all accrued interest) then outstanding of the Debt being refinanced; and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such refinancing;
(b) such Permitted Refinancing Debt has (i) a Stated Maturity that is either (X) no earlier than the Stated Maturity of the Debt being refinanced or (Y) after the Stated Maturity of the Notes and (ii) a Weighted Average Life to Maturity that is equal to or greater than the Weighted Average Life to Maturity of the Debt being refinanced; and
(c) if the Debt being refinanced is subordinated in right of payment to the Notes, such Permitted Refinancing Debt is subordinated in right of payment to the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Debt being refinanced; and
(d) if the Issuer was the obligor on the Debt being refinanced, such Permitted Refinancing Debt is Incurred by the Issuer.
“Person” means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, limited liability company or government or other entity.
“Preferred Stock” of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person.
“Purchase Date” has the meaning set forth in the definition of “Offer to Purchase.”
“Qualified Capital Stock” of any Person means any and all Capital Stock of such Person other than Redeemable Stock.
“Rating Agency” means each of (i) Fitch and Moody’s or (ii) if either Fitch or Moody’s or both of them are not making ratings of the Notes publicly available, a nationally recognized U.S. rating agency or agencies, as the case may be, selected by the Issuer, which will be substituted for Fitch or Moody’s or both, as the case may be.
“Rating Category” means (i) with respect to Fitch, any of the following categories (any of which may include a “+” or “—”): AAA, AA, A, BBB, BB, B, CCC, CC, C, R, SD and D (or equivalent successor categories); (ii) with respect to Moody’s, any of the following categories (any of which
191 may include a “1,” “2” or “3”): Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C (or equivalent successor categories), and (iii) the equivalent of any such categories of Fitch or Moody’s used by another Rating Agency, if applicable. “Rating Date” means the date which is the earlier of (i) 120 days prior to the occurrence of an event specified in clauses (b), (c), (d) or (e) of the definition of Change of Control and (ii) the date of the first public announcement of the possibility of such event. “Redeemable Stock” of any Person means any Capital Stock of such Person that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or otherwise (including upon the occurrence of an event) matures or is required to be redeemed (pursuant to any sinking fund obligation or otherwise) or is convertible into or exchangeable for Debt or is redeemable at the option of the holder thereof, in whole or in part, at any time prior to the final Stated Maturity of the Notes. “Related Business” means (i) any business, services or activities engaged in by the Issuer or any of its Subsidiaries on the Issue Date and (ii) any business, services and activities that are related, complementary, incidental, ancillary or similar to any of the foregoing, or are extensions or developments thereof, including, without limitation, broadband internet, network-related services, cable television, broadcast content, network neutral services, electronic transactional, financial and commercial services related to provision of telephony or internet services. “Related Party” means: (a) any controlling stockholder, partner or member, or any 50% (or more) owned Subsidiary, of the Equity Investor; and (b) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Person Beneficially Owning a majority or a controlling interest of which consists of the Equity Investor and/or such other Persons referred to in clause (a). “Restricted Cash” means the sum of (i) Restricted MFS Cash and (ii) without duplication, the amount of cash that would be stated as “restricted cash” on the consolidated statement of financial position of the Issuer as of such date in accordance with IFRS. “Restricted MFS Cash” means, as of any date of determination, an amount equal to any cash paid in or deposited by or held on behalf of any customer or dealer of, or any other third party in relation to, one or more of the Issuer’s Subsidiaries engaged in the provision of mobile financial services and designated as “restricted cash” on the consolidated statement of financial position of the Issuer, together with any interest thereon. “Senior Secured Debt” means, as of any date of determination, any Debt of (a) the Issuer that is secured by a security interest in any assets of the Issuer or any of its Subsidiaries and/or (b) any Subsidiary of the Issuer, other than Debt Incurred pursuant to clauses (iv) (to the extent such Guarantee is in respect of Debt otherwise permitted to be secured by a security interest in any assets of the Issuer or any of its Subsidiaries and/or Incurred by a Subsidiary of the Issuer, as applicable), (vi), (viii), (ix), (x) and (xi) of the definition of Permitted Debt. “Specified Subsidiary Sale” means the sale, transfer or other disposition of all of the Capital Stock, or all of the assets or properties of, (a) any Person, the primary purpose of which is to own Tower Equipment located in any market in which the Issuer or its Subsidiaries operate; (b) any Person which operates the Issuer’s or any Subsidiary of the Issuer’s mobile financial services business; (c) Latin America Internet Holding GmbH; or (d) Africa Internet Holding GmbH. “Significant Subsidiary” means, at the date of determination, any Subsidiary of the Issuer that together with its Subsidiaries (1) for the most recent fiscal year, accounted for more than 10% of the consolidated revenues of the Issuer or (2) as of the end of the most recent fiscal year, was the owner of more than 10% of the consolidated assets of the Issuer. “Stated Maturity,” when used with respect to any security or any installment of interest thereon, means the date specified in such security as the fixed date on which the principal of such security
192 or such installment of interest is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred).
“Subsidiary” of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof.
“Tower Equipment” means passive infrastructure related to telecommunications services, excluding telecommunications equipment, but including, without limitation, towers (including tower lights and lightning rods), power breakers, deep cycle batteries, generators, voltage regulators, main AC power, rooftop masts, cable ladders, grounding, walls and fences, access roads, shelters, air conditioners and BTS batteries owned by the Issuer or any of its Subsidiaries.
“Treasury Rate” means, as at any redemption date, the yield to maturity as at such redemption date of United States Treasury securities with a constant maturity (as complied and published in the most recent Federal Reserve Statistical Release H. 15 (519) that has become publicly available at least two Business Days prior to the redemption date (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to May 22, 2017; provided, however, that if the period from the redemption date to May 22, 2017, is less than one year, the weekly average yield on actually traded United States securities adjusted to a constant maturity of one year will be used.
“U.S. Dollar Equivalent” means with respect to any monetary amount in a currency other than U.S. Dollars, at any time of determination thereof, the amount of U.S. Dollars obtained by translating such other currency involved in such computation into U.S. Dollars at the spot rate for the purchase of U.S. Dollars with the applicable other currency as published in the Financial Times on the date that is two Business Days prior to such determination.
“Voting Stock” of any person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency.
“Weighted Average Life to Maturity” means, when applied to any Debt or Preferred Stock at any date, the number of years obtained by dividing (a) the then outstanding principal amount of such Debt or liquidation preference of such Preferred Stock, as the case may be, into (b) the total of the product obtained by multiplying (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal or upon mandatory redemption, including payment at final maturity, in respect thereof, by (y) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment.
193 Book-entry, delivery and form General
The Notes sold outside the United States pursuant to Regulation S under the Securities Act will initially be represented by a global note in registered form without interest coupons attached (the “Regulation S Global Note” and, together with the 144A Global Note (as defined below), the “Global Notes”). The Regulation S Global Note will be deposited, on the closing date, with a common depositary and registered in the name of the nominee of the common depositary for the accounts of Euroclear and Clearstream.
The Notes sold within the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act will initially be represented by a global note in registered form without interest coupons attached (the “144A Global Note”). The 144A Global Note will be deposited, on the closing date, with a custodian for DTC, and registered in the name of Cede & Co., as nominee for DTC.
Ownership of interests in the 144A Global Note (“144A Book-Entry Interests”) and ownership of interests in the Regulation S Global Note (the “Regulation S Book-Entry Interest,” and together with the 144A Book-Entry Interests, the “Book-Entry Interests”) will be limited to persons that have accounts with Euroclear, Clearstream or DTC or persons that may hold interests through such participants. Book-Entry Interests will be shown on, and transfers thereof will be effected only through, records maintained in book-entry form by Euroclear, Clearstream, DTC and their participants.
The Book-Entry Interests will not be held in definitive form. Instead, Euroclear, Clearstream or DTC will credit on their respective book-entry registration and transfer systems a participant’s account with the interest beneficially owned by such participant. The laws of some jurisdictions, including certain states of the United States, may require that certain purchasers of securities take physical delivery of such securities in definitive form. The foregoing limitations may impair the ability to own, transfer or pledge Book-Entry Interests. In addition, while the Notes are in global form, “holders” of Book-Entry Interests will not be considered the owners or “holders” of Notes for any purpose.
So long as the Notes are held in global form, Euroclear, Clearstream and/or DTC, as applicable, (or their respective nominees) will be considered the sole holders of Global Notes for all purposes under the Indenture. As such, participants must rely on the procedures of Euroclear, Clearstream and/or DTC and indirect participants must rely on the procedures of Euroclear, Clearstream and/ or DTC and the participants through which they own Book-Entry Interests in order to exercise any rights of holders under the Indenture.
Neither the Issuer, the Registrar, any Paying Agent, nor the Trustee under the Indenture nor any of the Issuer’s respective agents will have any responsibility or be liable for any aspect of the records relating to the Book-Entry Interests.
Issuance of definitive registered notes
Under the terms of the Indenture, owners of Book-Entry Interests will receive definitive Notes in registered form (the “Definitive Registered Notes”):
• if Euroclear, Clearstream or DTC notifies the Issuer that it is unwilling or unable to continue to act as depositary and a successor depositary is not appointed by the Issuer within 120 days;
• in whole, but not in part, if the Issuer, Euroclear, Clearstream or DTC so request following an event of default under the Indenture; or
• if the owner of a Book-Entry Interest requests such exchange in writing delivered through Euroclear, Clearstream or DTC or to the Issuer following an Event of Default under the Indenture.
194 In such an event, the Registrar will issue Definitive Registered Notes, registered in the name or names and issued in any approved denominations, requested by or on behalf of Euroclear, Clearstream or DTC or the Issuer, as applicable (in accordance with their respective customary procedures and based upon directions received from participants reflecting the beneficial ownership of Book-Entry Interests), and such Definitive Registered Notes will bear the restrictive legend referred to in “Transfer Restrictions” below, unless that legend is not required by the Indenture or applicable law.
The Issuer, the Trustee, the Principal Paying Agent and the Registrar shall treat the registered holder of any Global Note or Definitive Note as the absolute owner thereof, and no person will be liable for treating the registered holders as such. Ownership of the Global Notes will be evidenced through registration from time to time at the registered office of the Trustee, and such registration is a means of evidencing title to the Notes.
The Issuer will not impose any fees or other charges in respect of the Notes; however, owners of the Book-Entry Interests may incur fees normally payable in respect of the maintenance and operation of accounts in Euroclear, Clearstream or DTC, as applicable.
Redemption of Global Notes
In the event any Global Note, or any portion thereof, is redeemed, Euroclear, Clearstream and/or DTC, as applicable, will distribute the amount received by it in respect of the Global Note so redeemed to the holders of the Book-Entry Interests in such Global Note from the amount received by it in respect of the redemption of such Global Note. The redemption price payable in connection with the redemption of such Book-Entry Interests will be equal to the amount received by Euroclear, Clearstream and DTC, as applicable, in connection with the redemption of such Global Note (or any portion thereof). The Issuer understands that under existing practices of Euroclear, Clearstream and DTC, if fewer than all of the Notes are to be redeemed at any time, Euroclear, Clearstream and DTC will credit their respective participants’ accounts on a proportionate basis (with adjustments to prevent fractions) or by lot or on such other basis as they deem fair and appropriate.
Payments on Global Notes
Payments of amounts owing in respect of the Global Notes (including principal, premium, interest, additional interest and additional amounts) will be made by the Issuer to the Principal Paying Agent. The Principal Paying Agent will, in turn, make such payments to DTC or its nominee and to the common depositary or its nominee for Euroclear and Clearstream, which will distribute such payments to participants in accordance with their respective procedures.
Under the terms of the Indenture, the Issuer and the Trustee will treat the registered holder of the Global Notes (i.e., Euroclear, Clearstream or DTC (or their respective nominees)) as the owner thereof for the purpose of receiving payments and for all other purposes. Consequently, neither the Issuer nor the Trustee or any of their respective agents has or will have any responsibility or liability for:
• any aspects of the records of Euroclear, Clearstream, DTC or any participant or indirect participant relating to or payments made on account of a Book-Entry Interest, for any such payments made by Euroclear, Clearstream, DTC or any participant or indirect participant, or for maintaining, supervising or reviewing the records of Euroclear, Clearstream, DTC or any participant or indirect participant relating to or payments made on account of a Book-Entry Interest; or
• Euroclear, Clearstream, DTC or any participant or indirect participant.
Payments by participants to owners of Book-Entry Interests held through participants are the responsibility of such participants, as is now the case with securities held for the accounts of subscribers registered in “street name.”
195 Currency and payment for the Global Notes
The principal of, premium, if any, and interest on, and all other amounts payable in respect of, the Global Notes, will be paid to holders of interest in such Notes through Euroclear, Clearstream and/or DTC in U.S. dollars.
Action by owners of Book-Entry Interests
Euroclear, Clearstream and DTC have advised the Issuer that they will take any action permitted to be taken by a holder of Notes only at the direction of one or more participants to whose account the Book-Entry Interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. Euroclear, Clearstream and DTC will not exercise any discretion in the granting of consents, waivers or the taking of any other action in respect of the Global Notes. However, if there is an event of default under the Notes, each of Euroclear, Clearstream and DTC reserves the right to exchange the Global Notes for Definitive Registered Notes in certificated form, and to distribute such Definitive Registered Notes to their respective participants.
Transfers
Transfers between participants in Euroclear, Clearstream and DTC will be effected in accordance with the respective rules of Euroclear, Clearstream and DTC and will be settled in immediately available funds. If a holder requires physical delivery of Definitive Registered Notes for any reason, including to sell Notes to persons in states which require physical delivery of securities or to pledge such securities, such holder must transfer its interests in the Global Notes in accordance with the normal procedures of Euroclear, Clearstream and DTC and in accordance with the procedures set forth in the Indenture governing the Notes.
The Global Notes will bear a legend to the effect set forth in “Transfer Restrictions” below. Book- Entry Interests in the Global Notes will be subject to the restrictions on transfer referred to in “Transfer Restrictions.”
Book-Entry Interests in the 144A Global Note may be transferred to a person who takes delivery in the form of Book-Entry Interests in the Regulation S Global Note only upon delivery by the transferor of a written certification (in the form provided in the Indenture) to the effect that such transfer is being made in accordance with Regulation S under the Securities Act. Prior to 40 days after the date of initial issuance of the Notes, ownership of Regulation S Book-Entry Interests will be limited to persons that have accounts with Euroclear, Clearstream or DTC or persons who hold interests through Euroclear, Clearstream or DTC, and any sale or transfer of such interest to U.S. persons shall not be permitted during such periods unless such resale or transfer is made pursuant to Rule 144A. Regulation S Book-Entry Interests may be transferred to a person who takes delivery in the form of 144A Book-Entry Interests only upon delivery by the transferor of a written certification (in the form provided in the Indenture) to the effect that such transfer is being made to a person who the transferor reasonably believes is a “qualified institutional buyer” within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A or otherwise in accordance with the transfer restrictions described under “Transfer Restrictions” and in accordance with any applicable securities laws of any other jurisdiction.
Subject to the foregoing, and as set forth in “Transfer Restrictions,” Book-Entry Interests may be transferred and exchanged as described under “Description of the Notes—Transfer.” Any Book- Entry Interest in one of the Global Notes that is transferred to a person who takes delivery in the form of a Book-Entry Interest in the other Global Note will, upon transfer, cease to be a Book- Entry Interest in the first-mentioned Global Note and become a Book-Entry Interest in the other Global Note, and accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to Book-Entry Interests in such other Global Note for as long as that person retains such a Book-Entry Interest.
196 Definitive Registered Notes may be transferred and exchanged for Book-Entry Interests in a Global Note only as described under “Description of the Notes—Transfer” and, if required, only if the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such Notes. See “Transfer Restrictions.”
Information concerning Euroclear, Clearstream and DTC
All Book-Entry Interests will be subject to the operations and procedures of Euroclear, Clearstream or DTC, as applicable. The Issuer provides the summaries of those operations and procedures provided in this offering memorandum solely for the convenience of investors. The operations and procedures of each settlement system are controlled by that settlement system and may be changed at any time. Neither the Issuer nor the Initial Purchasers are responsible for those operations or procedures.
DTC advised the Issuer that it is a limited purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (that DTC’s direct participants deposit with DTC). DTC also facilitates the post-trade settlement among direct participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between direct participants’ accounts. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a direct participant, either directly or indirectly.
Euroclear and Clearstream hold securities for participating organizations. They also facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in the accounts of such participants. Euroclear and Clearstream provide various services to their participants, including the safekeeping, administration, clearance, settlement, lending and borrowing of internationally traded securities. Euroclear and Clearstream interface with domestic securities markets. Euroclear and Clearstream participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organizations. Indirect access to Euroclear and Clearstream is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Euroclear and Clearstream participant, either directly or indirectly.
Because Euroclear, Clearstream and DTC can only act on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of an owner of a beneficial interest to pledge such interest to persons or entities that do not participate in the Euroclear, Clearstream or DTC systems, or otherwise take actions in respect of such interest, may be limited by the lack of a definite certificate for that interest. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests to such person may be limited. In addition, owners of beneficial interests through the Euroclear, Clearstream or DTC systems will receive distributions attributable to the 144A Global Notes only through Euroclear, Clearstream or DTC participants.
197 Secondary market trading, global clearance and settlement under the book-entry system
Application will be made to the Luxembourg Stock Exchange for the Notes represented by the Global Notes to be admitted to listing and to trading on the Euro MTF Market of the Luxembourg Stock Exchange. The Issuer expects that secondary trading in any certificated Notes will also be settled in immediately available funds.
Initial settlement
Initial settlement for the Notes will be made in U.S. dollars. Book-Entry Interests owned through Euroclear, Clearstream or DTC accounts will follow the settlement procedures applicable to conventional Eurobonds in registered form.
Secondary market trading
The Book-Entry Interests will trade through participants of Euroclear, Clearstream or DTC and will settle in same day funds. Since the purchase determines the place of delivery, it is important to establish at the time of trading of any Book-Entry Interests where both the purchaser’s and the seller’s accounts are located to ensure that settlement can be made on the desired value date.
198 Transfer restrictions The Notes have not been registered under the Securities Act and may not be offered, sold or otherwise transferred within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act) except to (i) qualified institutional buyers in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A or (ii) non-U.S. persons in offshore transactions in reliance on Regulation S. By purchasing the Notes, you will be deemed to have represented and agreed as follows (terms used in this paragraph that are defined in Rule 144A or Regulation S under the Securities Act are used herein as defined therein): (1) You are not an “affiliate” (as defined in Rule 144 under the Securities Act) of the Issuer, you are not acting on behalf of the Issuer and you (A) (i) are a “qualified institutional buyer” (as defined in Rule 144A under the Securities Act), (ii) are aware that the sale to you is being made in reliance on Rule 144A, and (iii) are acquiring the Notes for your own account or for the account of a qualified institutional buyer; or (B) are not a U.S. person (as defined in Regulation S under the Securities Act) (and are not purchasing the Notes for the account or benefit of a U.S. person, other than a distributor) and are purchasing the Notes in an offshore transaction pursuant to Regulation S. (2) You agree on your own behalf and on behalf of any investor account for which you are purchasing the Notes, and each subsequent holder of such Notes by its acceptance thereof will be deemed to agree, to offer, sell or otherwise transfer such Notes prior to the date (the “Resale Restriction Termination Date”) that is one year (in the case of the Rule 144A Note) or 40 days (in the case of the Regulation S Note) after the later of the date of the original issue and the last date on which the Issuer or any of its affiliates was the owner of such Notes (or any predecessor thereto) only (i) to the Issuer or any subsidiary thereof, (ii) pursuant to a registration statement that has been declared effective under the Securities Act, (iii) for so long as the Notes are eligible pursuant to Rule 144A under the Securities Act, to a person you reasonably believe is a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the transfer is being made in reliance on Rule 144A under the Securities Act, (iv) pursuant to offers and sales that occur outside the United States in compliance with Regulation S under the Securities Act, or (v) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within its or their control and to compliance with any applicable state securities laws, and any applicable local laws and regulations, and further subject to the Issuer’s and the Trustee’s rights prior to any such offer, sale or transfer (A) pursuant to clause (v) to require the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them, and (B) in each of the foregoing cases, to require that a certificate of transfer in the form appearing on the reverse of the security is completed and delivered by the transferor to the Trustee. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. (3) You acknowledge that none of the Issuer, the Initial Purchasers or any person representing the Issuer or the Initial Purchasers has made any representation to you with respect to the Issuer or the offer or sale of any of the Notes, other than by the Issuer with respect to the information contained in this offering memorandum, which offering memorandum has been delivered to you and upon which you are relying in making your investment decision with respect to the Notes. You acknowledge that the Initial Purchasers make no representation or warranty as to the accuracy or completeness of this offering memorandum. You have had access to such financial and other information concerning the Issuer, the Indenture governing the Notes and the Notes in connection with your decision to purchase any of the Notes, including an opportunity to ask questions of, and request information from, the Issuer and the Initial Purchasers.
199 (4) You also acknowledge that each Global Note will contain a legend substantially to the following effect: THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE U.S. SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN “OFFSHORE TRANSACTION” PURSUANT TO RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, AND (2) AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE “RESALE RESTRICTION TERMINATION DATE”) WHICH IS [IN THE CASE OF RULE 144A NOTES: ONE YEAR AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE)] [IN THE CASE OF REGULATION S NOTES: 40 DAYS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE DATE ON WHICH THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE) WAS FIRST OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN RULE 902 OF REGULATION S) IN RELIANCE ON REGULATION S] ONLY (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE U.S. SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE U.S. SECURITIES ACT (“RULE 144A”), TO A PERSON IT REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S UNDER THE U.S. SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT, SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF SUCH INVESTOR ACCOUNT OR ACCOUNTS BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL AND TO COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, AND ANY APPLICABLE LOCAL LAWS AND REGULATIONS AND FURTHER SUBJECT TO THE ISSUER’S AND THE TRUSTEE’S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE AND (III) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. BY ACCEPTING THIS NOTE (OR AN INTEREST IN THE NOTES REPRESENTED HEREBY) EACH ACQUIRER AND EACH TRANSFEREE IS DEEMED TO REPRESENT, WARRANT AND AGREE THAT AT THE TIME OF ITS ACQUISITION AND THROUGHOUT THE PERIOD THAT IT HOLDS THIS NOTE OR ANY INTEREST HEREIN (1) EITHER (A) IT IS NOT, AND IT IS NOT ACTING ON BEHALF OF (AND FOR SO LONG AS IT HOLDS SUCH NOTES OR ANY INTEREST THEREIN IT WILL NOT BE, AND WILL NOT BE ACTING ON BEHALF OF), AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3(3) OF THE UNITED STATES EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”)), SUBJECT TO THE PROVISIONS OF PART 4 OF SUBTITLE B OF TITLE I OF ERISA, A PLAN TO WHICH SECTION 4975 OF THE UNITED
200 STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED, (“CODE”), APPLIES, OR ANY ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” (WITHIN THE MEANING OF 29 C.F.R. SECTION 2510.3-101, AS MODIFIED BY SECTION 3(42) OF ERISA, OR OTHERWISE) BY REASON OF SUCH AN EMPLOYEE BENEFIT PLAN’S AND/OR PLAN’S INVESTMENT IN SUCH ENTITY (EACH, A “BENEFIT PLAN INVESTOR”), OR A GOVERNMENTAL, CHURCH OR NON-U.S. PLAN WHICH IS SUBJECT TO ANY FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER LAWS OR REGULATIONS THAT ARE SUBSTANTIALLY SIMILAR TO THE FIDUCIARY RESPONSIBILITY OR THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND/OR SECTION 4975 OF THE CODE (“SIMILAR LAWS”), AND NO PART OF THE ASSETS USED BY IT TO ACQUIRE OR HOLD THIS NOTE OR ANY INTEREST HEREIN CONSTITUTES THE ASSETS OF ANY BENEFIT PLAN INVESTOR OR SUCH A GOVERNMENTAL, CHURCH OR NON-U.S. PLAN, OR (B) IF IT IS A GOVERNMENTAL, CHURCH OR NON-U.S. PLAN SUBJECT TO SIMILAR LAW, ITS ACQUISITION, HOLDING AND DISPOSITION OF THIS NOTE OR AN INTEREST HEREIN DOES NOT AND WILL NOT CONSTITUTE OR OTHERWISE RESULT IN A NON-EXEMPT VIOLATION OF ANY SIMILAR LAWS; AND NEITHER ISSUER NOR ANY OF ITS AFFILIATES IS A “FIDUCIARY” (WITHIN THE MEANING OF ANY DEFINITION OF “FIDUCIARY” UNDER SIMILAR LAWS) WITH RESPECT TO THE PURCHASER OR HOLDER IN CONNECTION WITH ANY PURCHASE OR HOLDING OF THE NOTES, OR AS A RESULT OF ANY EXERCISE BY THE ISSUER OR ANY OF ITS AFFILIATES OF ANY RIGHTS IN CONNECTION WITH THE NOTES, AND NO ADVICE PROVIDED BY THE ISSUER OR ANY OF ITS AFFILIATES HAS FORMED A PRIMARY BASIS FOR ANY INVESTMENT DECISION BY OR ON BEHALF OF THE PURCHASER OR HOLDER IN CONNECTION WITH THE NOTES AND THE TRANSACTIONS CONTEMPLATED WITH RESPECT TO THE NOTES; AND (2) IT WILL NOT SELL OR OTHERWISE TRANSFER THIS NOTE OR ANY INTEREST HEREIN OTHERWISE THAN TO A PURCHASER OR TRANSFEREE THAT IS DEEMED TO MAKE THESE SAME REPRESENTATIONS, WARRANTIES AND AGREEMENTS WITH RESPECT TO ITS ACQUISITION, HOLDING AND DISPOSITION OF THIS NOTE.
(5) The following legend shall also be included, if applicable:
THE FOLLOWING INFORMATION IS SUPPLIED SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES. THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT (“OID”) WITHIN THE MEANING OF SECTION 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”), AND THIS LEGEND IS REQUIRED BY SECTION 1275(c) OF THE CODE. HOLDERS MAY OBTAIN INFORMATION REGARDING THE AMOUNT OF ANY OID, THE ISSUE PRICE, THE ISSUE DATE, AND THE YIELD TO MATURITY RELATING TO THE NOTES BY CONTACTING THE TRUSTEE AT CITIGROUP CENTRE, 25 CANADA SQUARE, CANARY WHARF, LONDON E14 5LB, UNITED KINGDOM.
If you purchase Notes, you will also be deemed to acknowledge that the foregoing restrictions apply to holders of beneficial interests in these Notes as well as to holders of these Notes.
(1) You acknowledge that the Registrar will not be required to accept for registration of transfer any Notes acquired by you, except upon presentation of evidence satisfactory to the Issuer and the Registrar that the restrictions set forth herein have been complied with.
(2) You acknowledge that:
(a) The Issuer, the Initial Purchasers and others will rely upon the truth and accuracy of your acknowledgments, representations and agreements set forth herein and you agree that, if any of your acknowledgments, representations or agreements herein cease to be accurate and complete, you will notify the Issuer and the Initial Purchasers promptly in writing; and
(b) if you are acquiring any Notes as a fiduciary or agent for one or more investor accounts, you represent with respect to each such account that:
(i) you have sole investment discretion; and
201 (ii) you have full power to make, and make, the foregoing acknowledgments, representations and agreements.
(3) You agree that you will give to each person to whom you transfer these Notes notice of any restrictions on the transfer of the Notes.
(4) You acknowledge that the above restrictions on resale will apply from the closing date until the Resale Restriction Termination Date.
(5) The purchaser understands that no action has been taken in any jurisdiction (including the United States) by the Issuer or the Initial Purchasers that would permit a public offering of the Notes or the possession, circulation or distribution of this offering memorandum or any other material relating to the Issuer or the Notes in any jurisdiction where action for the purpose is required. Consequently, any transfer of the Notes will be subject to the selling restrictions set forth hereunder and under “Plan of Distribution.”
Further, by acquiring the Notes, you will be deemed to have further represented and agreed as follows:
(1) With respect to the acquisition, holding and disposition of the Notes, or any interest therein, (A) either (i) you are not, and are not acting on behalf of (and for so long as you hold such Notes or any interest therein will not be, and will not be acting on behalf of), an employee benefit plan (as defined in Section 3(3) of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), subject to the provisions of part 4 of subtitle B of Title I of ERISA, a plan to which Section 4975 of the U.S. Internal Revenue Code of 1986, as amended (“Code”), applies, or any entity whose underlying assets include “plan assets” by reason of such an employee benefit plan’s and/or plan’s investment in such entity (each, a “Benefit Plan Investor”), or a governmental, church or non-U.S. plan which is subject to any federal, state, local, non-U.S. or other laws or regulations that are substantially similar to the fiduciary responsibility or prohibited transaction provisions of ERISA or the provisions of Section 4975 of the Code (“Similar Laws”), and no part of the assets to be used by you to acquire or hold such Notes or any interest therein constitutes the assets of any such Benefit Plan Investor or such plan, or (ii) if you are a governmental, church or non-U.S. plan subject to Similar Laws, your acquisition, holding and disposition of such Note, or any interest therein does not and will not constitute or otherwise result in a non-exempt violation of any Similar Laws; and neither Issuer nor any of its affiliates is a “fiduciary” within the meaning of any definition of “fiduciary” under Similar Laws with respect to you, as the purchaser or holder, in connection with your purchase or holding of the Notes, or as a result of any exercise by the Issuer or any of its affiliates of any rights in connection with the Notes, and no advice provided by the Issuer or any of its affiliates has formed a primary basis for any investment decision by or on behalf of you as the purchaser or holder in connection with the Notes and the transactions contemplated with respect to the Notes; and (B) you will not sell or otherwise transfer such Notes or any interest therein otherwise than to a purchaser or transferee that is deemed to make these same representations, warranties and agreements with respect to its acquisition, holding and disposition of such Notes or any interest therein.
(2) You and any fiduciary causing you to acquire an interest in the Notes agree to indemnify and hold harmless the Issuer, the Initial Purchasers and the Trustee and their respective affiliates, from and against any cost, damage or loss incurred by any of them as a result of any of the foregoing representations and agreements being or becoming false.
(3) Any purported acquisition or transfer of any Note or beneficial interest therein to an acquirer or transferee that does not comply with the foregoing requirements shall be null and void ab initio.
202 Tax considerations Certain U.S. federal income tax consequences for U.S. holders
TO COMPLY WITH U.S. TREASURY DEPARTMENT CIRCULAR 230, PROSPECTIVE INVESTORS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES CONTAINED OR REFERRED TO IN THIS OFFERING MEMORANDUM IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER UNDER THE UNITED STATES INTERNAL REVENUE CODE; (B) ANY SUCH DISCUSSION IS INCLUDED HEREIN IN CONNECTION WITH THE PROMOTION OR MARKETING (WITHIN THE MEANING OF CIRCULAR 230) OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) A TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
The following discussion is a summary of certain U.S. federal income tax consequences of the purchase, ownership and disposition of the Notes by a U.S. holder (as defined below), but does not purport to be a complete analysis of all potential tax effects and does not address the effects of any state, local or non-U.S. tax laws. This discussion is based upon the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations issued thereunder, and judicial and administrative interpretations thereof, each available and as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. No rulings from the Internal Revenue Service (“IRS”) have been or are expected to be sought with respect to the matters discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of the purchase, ownership or disposition of the Notes or that any such position would not be sustained.
This discussion does not address all of the U.S. federal income tax consequences that might be relevant to a holder in light of such holder’s particular circumstances or to holders subject to special rules, such as certain financial institutions, certain U.S. expatriates, insurance companies, dealers in securities or currencies, traders in securities or currencies, U.S. holders whose functional currency is not the U.S. dollar, tax-exempt organizations, regulated investment companies, real estate investment trusts, partnerships or other pass-through entities (or investors in such entities), persons liable for alternative minimum tax, banks, life insurance companies and persons holding the Notes as part of a “straddle,” “hedge,” “conversion transaction” or other integrated transaction. In addition, this discussion is limited to persons who purchase the Notes for cash at original issue and at their “issue price” (the first price at which a substantial part of the Notes are sold to the public for cash, excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers) and who hold the Notes as capital assets within the meaning of section 1221 of the Code.
For purposes of this discussion, a “U.S. holder” is a beneficial owner of a Note that is, for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States; (ii) a corporation or any entity taxable as a corporation created or organized in the United States or under the laws of the United States or any state thereof or the District of Columbia; (iii) any estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) any trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or if a valid election under applicable Treasury regulations is in place to treat the trust as a U.S. person.
If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) holds the Notes, the tax treatment of such partnership and a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A holder that is a partnership, and partners in such partnerships, should consult their tax advisors regarding the tax consequences of the purchase, ownership and disposition of the Notes.
203 Prospective purchasers of the Notes should consult their tax advisors concerning the tax consequences of holding Notes in light of their particular circumstances, including the application of the U.S. federal income tax considerations discussed below, as well as the application of state, local, foreign or other tax laws.
Characterization of the Notes
The Issuer intends to take the position that the Notes should be characterized as indebtedness for U.S. federal income tax purposes. However, the Issuer’s determination is not binding on the IRS and no legal opinion will be rendered (or ruling sought) regarding the characterization of the Notes for U.S. federal income tax purposes. The remainder of this discussion assumes the Notes will be characterized as indebtedness for U.S. federal income tax purposes.
In certain circumstances, which are discussed in “Description of the Notes—Additional Amounts,” “Description of the Notes—Optional Redemption” and “Description of the Notes—Change of Control,” we might be obligated to make payments on the Notes in excess of stated principal and interest. We intend to take the position that the foregoing contingencies should not cause the Notes to be treated as contingent payment debt instruments. Assuming such position is respected, a U.S. holder would be required to include in income the amount of any such additional payments at the time such payments are received or accrued in accordance with such U.S. holder’s method of accounting for U.S. federal income tax purposes. Our position is binding on a holder, unless the holder discloses in the proper manner to the IRS that it is taking a different position. If the IRS successfully challenged this position, and the Notes were treated as contingent payment debt instruments, all U.S. holders (including cash-basis U.S. holders) could be required to include the interest in income as it accrues and to treat as ordinary income, rather than capital gain, any gain recognized on a sale, exchange, retirement or redemption of a Note. This discussion assumes that the Notes will not be considered contingent payment debt instruments.
Prospective purchasers of the Notes are urged to consult their tax advisors regarding the characterization of the Notes and the potential tax consequences in the event the Notes are recharacterized as equity for U.S. federal income tax purposes as well as the potential application to the Notes of the contingent payment debt instrument rules and the consequences thereof.
Payments of Interest. Payments of stated interest on the Notes generally will be taxable to a U.S. holder as ordinary income at the time that such payments are received or accrued, in accordance with such U.S. holder’s method of accounting for U.S. federal income tax purposes. It is possible that the Notes will be issued with OID. For U.S. federal income tax purposes, if the excess (if any) of the principal amount of the Notes over their issue price (as defined above) is equal to, or is greater than, a prescribed de minimis amount, the excess would be treated as OID. Generally, the de minimis amount is 1⁄4 of 1% of the principal amount multiplied by the number of complete years to maturity from the Issue Date. If the Notes are issued with OID, in addition to stated interest payments which are includable in income as described above, U.S. holders (regardless of their method of accounting) would be required to include the OID in income as it accrues, in accordance with a constant yield method based on a compounding of interest, before the receipt of cash payments to which this income is attributable. Under this method, U.S. holders generally would be required to include in income increasingly greater amounts of OID in successive accrual periods. A U.S. holder may make an election to include in gross income all interest that accrues on a Note (including stated interest, and any OID or de minimis OID) in accordance with a constant yield method based on the compounding of interest.
Interest income and OID, if any, on a Note generally will be foreign source “passive category income” or, in the case of certain U.S. holders, “general category income” for purposes of computing the foreign tax credit allowable to U.S. holders under U.S. federal income tax laws.
204 Should any non-U.S. tax be withheld from payments on the Notes, the amount withheld and the gross amount of any Additional Amounts paid to a U.S. holder (see “Description of the Notes— Additional Amounts”) will be included in such holder’s income at the time such amount is received or accrued in accordance with such holder’s method of accounting for U.S. federal income tax purposes. Non-U.S. withholding tax paid at the rate applicable to a U.S. holder (taking into account any applicable income tax treaty) may, subject to limitations and conditions, be treated as foreign income tax eligible for credit against such holder’s U.S. federal income tax liability or, at such holder’s election, eligible for deduction in computing such holder’s U.S. federal taxable income. U.S. holders should consult their tax advisors regarding the creditability or deductibility of any withholding taxes. Any Additional Amounts would generally constitute foreign source income. Sale, Exchange, Redemption, Retirement or Other Taxable Disposition of Notes. Upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, a U.S. holder generally will recognize U.S. source gain or loss equal to the difference between the amount realized upon the sale, exchange, redemption, retirement or other disposition (less an amount equal to any accrued but unpaid interest, which will be taxable as interest income as discussed above to the extent not previously included in income by the U.S. holder) and the U.S. holder’s adjusted U.S. federal income tax basis in the Note. A U.S. holder’s adjusted U.S. federal income tax basis in a Note generally will be its cost for that Note, increased by the amount of OID, if any, that the U.S. holder previously included in income with respect to the Note and reduced by any payments on the Note other than stated interest. Any such gain or loss generally will be capital gain or loss. Capital gains of noncorporate U.S. holders (including individuals) derived in respect of capital assets held for more than one year currently are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. In the event a U.S. holder is subject to non-U.S. tax upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, it is unlikely that such U.S. holder will be able to credit such non-U.S. tax against its U.S. federal income tax liability with respect to any gain realized by the U.S. holder upon the sale, exchange, redemption, retirement or other taxable disposition. U.S. holders should consult their tax advisors regarding the creditability of any such tax. Additional Notes. The Issuer may issue Additional Notes as described under “Description of the Notes.” These Additional Notes, even if they are treated for non-tax purposes as part of the same series as the original Notes, in some cases may be treated as a separate series for U.S. federal income tax purposes. In such case, the market value of the original Notes may be adversely affected (if the OID characteristics of the Additional Notes are less favorable than those of the original Notes) since the Additional Notes may be indistinguishable from the original Notes and, therefore, may trade based on the OID characteristics of the Additional Notes.
Certain information reporting requirements Certain U.S. holders who are individuals are required to report information relating to an interest in our Notes, subject to certain exceptions (including an exception for Notes held in accounts maintained by certain financial institutions). Under certain circumstances, an entity may be treated as an individual for purposes of the foregoing rules. U.S. holders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of the Notes.
Information reporting and backup withholding Backup withholding of U.S. federal income tax may apply to payments made in respect of the Notes to U.S. holders who are not exempt recipients and who fail to provide certain identifying information (such as the beneficial owner’s taxpayer identification number) in the manner required. Generally, individuals are not exempt recipients. Payments made in respect of the Notes to a U.S. beneficial owner must be reported to the IRS, unless such U.S. holder is an exempt recipient and, when required, demonstrates this fact.
205 Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s U.S. federal income tax liability. A holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
In addition, upon the sale of a Note to (or through) a broker, the broker must withhold a percentage of the gross sales proceeds unless either (i) the broker determines that the seller is a corporation or other exempt recipient or (ii) the seller provides, in the required manner, certain identifying information and, in the case of a non-U.S. beneficial owner, certifies that such seller is a non-U.S. beneficial owner (and certain other conditions are met). Such a sale must also be reported by the broker to the IRS, unless either (i) the broker determines that the seller is an exempt recipient or (ii) the seller certifies its non-U.S. status (and certain other conditions are met). Certification of the beneficial owner’s non-U.S. status usually would be made on IRS Form W-8 under penalties of perjury, although in certain cases it may be possible to submit other documentary evidence. The term “broker” generally includes all persons who, in the ordinary course of a trade or business, stand ready to effect sales made by others, as well as brokers and dealers registered as such under the laws of the United States or a state. These requirements generally will apply to a U.S. office of a broker, and the information reporting requirements generally will apply to a foreign office of a U.S. broker, as well as to a foreign office of a foreign broker if the broker is (i) a controlled foreign corporation within the meaning of Section 957(a) of the Code, (ii) a foreign person 50 percent or more of whose gross income from all sources for the 3-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the foreign broker has been in existence) was effectively connected with the conduct of a trade or business within the United States or (iii) a foreign partnership if it is engaged in a trade or business in the United States or if 50 percent or more of its income or capital interests are held by U.S. persons.
U.S. Foreign Account Tax Compliance Act
Pursuant to the U.S. Foreign Account Tax Compliance Act (“FATCA”), certain issuers of debt instruments and financial intermediaries may be required to withhold U.S. tax on payments on such debt instruments. FATCA withholding will be phased in starting January 1, 2014, but FATCA withholding on debt obligations generating foreign source interest (such as the Notes) will not begin to apply at the earliest until 2017. Furthermore, in accordance with a grandfathering rule, even if the payments on the Notes are otherwise potentially subject to FATCA withholding, the Notes, so long as they are characterized as indebtedness for U.S. federal income tax purposes, should only become subject to the FATCA regime if the Notes are issued (or materially modified) after the date that is six months after the date final regulations defining the term “foreign passthru payment” are published. No such final regulations have been published yet. In the event that additional Notes are issued that are ineligible for an exemption, unless additional Notes are distinguishable from the original Notes, withholding agents may treat all Notes, including the original Notes, as subject to withholding. Further, in the event any withholding under FATCA is required with respect to any payments on the Notes, there will be no additional amounts payable to compensate for the withheld amount. The IRS’s guidance with respect to certain of these rules is only preliminary, and the scope of these rules remains unclear and potentially subject to material changes. Moreover, non-U.S. governments may enter into agreements with the IRS to implement FATCA. Holders should consult their own tax advisors on how these rules may apply to their investment in the Notes.
Luxembourg Income tax consequences
The following is a summary of certain material Luxembourg tax consequences of purchasing, owning and disposing of the Notes. It does not purport to be a comprehensive description of all tax considerations that may be relevant to a decision to dispose of the Notes. It is based on the laws, regulations and administration and judicial interpretations presently in force in Luxembourg, though it is not intended to be, nor should it be construed to be, legal or tax
206 advice. This summary also does not take into account the specific circumstances of particular investors. Prospective investors in the Notes should therefore consult their own professional advisers as to the effects of state, local or foreign laws, including Luxembourg tax law, to which they may be subject.
Any reference in the present section to a tax, duty, levy, impost or other charge or withholding of a similar nature refers to Luxembourg tax law and/or concepts only. Investors may further be subject to net wealth tax (impôt sur la fortune) as well as other duties, levies or taxes. Corporate income tax (impôt sur le revenu), municipal business tax (impôt commercial communal) as well as the solidarity surcharge invariably apply to most corporate taxpayers resident of Luxembourg for tax purposes. Individual taxpayers are generally subject to personal income tax and the solidarity surcharge. Under certain circumstances, where an individual taxpayer acts in the course of the management of a professional or business undertaking, municipal business tax may apply as well.
Withholding tax
All payments of interest and principal by the Issuer in the context of the holding, disposal, redemption or repurchase of the Notes can be made free of withholding or deduction for or on account of any taxes of whatsoever nature imposed, levied, withheld, or assessed by Luxembourg or any political subdivision or taxing authority thereof or therein in accordance with applicable law, subject however to:
(i) the application of the Luxembourg laws of June 21, 2005 (the “Laws”) implementing the European Union Savings Directive (please refer to the paragraph below entitled “EU Savings Directive”) and several agreements (the “Agreements”) concluded with certain dependent or associated territories and providing for the possible application of a withholding tax on interest paid to or for the benefit of certain non-Luxembourg resident investors (individuals and certain types of entities called “residual entities”) in the event such payments being made by the relevant Issuer or by a paying agent established in Luxembourg within the meaning of the above- mentioned directive (for more information, please see “—EU Savings Directive”) unless the beneficiary of the payment of interest or similar income elects for an exchange of information or provides a specific tax certificate to the Luxembourg paying agent (see “—EU Savings Directive”); and;
(ii) the application of the Luxembourg law of December 23, 2005 as amended introducing a final tax on certain payments of interest made to certain Luxembourg resident individuals (the “Law”).
Resident noteholders
Payment of interest or similar income (within the meaning of the Law) on debt instruments made or deemed made by a paying agent (within the meaning of the Law) established in Luxembourg to or for the benefit of an individual Luxembourg resident for tax purposes who is the beneficial owner of such payment or to certain residual entities (such entities defined in article 4.2 of the EU Savings Directive, “Residual Entities”) established in another EU Member State or in an associated or dependent territory with which an Agreement has been signed, and deemed to be acting on behalf of an individual Luxembourg resident, may be subject to a final tax at a rate of 10%. Such final tax will be in full discharge of income tax if the individual beneficial owner acts in the course of the management of his/her private wealth. Responsibility for the withholding and payment of the tax lies with the Luxembourg paying agent.
An individual beneficial owner of interest or similar income (within the meaning of the Law) who is a resident of Luxembourg and acts in the course of the management of his private wealth may opt for a final tax of 10% when he receives or is deemed to receive such interest or similar income from a paying agent established in another EU Member State, in a Member State of the EEA which is not an EU Member State, or in a State which has concluded a treaty directly in connection with the EU Savings Directive. Responsibility for the declaration and the payment of the 10% final tax is assumed by the individual resident beneficial owner of interest.
207 Non-resident noteholders
Under the EU Savings Directive and the Laws, a Luxembourg based paying agent (within the meaning of the EU Savings Directive) may be required to withhold tax on interest and other similar income (within the meaning of the Laws) paid by it to (or under certain circumstances, to the benefit of) an individual resident in another Member State of the European Union or a Residual Entity established in another Member State of the European Union, unless the beneficiary of the interest payments or the Residual Entity (where applicable) elects for an exchange of information or provides the relevant documents to the Luxembourg paying agent. The same regime applies to payments by a Luxembourg based paying agent to individuals resident or Residual Entities established in certain dependant or associated territories (including Aruba, the British Virgin Islands, Guernsey, the Isle of Man, Jersey, Montserrat, Curaçao, Saba, Sint Eustatius, Bonaire and Sint Maarten).
The current tax rate is 35%. The tax system will only apply during a transitional period, the ending of which depends on the conclusion of certain agreements relating to information exchange with certain other countries (the transitional period may therefore never end).
Income taxation
Non-resident noteholders
Non-resident Noteholders, not having a permanent establishment, a permanent representative, or a fixed place of business in Luxembourg to which the Notes or income thereon are attributable, are not subject to Luxembourg income taxes on income accrued or received, redemption premiums or issue discounts, under the Notes nor on capital gains realized on the disposal or redemption of the Notes. Non-residents holders who have a permanent establishment, a permanent representative, or a fixed place of business in Luxembourg to which the Notes or income therefrom are attributable are subject to Luxembourg income tax on interest accrued or received, redemption premiums or issue discounts, under the Notes and on any gains realized upon the sale or disposal of the Notes.
Resident noteholders
Individuals
A resident Noteholder, acting in the course of the management of his/her private wealth, is subject to Luxembourg income tax in respect of interest or similar income received, redemption premiums or issue discounts, under the Notes, except if tax has been levied on such payments in accordance with the Law.
A gain realized by an individual Noteholder, acting in the course of the management of his/her private wealth, upon the sale or disposal, in any form whatsoever, of Notes is not subject to Luxembourg income tax, provided this sale or disposal took place more than 6 months after the Notes were acquired. However, any portion of such gain corresponding to accrued but unpaid interest income is subject to Luxembourg income tax, except if tax has been levied on such interest in accordance with the Law.
Corporations
A corporate resident holder of the Notes must include any interest accrued or received, any redemption premium or issue discount, as well as any gain realized on the sale or disposal, in any form whatsoever, of the Notes, in its taxable income for Luxembourg income tax assessment purposes.
A holder of the Notes that is governed by the law of May 11, 2007 on family estate management companies (as amended), or by the law of December 17, 2010 on undertakings for collective investment (amending the law of December 20, 2002), or the law of February 13, 2007 on
208 specialized investment funds (as amended) is neither subject to Luxembourg income tax in respect of interest accrued or received, any redemption premium, nor on gains realized on the sale or disposal, in any form whatsoever, of the Notes.
Net wealth taxation
A Luxembourg resident corporate holder of the Notes as well as a non-Luxembourg resident holder of the Notes which maintains a permanent establishment, fixed place of business or a permanent representative in Luxembourg to which such Notes or income thereon are attributable, are subject to Luxembourg wealth tax on such Notes, except if the Noteholder is a family estate management company (société de gestion de patrimoine familial) introduced by the law of May 11, 2007 (as amended), an undertaking for collective investment governed by the law of December 17, 2010 (amending the law of December 20, 2002), a securitization vehicle governed by and compliant with the law of March 22, 2004 on securitization (as amended), a company governed by and compliant with the law of June 15, 2004 (as amended) on venture capital vehicles, or a specialized investment fund governed by the law of February 13, 2007 on specialized investment funds (as amended).
An individual holder of the Notes, whether he/she is resident of Luxembourg or not, is not subject to Luxembourg wealth tax.
Other taxes
Neither the issuance nor the transfer of Notes will give rise to any Luxembourg stamp duty, value-added tax, issuance tax, registration tax, transfer tax or similar taxes or duties, provided that the relevant issue or transfer agreement is not submitted to registration in Luxembourg which is not mandatory.
Where a holder of the Notes is a resident of Luxembourg for tax purposes at the time of his/her death, the Notes are included in his/her taxable estate for inheritance tax assessment purposes.
Gift tax may be due on a gift or donation of Notes if embodied in a Luxembourg deed or recorded in Luxembourg.
EU savings directive
On June 3, 2003, the EU Council of Economic and Finance Ministers adopted the EU Council Directive 2003/48/EC on the taxation of savings income effective from July 1, 2005. Under the directive, each Member State is required to provide to the tax authorities of another Member State details of payments of interest within the meaning of the European Union Savings Directive or other similar income paid by a paying agent within the meaning of the European Union Savings Directive, to an individual resident or certain types of entities defined in article 4.2 of the European Union Savings Directive (the “Residual Entities”), established in that other Member State (or certain dependent or associated territories). For a transitional period, however, Luxembourg and Austria are permitted to apply a withholding tax system whereby if a beneficial owner, within the meaning of the European Union Savings Directive, does not opt for exchange of information and does not provide a specific tax certificate issued by the tax authorities of his/ her Member State of residence “certificate of exemption,” Luxembourg and Austria will levy a withholding tax on payments to such beneficial owner. The tax rate of the withholding is 35%. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to such payments. As of January 1, 2010, Belgium, which previously also applied withholding, applies the regime of exchange of information described above. See “European Union Directive on Taxation of Savings Income in the Form of Interest Payments” (Council Directive 2003/48/EC).
Also with effect from July 1, 2005, a number of non-EU countries (Switzerland, Andorra, Liechtenstein, Monaco and San Marino) and certain dependant or associated territories (including Jersey, Guernsey, Isle of Man, Montserrat, British Virgin Islands, Curaçao, Saba, Saint
209 Eustatius, Bonaire, St. Maarten, Aruba, Cayman Islands, Turks and Caicos Islands and Anguilla) have agreed to adopt similar measures (either provision of information or transitional withholding) in relation to payments made by a paying agent (within the meaning of the European Union Savings Directive) within their jurisdiction to, or collected by such a paying agent for, an individual resident or a Residual Entity established in a Member State. In addition, Luxembourg has entered into reciprocal provision of information or transitional withholding arrangements or reciprocal provision of information (at the recipient beneficial owner’s or Residual Entity’s requests) with certain of those dependent or associated territories in relation to payments made by a paying agent (within the meaning of the European Union Savings Directive) in Luxembourg to, or collected by such a paying agent for, an individual resident or a Residual Entity established in one of those territories.
On November 13, 2008, the European Commission announced proposals to amend the European Union Savings Directive. If implemented, the proposed amendments would, inter alia, (i) extend the scope of the European Union Savings Directive to payments made through certain intermediate structures (whether or not established in a EU Member State) for the ultimate benefit of EU resident individuals and (ii) provide for a wider definition of interest subject to the European Union Savings Directive. The European Parliament approved an amended version of this proposal on April 24, 2009. Discussions are still ongoing at Council level, building on unanimous conclusions adopted on December 2, 2008 and on June 9, 2009. Investors who are in any doubt as to their position should consult their professional advisers.
210 ERISA considerations Sections 404 and 406 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), impose certain fiduciary and prohibited transaction restrictions on employee benefit plans subject to Title I of ERISA (“ERISA Plans”) and on certain other retirement plans and arrangements, including individual retirement accounts and annuities, Keogh plans and bank collective investment funds and insurance company general and separate accounts, in which such ERISA Plans are invested. Section 4975 of the Code imposes essentially the same prohibited transaction restrictions on tax-qualified retirement plans described in Section 401(a) of the Code, individual retirement or other savings accounts described in Section 4975(e)(1) of the Code (collectively, “Tax-Favored Plans”). ERISA and Section 4975 of the Code prohibit a broad range of transactions involving assets of ERISA Plans and Tax Favored Plans (collectively, “Plans”) and persons who have certain specified relationships to such Plans (so-called “parties in interest” within the meaning of Section 3(14) of ERISA or “disqualified persons” within the meaning of Section 4975 of the Code; collectively “Parties in Interest”), unless a statutory or administrative exemption is available with respect to any such transaction. Certain employee benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA), plans maintained outside the United States primarily for the benefit of persons substantially all of whom are non-resident aliens as described in Section 4(b)(4) of ERISA and, if no election has been made under Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA) are not subject to the requirements of Title I of ERISA; however, such plans may nonetheless be subject to other state, local, federal or non-U.S. laws or regulations that are substantially similar to the fiduciary responsibility or prohibited transaction provisions of ERISA or Section 4975 of the Code (“Similar Law”). Accordingly, fiduciaries of such plans should consult with their counsel before investing the assets of such plans in the Notes. Any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited transaction rules set forth in Section 503 of the Code. The United States Department of Labor (the “DOL”) has promulgated regulations at 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of ERISA (the “DOL Regulations”), defining the term “Plan Assets.” Under the DOL Regulations, generally, when a Plan makes an investment in an equity interest in another entity (such as the Issuer), the underlying assets of that entity may be considered Plan Assets unless certain exceptions apply. Exceptions contained in the DOL Regulations provide that a Plan’s assets will include both an equity interest and an undivided interest in each underlying asset of the entity in which it makes an equity investment, unless: (1) the entity is an “operating company” as defined in the DOL Regulations; (2) the equity investment made by the Plan is either in a “publicly offered security” that is “widely held,” both as defined in the DOL Regulations, or a security issued by an investment company registered under the Investment Company Act of 1940, as amended; or (3) Benefit Plan Investors (as defined below) do not own 25% or more in value of any class of equity interests of the entity, excluding equity interests held by persons (other than Benefit Plan Investors) with discretionary authority or control over the entity’s assets, or who provide investment advice for a fee with respect to such assets, and any affiliates thereof. For this purpose, “Benefit Plan Investors” include Plans and any entity whose underlying assets include Plan Assets by reason of a Plan’s investment in such entity. Under the DOL Regulations, the term “equity interest” means any interest in an entity other than an instrument that is treated as indebtedness under applicable local law and which has no substantial equity features. The Issuer anticipates that, as of the date hereof, the Notes will not be treated as indebtedness without significant equity features for the purposes of the DOL Regulations as of the date hereof. The Issuer does not anticipate that an exception under the DOL Regulations will apply with respect to the Notes. Therefore, the Issuer intends to restrict the acquisition and transfer of the Notes by Benefit Plan Investors such that Benefit Plan Investors will not be permitted to acquire the Notes. Each purchaser and transferee of a Note will be required to, or will be deemed to represent and warrant that (i) it is not, and is not acting on behalf of, a Benefit Plan Investor, (ii) if it is, or is acting on behalf of, a plan or arrangement subject to Similar Law, the purchase and holding of
211 the Notes does not constitute a violation of Similar Law and neither the Issuer nor any of its affiliates is a fiduciary within the meaning of any definition of “fiduciary” under Similar Laws or has provided advice forming the primary basis for an investment decision by the purchaser or transferee of the Notes. Any purported acquisition or transfer in contravention of the foregoing restriction shall be null and void ab initio.
212 Certain insolvency considerations Set forth below is a brief description of certain aspects of insolvency laws in Luxembourg. In the event that the Issuer experienced financial difficulty, it is not possible to predict with certainty in which jurisdiction or jurisdictions insolvency or similar proceedings would be commenced, or the outcome of such proceedings.
Luxembourg Insolvency
The Issuer is incorporated and has its registered office in Luxembourg. Accordingly, insolvency proceedings with respect to the Issuer may proceed under, and be governed by, Luxembourg insolvency laws. Luxembourg insolvency laws may not be as favorable to investors’ interests as those of other jurisdictions with which investors may be familiar and may limit Noteholders’ ability to enforce the terms of the Notes. Insolvency proceedings may have a material adverse effect on the Issuer’s business and assets and its obligations under the Notes.
The following is a brief description of certain aspects of Luxembourg insolvency laws under which the following types of proceedings (together referred to as “insolvency proceedings”) may be opened against a Luxembourg company to the extent it has its registered office or center of main interest in Luxembourg:
Bankruptcy (faillite): a Luxembourg company may be declared bankrupt provided that two conditions are fulfilled: (i) the company is in default of payment (i.e., it fails to pay its debts as they fall due) (cessation de paiement) and (ii) the company has a loss of creditworthiness (ébranlement de crédit). The opening of bankruptcy proceedings may be requested by:
• the company itself (aveu de faillite), in which case the company must declare bankruptcy within one month of ceasing to pay its debts which are due;
• any of the company’s creditors (assignation en faillite) by serving a bankruptcy writ on the company to appear before the Commercial District Court; or
• the court on its own motion (faillite d’office) if the court obtains information from the public prosecutor’s office, debtors or third parties indicating that the company has met the bankruptcy conditions.
If a court finds that the aforementioned two conditions have been satisfied, it will open bankruptcy proceedings, resulting in the suspension of all individual measures of enforcement against the company, subject to certain limited exceptions.
Controlled management proceedings (gestion contrôlée): the opening of controlled management proceedings may only be requested by the company and not by its creditors. Prior approval by more than 50% of the creditors representing more than 50% of the company’s liabilities is required.
Composition proceedings (concordat préventif de la faillite): composition proceedings may be requested only by the company (having received prior consent from a majority of the creditors representing 75% of the outstanding amount).
The court’s decision to admit a company to the composition proceedings triggers a provisional freeze on individual enforcement of claims by unsecured creditors.
In addition to these proceedings, the ability of the holders of Notes to receive payment under the Notes may be affected by a court decision to grant a reprieve from payments (sursis de paiements) or to put the Issuer into judicial liquidation (liquidation judiciaire). Judicial liquidation proceedings may be opened at the public prosecutor’s request against companies pursuing an activity in violation of criminal laws or in serious violation of the commercial code or of the Luxembourg Companies Law. Such liquidation proceedings will generally follow the same rules as those applicable to bankruptcy proceedings.
213 The Issuer’s liabilities in respect of the Notes will, in the event of a liquidation following bankruptcy or judicial liquidation proceedings, rank after the cost of liquidation (including any debt incurred for the purpose of such liquidation) and those of the Issuer’s debts that are entitled to priority under Luxembourg law. Preferential claims under Luxembourg law include, among others:
• certain amounts owed to the Luxembourg Revenue;
• value-added tax and other taxes and duties owed to the Luxembourg Customs and Excise;
• social security contributions; and
• remuneration owed to employees.
For the avoidance of doubt, the above list is not exhaustive.
Assets over which a security interest has been granted will, in principle, not be available for distribution to unsecured creditors (except after enforcement and to the extent a surplus is realized).
During insolvency proceedings, all enforcement measures by unsecured creditors are suspended. Secured creditors’ ability to enforce their security interests may also be limited in the event of controlled management proceedings, which automatically cause the secured creditors’ rights to be frozen until the court has made a final decision as to the petition for controlled management, and may be affected thereafter by a reorganization order from the court. A reorganization order requires prior approval by more than 50% of the creditors representing more than 50% of the company’s liabilities.
After converting all of the company’s available assets into cash and determining all of the company’s liabilities, the bankruptcy receiver (curateur) will distribute the proceeds of the sale to the creditors according to their priority ranking, as set forth by law, after deducting the bankruptcy receiver’s fees and the bankruptcy costs (frais de la masse).
Transactions that may be challenged or set aside
Luxembourg insolvency laws may also affect transactions entered into or payments made by the relevant Luxembourg company during the period before bankruptcy, the so-called “suspect period” (période suspecte) which is a maximum of six months (and ten days, depending on the transaction in question) preceding the judgment declaring bankruptcy, except that in certain specific situations the court may set the start of the suspect period at an earlier date. In particular:
• pursuant to Article 445 of the Luxembourg Code of Commerce, specified transactions (such as, in particular, the granting of a security interest for antecedent debts; the payment of debts which have not fallen due, whether payment is made in cash or by way of assignment, sale, set-off or by any other means; the payment of debts which have fallen due by any means other than in cash or by bill of exchange; and the sale of assets without consideration or with substantially inadequate consideration) entered into during the suspect period (or the ten days preceding it) must be set aside or declared null and void, if so requested by the insolvency receiver;
• pursuant to Article 446 of the Luxembourg Code of Commerce, payments made for matured debts, as well as other transactions concluded for consideration, during the suspect period are subject to cancellation by the court upon proceedings instituted by the insolvency receiver if they were concluded with knowledge of the bankrupt party’s cessation of payments; and
• pursuant to Article 448 of the Luxembourg Code of Commerce and Article 1167 of the Civil Code (action paulienne), the insolvency receiver (acting on behalf of the creditors) has the right to challenge any fraudulent payments and transactions, including the granting of security with an intent to defraud, made prior to the bankruptcy, without any time limit.
214 In principle, a bankruptcy order rendered by a Luxembourg court does not result in automatic termination of contracts. The company’s contracts, therefore, subsist after the bankruptcy order; however, the bankruptcy receiver may choose to terminate certain contracts. As of the bankruptcy adjudication date, no interest on any unsecured claim will accrue vis-à-vis the bankruptcy estate.
The bankruptcy receiver decides whether or not to continue performance under ongoing contracts (i.e., contracts existing before the bankruptcy order). The bankruptcy receiver may elect to continue the debtor’s business, provided the bankruptcy receiver obtains the court’s authorization and such continuation does not cause any prejudice to the creditors; however, two exceptions apply:
• the parties to an agreement may contractually agree that bankruptcy constitutes an early termination or acceleration event; and
• intuitu personae contracts (i.e., contracts whereby the identity of one of the contracting parties is an essential element of the contract) are automatically terminated as of the bankruptcy judgment, as indicated above, since the debtor is no longer responsible for the management of the company.
The bankruptcy receiver may elect not to perform any of the bankrupt party’s obligations that have yet to be performed after bankruptcy has been opened under any agreement the bankruptcy party entered into before the bankruptcy was opened. The counterparty to that agreement may make a claim for damages in the bankruptcy and such claim will rank pari passu with all other unsecured creditors’ claims and/or seek a court order to have the relevant contract dissolved.
International aspects of insolvency proceedings
Pursuant to the EU Council Regulation No. 1346/2000 of May 29, 2000 on insolvency proceedings (the “EU Insolvency Regulation”), the court with jurisdiction to open insolvency proceedings in relation to a company is the court of the Member State where the relevant company has its center of main interests (as that term is used in Article 3(1) of the EU Insolvency Regulation), which is a question of fact.
The EU Insolvency Regulation does not include a clear definition of the term “center of main interests,” so the interpretation of that term may change from time to time. There is however a rebuttable presumption under Article 3(1) of the EU Insolvency Regulation that a company has its center of main interests (“COMI”) in the Member State in which it has its registered office. Accordingly, there is a rebuttable presumption that the COMI of the Issuer is in Luxembourg and consequently that any “main insolvency proceedings” (as defined in the EU Insolvency Regulation) would be opened by a Luxembourg court and governed by Luxembourg law unless the COMI is determined to be located in a different Member State. Preamble 13 of the EU Insolvency Regulation states that the COMI of a debtor should correspond to the place where the debtor conducts the administration of its interests on a regular basis and “is therefore ascertainable by third parties.” In that respect, factors such as where board meetings are held, where a company conducts the majority of its business and where the majority of a company’s creditors are established may all be relevant in determining the place where a company has its COMI. A company’s COMI is determined when the relevant insolvency proceedings are opened.
If a company’s COMI is and will remain located in the state where it has its registered office, the main insolvency proceedings would be opened in that jurisdiction and, accordingly, a court in that jurisdiction would be entitled to open the types of insolvency proceedings referred to in Annex A to the EU Insolvency Regulation. Insolvency proceedings opened in one Member State under the EU Insolvency Regulation are recognized in the other Member States, although secondary proceedings may be opened in another Member State if the debtor has an “establishment” (as defined in the EU Insolvency Regulation) in the other Member State. Such secondary proceedings are restricted to the debtor’s assets in the other Member State.
215 Registration in Luxembourg
Registration of the Notes, the Indenture and the transaction documents (and any related document) with the Administration de l’Enregistrement et des Domaines in Luxembourg may be required in the case of legal proceedings before Luxembourg courts or if the Notes, the Indenture and the transaction documents (and any related document) must be produced before an official Luxembourg authority (autorité constituée). In such case, either a nominal registration duty or an ad valorem duty (or, for instance, 0.24% of the payment obligation mentioned in the registered document) will be payable depending on the nature of the document to be registered.
The Luxembourg courts or the official Luxembourg authority may require that the Notes, the Indenture and the transaction documents (and any related document) and any judgment obtained in a foreign court be translated into French or German.
216 Plan of distribution
Under the terms and subject to the conditions contained in a purchase agreement dated May 17, 2013 (the “Purchase Agreement”) between J.P. Morgan Securities plc, Standard Bank Plc and BNP Paribas (the “Initial Purchasers”), on the one hand, and the Issuer, on the other hand, the Initial Purchasers have agreed to purchase from us, and we have agreed to sell to the Initial Purchasers, all of the Notes.
The Purchase Agreement provides that the obligation of the Initial Purchasers to pay for and accept delivery of the Notes is several and not joint and is subject to the approval of certain legal matters by their counsel and certain other conditions. The Initial Purchasers are committed to take and pay for all of the Notes if any are taken. After the initial offering, the offering price and other selling terms may be varied from time to time by the Initial Purchasers without notice. The Initial Purchasers may offer and sell the Notes through certain of their affiliates.
To the extent that J.P. Morgan Securities plc intends to effect any sales of the Notes in the United States, J.P. Morgan Securities plc will do so through J.P. Morgan Securities LLC, its selling agent, or one or more U.S. registered broker-dealers or as otherwise permitted by applicable U.S. law. To the extent that Standard Bank Plc intends to effect any sales of the Notes in the United States, Standard Bank Plc will do so through Standard New York Securities Inc., its selling agent, or one or more U.S. registered broker-dealers or as otherwise permitted by applicable U.S. law.
The Issuer has agreed to indemnify the Initial Purchasers against certain liabilities, including liabilities under the Securities Act, and to contribute to payments which the Initial Purchasers may be required to make in respect thereof. In addition, the Issuer has agreed to reimburse the Initial Purchasers for certain expenses incurred in connection with the offering of the Notes.
The Notes will constitute a new issue of securities with no established trading market. We do not intend to apply for listing or quotation of the Notes on any national securities exchange in the United States or through NASDAQ. However, there can be no assurance that the prices at which the Notes will sell in the market after this offering will not be lower than the initial offering price or that an active trading market for the Notes after the completion of the offering will develop and continue after this offering. The Initial Purchasers have advised us that they currently intend to make a market in the Notes. However, they are not obligated to do so and may discontinue any market making activities with respect to the Notes at any time without notice. In addition, market making activity will be subject to the limits imposed by applicable law. Accordingly, there can be no assurance that the trading market for the Notes will have any liquidity.
The Issuer has agreed that, without the prior written consent of the Initial Purchasers, none of MIC S.A. or any of its subsidiaries will offer or sell any debt securities (other than the Notes and related party loans) issued or guaranteed by the Issuer and having a tenor of more than one year for a period of 90 days after the date of this offering memorandum.
The Notes have not been and will not be registered under the Securities Act and may not be offered, sold or delivered within the United States except (1) to qualified institutional buyers in reliance on Rule 144A under the Securities Act and (2) outside the United States in offshore transactions in reliance on Regulation S under the Securities Act in accordance with applicable laws. Any offer or sale of the Notes in reliance on Rule 144A under the Securities Act will be made by broker-dealers who are registered as such under the Exchange Act.
In addition, until 40 days after the commencement of this offering, an offer or sale of the Notes within the United States by a dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in compliance with Rule 144A under the Securities Act or pursuant to another exemption from the registration requirements of the Securities Act.
217 We expect that delivery of the Notes will be made against payment therefor on or about May 22, 2013, which we expect will be the third business day following the pricing date of the Notes.
Investors who purchase Notes from the Initial Purchasers may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page of this offering memorandum.
Other relationships
The Initial Purchasers and/or their affiliates are full service financial institutions and have in the past engaged, and may in the future engage, in transactions with and perform services, including financial advisory and commercial and investment banking services, for us and our affiliates in the ordinary course of business, including acting as financial intermediaries with respect to the proceeds of this offering, for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Initial Purchasers and/or their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investments and securities activities may involve securities and instruments of ours or our affiliate. We may enter into hedging or other derivative transactions as part of our risk management strategy with one or more of the Initial Purchasers, which may include transactions relating to our obligations under the Notes. Our obligations under these transactions may be secured by cash or other collateral. J.P. Morgan Europe Limited, an affiliate of J.P. Morgan Securities plc, and certain affiliates of Standard Bank Plc are lenders, arrangers or agents under certain of the facilities which will be repaid in full with the proceeds of this offering.
The Initial Purchasers or their respective affiliates may purchase the Notes for its or their own account and be allocated Notes.
Selling restrictions
General
No action has been taken by the Issuer or any of the Initial Purchasers that would, or is intended to, permit a public offer of the Notes (or beneficial interests therein), or possession or distribution of this offering memorandum or any other offering or publicity material relating to the Notes, in any country or jurisdiction where any such action for that purpose is required. Accordingly, each Initial Purchaser has undertaken that it will not, directly or indirectly, offer or sell any Notes (or beneficial interests therein) or have in its possession, distribute or publish any offering memorandum, prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of Notes (or beneficial interests therein) by it will be made on the same terms.
In addition to the selling restrictions set forth below, prospective investors should be aware that the laws and practices of certain countries require investors to pay stamp taxes and other charges in connection with purchases of securities.
United States
The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons
218 except to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to persons in offshore transactions in reliance on Regulation S under the Securities Act. Each of the Initial Purchasers has agreed that, except as permitted by the Purchase Agreement, it will not offer, sell or deliver the Notes (i) as part of its distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, within the United States or to, or for the account or benefit of, U.S. persons, and it will have sent to each broker/ dealer to which it sells the Notes in reliance on Regulation S during such 40-day period, a confirmation or other notice detailing the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act. Resales of the Notes are restricted as described under “Transfer Restrictions.”
In addition, until 40 days after the commencement of the offering, an offer or sale of Notes within the United States by a broker/dealer (whether or not it is participating in the offering), may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than pursuant to Rule 144A.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), no Initial Purchaser, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), has made or will make an offer of Notes to the public in that Relevant Member State, except that, with effect from and including the Relevant Implementation Date, the Initial Purchasers may make an offer of Notes to the public in that Relevant Member State:
• in (or in Germany, where the offer starts within) the period beginning on the date of publication of a prospectus in relation to the Notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive and ending on the date which is 12 months after the date of such publication;
• at any time to legal entities which are accounts considered as qualified investors in accordance with the Prospectus Directive; or
• in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer of notes to the public” in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC as amended by the Directive 2010/73/EC and includes any relevant implementing measure in each Relevant Member State.
Luxembourg
This offering memorandum has not been approved by, and will not be submitted for approval to, the Luxembourg Financial Services Authority (Commission de Surveillance du Secteur Financier) for purposes of public offering or sale in or from Luxembourg and/or admission to the Luxembourg EU regulated market. Accordingly, the Notes may not be offered or sold to the public in Luxembourg, directly or indirectly, and neither this offering memorandum nor any other offering circular, prospectus, form of application, advertisement or other material may be
219 distributed, or otherwise made available in or from, or published in, Luxembourg, except for the sole purpose of the admission to trading and listing of the Notes on the Official List of the Luxembourg Stock Exchange’s Euro MTF market and except in circumstances where:
• if Luxembourg is not the home member state, the Luxembourg Financial Services Authority (Commission de Surveillance du Secteur Financier) has been notified by the competent authority in the home member state that a prospectus has been duly approved in accordance with the Prospectus Directive (as amended);
• the offer is made to “qualified investors” as described in points (1) to (4) of Section I of Annex II to Directive 2004/39/EC of the European Parliament and of the Council of April 21, 2004 on markets in financial instruments, and persons or entities who are, on request, treated as professional clients in accordance with Annex II to Directive 2004/39/EC, or recognized as eligible counterparties in accordance with Article 24 of Directive 2004/39/EC unless they have requested that they be treated as non-professional clients; or
• the offer benefits from any other exemption to, or constitutes a transaction otherwise not subject to, the requirement to publish a prospectus for the purpose of the Prospectus Law.
The Netherlands
The Notes have not been and will not be offered in the Netherlands other than to persons or entities which are qualified investors (gekwalificeerde beleggers) as defined in article 1:1 of the Dutch Financial Supervision Act (Wet op het financieel toezicht).
Switzerland
This offering memorandum is not an issue prospectus pursuant to article 1156 of the Swiss Code of Obligations or a listing prospectus pursuant to Articles 27 et seq. of the Listing Rules of the SIX Swiss Exchange and may not comply with the information standards required thereunder. Accordingly, the Notes will not be listed on any Swiss stock exchange and may not be offered to the public in or from Switzerland, but only to a selected and limited circle of investors who do not subscribe to the Notes with a view to distribution.
United Kingdom
Each of the Initial Purchasers (a) has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 (the “FSMA”) with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom; and (b) has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to it.
South Africa
Pursuant to the South African Banks Act of 1990, the Notes may not be and accordingly are not being offered to prospective investors in South Africa. In addition, South African exchange controls prohibit a sale of the Notes to South African residents or to foreign subsidiaries of South African companies, other than to certain qualifying South African investors utilizing their pre- approved prudential offshore allowances, (“Qualifying SA Institutions”). Accordingly, the Notes are not being marketed to prospective investors in the Republic of South Africa and will only be sold to South African residents if they are Qualifying SA Institutions. The offer of the Notes is not an “offer to the public” as defined in Section 95(h) of the Companies Act of 2008, as amended, and this offering memorandum does not, nor is it intended to, constitute a prospectus prepared and registered under the Companies Act.
220 Legal matters Legal matters
Certain legal matters in connection with this offering will be passed upon for the Issuer by Orrick, Herrington & Sutcliffe (Europe) LLP as to matters of United States federal and New York law and by NautaDutilh Avocats Luxembourg as to matters of Luxembourg law.
Certain legal matters in connection with this offering will be passed upon for the Initial Purchasers by Latham & Watkins (London) LLP as to matters of United States federal and New York law and by Loyens & Loeff as to matters of Luxembourg law.
221 Independent auditors The Millicom Group’s consolidated financial statements for the years ended December 31, 2009, 2010 and 2011 included in this offering memorandum have been audited by PricewaterhouseCoopers, Société coopérative (formerly PricewaterhouseCoopers S.à r.l.) independent auditors (réviseur d’enterprises agréé), 400, Route d’Esch, L-1471 Luxembourg, and the Millicom Group’s consolidated financial statements for the year ended December 31, 2012 included in this offering memorandum have been audited by Ernst & Young S.A. independent auditors (cabinet de révision agréé), 7, Rue Gabriel Lippmann, Parc d’Activité Syrdall 2, Luxembourg, L-5365 Munsbach, as stated in their reports appearing herein. The Millicom Group’s unaudited interim condensed consolidated financial statements for the three months ended March 31, 2013 included in this offering memorandum have been reviewed by Ernst & Young S.A. PricewaterhouseCoopers, Société coopérative, and Ernst & Young S.A. are members of the Luxembourg body of registered auditors (Institut des Réviseurs d’Entreprises).
222 Service of process and enforcement of judgments It may not be possible for you to effect service of process within the United States upon the Issuer or any of its directors and executive officers, or to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. securities laws against the Issuer in the United States.
If a judgment is obtained in a U.S. court against the Issuer or any of its directors or executive officers, investors will need to enforce such judgment in jurisdictions where the relevant company or individual has assets. Even though the enforceability of U.S. court judgments outside the United States in Luxembourg is described below, you should consult with your own advisors in any pertinent jurisdictions as needed to enforce a judgment in those countries or elsewhere outside the United States.
Luxembourg
The Issuer is organized under the laws of Luxembourg. Most of the Issuer’s directors, officers and other executives are neither residents nor citizens of the United States. Furthermore, most of the Issuer’s assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Issuer, or to enforce against it judgments of U.S. courts predicated upon the civil liability provisions of U.S. federal or state securities laws. It may be possible for investors to effect service of process within Luxembourg upon the Issuer, provided that the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters of November 15, 1965 is complied with.
A contractual provision allowing for service of process against the Issuer by any other party appointed to such effect could be overridden by Luxembourg statutory provisions allowing for the valid service of process against the Issuer at its registered office, in accordance with applicable laws.
Since there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the United States and Luxembourg, Luxembourg courts will not automatically recognize and enforce a final judgment rendered by a U.S. court. A valid judgment with respect to the Notes against a company incorporated in Luxembourg and obtained from a court of competent jurisdiction in the United States, which judgment remains in full force and effect after all appeals as may be taken in the relevant state or federal jurisdiction with respect thereto have been taken, may be entered and enforced through a court of competent jurisdiction of Luxembourg subject to compliance with the enforcement procedures (exequatur) set forth in Article 678 et seq. of the Luxembourg Nouveau Code de Procedure Civile and applicable case law. These are:
• the U.S. court awarding the judgment has jurisdiction to adjudicate the matter under its applicable laws, and such jurisdiction is recognized by Luxembourg private international and local law;
• the U.S. court order or judgment does not result from an evasion of Luxembourg law (fraude a la loi);
• the judgment is final and enforceable in the jurisdiction where the decision is rendered (executoire);
• the U.S. court has applied the substantive law as designated by the Luxembourg conflict of laws rules or, the order does not contravene the principles underlying those rules;
• the U.S. court has acted in accordance with its own procedural laws;
• the foreign procedure was regular in light of the laws of the country of origin, the decision of the foreign court was not obtained by fraud and the judgment was obtained in compliance
223 with the defendant’s rights (i.e., following proceedings where the defendant had the opportunity to appear, was granted the necessary time to prepare its case and, if it appeared, could present a defense); and
• the considerations of the foreign order as well as the judgment do not contravene international public policy as understood under the Luxembourg law or have been given in proceedings of a criminal or tax nature. Awards of damages made under civil liabilities provisions of the U.S. federal securities laws, or other laws, which are classified by Luxembourg courts as being of a penal or punitive nature (for example, fines or punitive damages) may not be recognized by Luxembourg courts.
We have also been advised by our Luxembourg counsel that if an original action is brought in Luxembourg, Luxembourg courts may refuse to apply the designated law if: (i) the choice of such law was not made bona fide, (ii) if the foreign law was not pleaded and proved or (iii) its application contravenes Luxembourg mandatory laws or Luxembourg public policy. In an action brought in Luxembourg on the basis of U.S. federal or state securities laws, Luxembourg courts may not have the requisite power to grant the remedies sought.
In a judgment of the Luxembourg District Court, dated January 10, 2008, the District Court differed slightly from the traditional rules for enforcing a judgment described above, and decided that, in order to enforce a foreign judgment in Luxembourg, a Luxembourg judge has to make sure that three conditions are fulfilled: (i) the “indirect” competence of the foreign judge based on the litigation’s connection with such judge, (ii) the conformity with international public policy requirements, both substantive and procedural, and (iii) the absence of fraud to the law. In the judgment, the District Court held that the Luxembourg judge does not need to verify that the (substantive) law applied by the foreign judge is the law which would have been applicable according to Luxembourg conflict of law rules.
Whether the District Court’s opinion will develop into the prevailing position of Luxembourg case law cannot be forecast with certainty at this stage, especially considering that the case at issue was not appealed to the Court of Appeal and because, to the best of our knowledge and belief, having taken all reasonable care to ensure that such is the case, there has been no further case law on the issue since then.
224 Listing and general information Legal information
The Issuer
MIC S.A. is a public limited liability company (société anonyme) incorporated under the name Millicom International Cellular S.A. on June 16, 1992. MIC S.A. has an authorized share capital of $199,999,800 divided into 133,333,200 shares with a par value of $1.50 per share. As of March 31, 2013, MIC S.A. had an issued share capital of $152,608,825.50 represented by 101,739,217 shares with a par value of $1.50 each, fully paid in. See “Major Shareholders and Related Party Transactions—Principal Shareholders and Corporate Structure.” MIC S.A.‘s amended and restated articles of association are dated May 29, 2012 and were published in the Recueil du Mémorial on July 5, 2012. MIC S.A.‘s registered address, 2, rue du Fort Bourbon, L-1249, Luxembourg. MIC S.A.‘s telephone number is +352 27 759 101. MIC S.A. is registered with the Luxembourg Trade and Companies Register under number B40630.
MIC S.A.‘s fiscal year ends on December 31.
MIC S.A. is the ultimate holding company for the Millicom Group’s operations, which are held through operating companies incorporated in the jurisdictions in which the Millicom Group does business. MIC S.A.‘s material operating subsidiaries and joint ventures are listed under “Our Business—Overview—Subsidiaries and their Market Presence.” MIC S.A.‘s ordinary shares were delisted from the NASDAQ National Market in the United States on May 30, 2011. The foreign jurisdictions that together constitute the current primary trading market for MIC S.A.‘s ordinary shares are Sweden and the United Kingdom. In Sweden, the shares are listed in the form of Swedish depository receipts (“SDRs”) on the NASDAQ OMX Stockholm stock exchange, and the SDRs are also traded off-exchange through a multilateral trading facility (“MTF”) based in Sweden and through over-the-counter (“OTC”) trading in Sweden. As of March 31, 2013, 95% of total shares are in the form of SDRs. Ordinary shares are still traded OTC in the United States.
With the primary listing in Stockholm, MIC S.A. terminated its Exchange Act reporting registration on October 12, 2012. MIC S.A. continues to be subject to NASDAQ OMX Stockholm’s listing rules and reporting requirements and the Swedish Code of Corporate Governance.
As of March 31, 2013, MIC S.A. had outstanding 101,739,217 common shares, each with a par value of $1.50, which represented all of its equity and voting securities. Each common share carries one voting right. As of March 31, 2013, the only significant related parties to MIC S.A. or persons who beneficially owned more than 5% of MIC S.A.‘s common shares were Investment AB Kinnevik, with 37,835,438 shares, representing approximately 37% of the voting shares on that date.
Auditors
The independent auditors of MIC S.A. are Ernst & Young S.A., with registered office at 7, Rue Gabriel Lippmann, Parc d’Activité Syrdall 2, Luxembourg, L-5365 Munsbach, Luxembourg.
Litigation
There are no, and have not been any, governmental, legal or arbitration proceedings against or affecting MIC S.A., nor is MIC S.A. aware of any pending or threatened proceedings of such kind, which may have or have had a significant effect on MIC S.A.’s financial position.
No conflict of interests
The members of MIC S.A.’s board of directors do not have any potential conflicts of interest between their duties to MIC S.A. and their respective private interests in respect of the issuance of the Notes.
225 No material adverse change As of the date of this offering memorandum, there has been no material adverse change with respect to MIC S.A. or its capacity to fulfill its obligations under the Notes.
General information Except as disclosed in this offering memorandum: • there has been no material adverse change in the consolidated financial position of MIC S.A. since March 31, 2013; and • MIC S.A. is not involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which MIC S.A. is aware) relating to claims or amounts that are material in the context of the issuance of the Notes. MIC S.A. accepts responsibility for the accuracy of the information contained in this offering memorandum. To the best knowledge and belief of MIC S.A., the information contained in this offering memorandum for which it takes responsibility is in accordance with the facts and does not omit anything likely to affect the import of such information.
Listing Application has been made for the Notes to be admitted to listing and trading on the Euro MTF Market of the Luxembourg Stock Exchange. Notice of any optional redemption, change of control or any change in the rate of interest payable on the Notes will be published in a Luxembourg newspaper of general circulation.
Luxembourg listing information Copies of the following documents may be obtained or inspected in physical form during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the Issuer’s registered office and the Transfer Agent, the Principal Paying Agent and the Luxembourg Listing Agent so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of such exchange require: • the memorandum and articles of association of the Issuer; • the Issuer’s consolidated financial statements, including future audited consolidated annual financial statements and future unaudited consolidated interim financial statements; and • the Indenture governing the Notes. Pursuant to Part 1, point 502 of the Rules and Regulations of the Luxembourg Stock Exchange, the Notes will be freely transferable on the Luxembourg Stock Exchange.
Clearing information The Notes sold pursuant to Regulation S and the Notes sold pursuant to Rule 144A of the Securities Act have been accepted for clearance through the facilities of DTC, Euroclear and Clearstream (CUSIP number 600814AK3, ISIN code US600814AK33 and Common Code 078394978 with respect to the Rule 144A notes, and ISIN code XS0921332069 and Common Code 092133206 with respect to the Regulation S Notes). The address of DTC is 55 Water Street, New York, New York 10041, USA; the address of Euroclear is Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II, B 1210 Brussels, Belgium; and the address of Clearstream is Clearstream Banking, 42 Avenue JF Kennedy, L-1855 Luxembourg.
Authorization The issuance of the Notes was duly authorized by resolutions of MIC S.A.‘s board of directors dated May 8, 2013.
226 Where you can find more information
Each purchaser of the Notes from the Initial Purchasers will be furnished with a copy of this offering memorandum and, to the extent provided to the Initial Purchasers by us for such purpose, any related amendments or supplements to this offering memorandum. Each person receiving this offering memorandum and any related amendments or supplements to this offering memorandum acknowledges that:
(1) such person has been afforded an opportunity to request from us, and to review and has received, all additional information considered by it to be necessary to verify the accuracy and completeness of the information herein; (2) such person has not relied on the Initial Purchasers or any person affiliated with the Initial Purchasers in connection with its investigation of the accuracy of such information or its investment decision; and (3) except as provided pursuant to (1) above, no person has been authorized to give any information or to make any representation concerning the Notes offered hereby other than those contained herein and, if given or made, such other information or representation should not be relied upon as having been authorized by us or the Initial Purchasers.
For so long as any of the Notes are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Issuer will, during any period in which it is neither subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, nor exempt from the reporting requirements under Rule 12g3-2(b) of the Exchange Act, make available to the holder or beneficial owner of such restricted securities or to any prospective purchaser of such restricted securities designated by such holder or beneficial owner, in each case upon the written request of such holder, beneficial owner or prospective purchaser, the information required to be provided by Rule 144A(d)(4) under the Securities Act. Any such request should be directed to the Issuer at 2, rue du Fort Bourbon, L-1249 Luxembourg.
The Issuer is not currently subject to the periodic reporting and other information requirements of the Exchange Act. However, pursuant to the Indenture, and so long as the Notes are outstanding, the Issuer will agree to furnish periodic information to holders of the Notes. See “Description of the Notes—Certain Covenants—Provision of Financial Information.”
For so long as the Notes are listed on the Official List of the Luxembourg Stock Exchange and admitted for trading on the Euro MTF Market, and the rules of that exchange so require, copies of the Issuer’s organizational documents, the Indenture and the Issuer’s most recent consolidated financial statements published may be requested from the Issuer at the specified office of the Issuer at 2, rue du Fort Bourbon, L-1249 Luxembourg. See “Important Information About This Offering Memorandum” and “—Listing—Luxembourg Listing Information” (above).
227 Glossary This glossary contains explanations of certain terms and definitions used in this offering memorandum in connection with the Millicom Group and its business. These terms and their given meanings may not correspond to standard industry definitions or usage of such terms.
“2G” ...... Thesecond generation of mobile communications technology. Radio signals on 2G networks are digital, whereas the previous mobile telephone systems (retrospectively dubbed 1G) were analog. 2G technologies can be divided into TDMA-based and CDMA-based standards, depending on the type of multiplexing used. GSM, a TDMA-based standard, is one of the main 2G standards.
“3G” ...... Thethird generation of mobile communications technology, which must comply with the International Mobile Telecommunications-2000 (IMT-2000) specifications set by the International Telecommunication Union. To meet the IMT-2000 standards, a system is required to provide peak data rates of at least 200 Kbps. The UMTS system and the CDMA2000 system are typically branded as 3G standards. 3G finds application in wireless voice telephone services, mobile internet access, fixed wireless internet access, video calls and mobile TV.
“4G” ...... Thefourth generation of mobile communications technology, which must comply with the International Mobile Telecommunications Advanced (IMT-Advanced) specifications set by the International Telecommunications Union-Radio communications sector. These specifications set peak speed requirements for 4G service of 100 Mbps for high mobility communication (such as from trains and cars) and 1 Gbps for low mobility communication (such as pedestrians and stationary users). Two systems are often branded as 4G by service providers, the Mobile WiMAX standard and the LTE standard, although they support less than 1 Gbps peak bit rate and are therefore not fully IMT-Advanced compliant. 4G provides mobile ultra-broadband internet access, for example to laptops with USB wireless modems, to smartphones and to other mobile devices.
“AMPS” ...... Advanced Mobile Phone System; an analog mobile phone system standard introduced in the Americas in 1978. AMPS is a first generation mobile communications technology that uses separate frequencies, or “channels,” for each conversation and therefore requires considerable bandwidth for a large number of users. AMPS networks have been replaced by digital networks.
“ARPU” ...... Average Revenue Per User; the Millicom Group defines ARPU per customer relationship as average total recurring revenue (including revenue earned from carriage fees and rental set-top boxes and excluding interconnection revenue, installation fees, mobile telephone revenue and set-top box sales) for the indicated period, divided by the average of the opening and closing RGU base or customer relationships, as applicable, for the period.
“backhaul” ...... Inahierarchical telecommunications network, the backhaul portion of the network comprises the intermediate links between the core network, or backbone network, and the small subnetworks at the edge of the entire hierarchical network.
228 “bandwidth”...... Thewidth of a communications channel; in other words, the difference between the highest and lowest frequencies available for network signals. Bandwidth also refers to the capacity to move information. “broadband” ...... Broadband refers to the wide bandwidth characteristics of a transmission medium (such as coaxial cable or wireless) and its ability to transport multiple signals and traffic types simultaneously. “bundle” ...... Acombination of television, internet and telephone products and services marketed together by service providers. “CDMA” ...... Code Division Multiple Access; a family of 3G mobile technology standards, which use CDMA channel access to send voice, data and signaling data between mobile phones and cell sites. “churn” ...... Churn rates are calculated by dividing the number of customers whose service is disconnected during a period, whether voluntarily or involuntarily (such as when a customer fails to pay a bill) by the average number of customers during the period. “CRBT” ...... Caller Ring Back Tones; a service offered by mobile network operators that enables subscribers to set music or personalized recorded sounds that will be heard on the telephone line by a caller while the subscriber’s phone is ringing. “ePIN” ...... Aservice that allows subscribers to top up their prepaid mobile account by using their handset. “Gbps” ...... Gigabits per second; each gigabit is one billion bits. “GPRS” ...... General Packet Radio Service; a packet oriented mobile data service on the 2G and 3G cellular communication systems’ GSM. GPRS usage is typically charged based on the volume of data transferred, compared to circuit switched data, which is usually billed per minute of connection time. GPRS data may be sold either as part of a bundle (e.g., up to 5 gigabits per month for a fixed fee) or on a pay-as-you- use basis. Usage above the cap is either charged per megabit or disallowed. “GSM” ...... Global System for Mobile Communications; a standard set by the European Telecommunciations Standards Institute to describe protocols for 2G digital cellular networks used by mobile phones. It was expanded over time to include data communications, first by circuit switched transport, then packet data transport via GPRS and EDGE. Further improvements were made when 3G UMTS standards were developed followed by 4G LTE-Advanced standards. “homes passed” ...... TheMillicom Group’s estimate of the number of potential residential and commercial subscribers to whom it can offer its services. “HSDPA” ...... High-Speed Downlink Packet Access; a 3G mobile telephone communications protocol in the HSPA family that allows networks based on UMTS to have higher data transfer speeds and capacity. Current HSDPA deployments support downlink speeds of up to 42 Mbps. Further speed increases are available with HSPA+. “HSPA” ...... High-Speed Packet Access; an amalgamation of two mobile telephone protocols, HSDPA and HSUPA, that extends and improves the performance of existing 3G mobile telecommunications networks utilizing the W-CDMA protocols.
229 “HSPA+” ...... Evolved High-Speed Packet Access; a technical standard for wireless, broadband telecommunication, it enhances the widely used W-CDMA (UMTS) based networks (HSUPA and HSDPA) with higher speeds for the end user that are comparable to the newer LTE networks.
“HSUPA” ...... High-Speed Uplink Packet Access; a 3G mobile telephone protocol in the HSPA family with uplink speeds up to 5.76 Mbps.
“internet” ...... Acollection of interconnected networks spanning the entire world, including university, corporate, government and research networks. These networks all use the IP communications protocol.
“IP”...... Internet Protocol; the principal communications protocol used for relaying network packets across the internet from the source host to the destination host.
“ISP”...... Internet Service Provider; an organization that provides access to the internet.
“Kbps” ...... Kilobits per second; each kilobit is one thousand bits.
“LTE” ...... Long Term Evolution, marketed as 4G LTE; a standard for wireless communication of high-speed data for mobile phones and data terminals. LTE is based on the GSM/EDGE and UMTS/HSPA network technologies, but increases the capacity and speed of wireless data networks using a different radio interface together and core network improvements. The LTE wireless interface is incompatible with 2G and 3G networks, so it must be operated on a separate wireless spectrum.
“Mbps” ...... Megabits per second; each megabit is one million bits.
“MHz” ...... Megahertz; a unit of frequency equal to one million Hertz.
“MMS” ...... Multimedia Messaging Service; a standard way to send messages that include multimedia content to and from mobile phones. It extends the core SMS capability that allowed exchange of text message only up to 160 characters in length.
“multiplexing” ...... Intelecommunications networks, a method by which multiple analog message signals or digital data streams are combined into one signal over a shared medium. The aim is to share an expensive resource. For example, several telephone calls may be carried using one wire.
“network” ...... Aninterconnected collection of components which would, in a telecommunications network, consist of switches connected to each other and to customer equipment by real or virtual links. Transmission links may be based on fiberoptic or metallic cable or point-to-point radio connections.
“PCS” ...... Personal Communications Service; a generation of wireless telephone technology that combines a range of features and services surpassing those available in analog and digital cellular phone systems, providing a user with an all-in-one wireless phone, paging, messaging and data service.
“quadruple play” ...... Triple play with the addition of mobile telephone service.
“RGU” ...... Revenue Generating Unit; separately, an analog cable television subscriber, digital cable television subscriber, internet subscriber or fixed telephone subscriber. A home, residential multiple dwelling unit or commercial unit may contain one or more RGUs. For example, a
230 subscriber who receives cable television, broadband internet and telephone services from the Millicom Group (regardless of their number of telephone access lines) would be counted as three RGUs.
“smartphone” ...... Amobile phone built on a mobile operating system, with more advanced computing capability and connectivity than a feature phone (a phone with additional functions beyond standard mobile services but lacking all of the features of a smartphone). Smartphones include features such as portable media players, low-end compact digital cameras, pocket video cameras, GPS navigation units, web browsers that display standard web pages as well as mobile-optimized sites, and some offer high-resolution touchscreens. High-speed data access is provided by Wi-Fi and mobile broadband.
“SMS” ...... Short Message Service; a text messaging service component of phone, web or mobile communication systems using standardized communications protocols that allow the exchange of short text messages between fixed-line or mobile phone devices.
“TDMA” ...... Time-Division Multiple Access; a channel access method for shared medium networks. It allows several users to share the same frequency channel by dividing the signal into different time slots. The users transmit in rapid succession, one after the other, each using its own time slot. This allows multiple stations to share the same transmission medium (e.g., radio frequency channel) while using only a part of its channel capacity. TDMA is used in 2G systems.
“triple play” ...... Acombination of three products over a single broadband connection: cable television, internet and fixed telephone services.
“UMTS” ...... Universal Mobile Telecommunications Service; a 3G mobile networking standard commonly used to upgrade GSM networks to 3G standards. UMTS uses W-CDMA radio access technology to offer greater spectral efficiency and bandwidth to mobile network operators.
“VAS” ...... Value-added Services, comprising all services and products other than standard mobile voice.
“VoIP” ...... Voice over Internet Protocol; the communication protocols, technologies, methodologies and transmission techniques involved in the delivery of voice communications and multimedia sessions over IP networks, such as the internet.
“VPN”...... Virtual Private Network; a technology for using the internet or another intermediate network to connect computers to isolated remote computer networks that would otherwise be inaccessible. A VPN provides varying levels of security so that traffic sent through the VPN connection stays isolated from other computers on the intermediate network, either through the use of a dedicated connection from one end of the VPN to the other, or through encryption. VPNs can connect individual users to a remote network or connect multiple networks together.
“W-CDMA” ...... Wideband Code Division Multiple Access; an air interface standard found in 3G mobile telecommunications networks. W-CDMA is the most commonly used member of the UMTS family and sometimes used as a synonym for UMTS.
231 “WiMAX” ...... Worldwide Interoperability for Microwave Access; a wireless communications standard that provides fixed and fully mobile internet access at data rates of 30 to 40 Mbps. Mobile WiMAX was a replacement candidate for cellular phone technologies such as GSM and CDMA and can be used as an overlay to increase capacity. Fixed WiMAX is also considered a wireless backhaul technology for 2G, 3G and 4G networks in both developed and developing nations.
232 Index of financial statements
Millicom International Cellular S.A. interim condensed consolidated financial statements for the three month periods ended March 31, 2013 Report on review of interim condensed consolidated financial statements ...... F-2 Interim condensed consolidated income statements for the three month period ended March 31, 2013 (unaudited) ...... F-3 Interim condensed consolidated statements of comprehensive income for the three month period ended March 31, 2013 (unaudited) ...... F-4 Interim condensed consolidated statements of financial position as at March 31, 2013 (unaudited) ...... F-5 Interim condensed consolidated statements of cash flows for the three month period ended March 31, 2013 (unaudited) ...... F-7 Interim condensed consolidated statements of changes in equity for the periods ended March 31, 2013 (unaudited) ...... F-8 Notes to the interim condensed consolidated financial statements as at March 31, 2013 and for the three month period then ended (unaudited) ...... F-9 Millicom International Cellular S.A. consolidated annual financial statements for the year ended December 31, 2012 Independent auditor’s report ...... F-21 Consolidated income statements ...... F-23 Consolidated statements of comprehensive income ...... F-24 Consolidated statements of financial position ...... F-25 Consolidated statements of cash flows ...... F-27 Consolidated statements of changes in equity ...... F-28 Notes to the consolidated financial statements ...... F-30 Millicom International Cellular S.A. consolidated annual financial statements for the years ended December 31, 2011, 2010 and 2009 Report of independent registered public accounting firm ...... F-103 Consolidated income statements ...... F-104 Consolidated statements of comprehensive income ...... F-105 Consolidated statements of financial position ...... F-106 Consolidated statements of cash flows ...... F-108 Consolidated statements of changes in equity ...... F-109 Notes to the consolidated financial statements ...... F-111
F-1 Report on review of interim condensed consolidated financial statements To the Shareholders of Millicom International Cellular S.A.
Introduction We have reviewed the accompanying interim condensed consolidated financial statements of Millicom International Cellular S.A. as of 31 March 2013, which comprise the interim consolidated statement of financial position as at 31 March 2013 and the related interim consolidated income statement, the interim consolidated statement of comprehensive income, the interim consolidated statement of changes in equity for the three-months periods then ended, and the interim consolidated cash flow statement for three-month period then ended and explanatory notes. Management is responsible for the preparation and fair presentation of these interim condensed financial statements in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting as adopted by the European Union (“IAS 34”). Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review.
Scope of Review We conducted our review in accordance with International Standard on Review Engagements 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity.” A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34.
ERNST & YOUNG Société Anonyme Cabinet de revision agréé
Olivier LEMAIRE
Luxembourg, 16 April 2013
F-2 Millicom International Cellular S.A. Interim condensed consolidated income statements for the three month period ended March 31, 2013
Three month Three month period ended period ended Notes March 31, 2013 March 31, 2012 US$ millions (unaudited) Revenue ...... 7 1,246 1,168 Cost of sales ...... (468) (421) Gross profit ...... 778 747 Sales and marketing ...... (246) (211) General and administrative expenses ...... (257) (224) Other operating expenses ...... (40) (22) Other operating income ...... 3 5 Operating profit ...... 7 238 295 Interest expense ...... (66) (47) Interest income ...... 3 4 Other non-operating (expenses) income, net ...... 8 42 (52) Gain (loss) from associates, net ...... (6) – Profit before taxes from continuing operations ...... 211 200 (Charge) credit for taxes, net ...... (68) (91) Net profit for the period ...... 143 109 Attributable to: Owners of the Company ...... 145 95 Non-controlling interests ...... (2) 14 Earnings per common share for profit attributable to the owners of the Company: Basic (US$) ...... 9 1.45 0.93 Diluted (US$) ...... 9 1.45 0.93
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
F-3 Millicom International Cellular S.A. Interim condensed consolidated statements of comprehensive income for the three month period ended March 31, 2013
Three Three months months ended ended March 31, March 31, 2013 2012 US$ millions (unaudited) Net profit for the period ...... 143 109 Other comprehensive income (to be reclassified to profit and loss in subsequent periods): Exchange differences on translating foreign operations ...... (1) 10 Cash flow hedge reserve movement ...... 6 – Total comprehensive income for the period ...... 148 119 Attributable to: Owners of the Company ...... 156 105 Non-controlling interests ...... (8) 14
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
F-4 Millicom International Cellular S.A. Interim condensed consolidated statements of financial position as at March 31, 2013
March 31, December 31, 2013 2012 Notes (unaudited) (audited) US$ millions ASSETS NON-CURRENT ASSETS Intangible assets, net ...... 2,459 2,419 Property, plant and equipment, net ...... 10 3,020 3,108 Investments in associates ...... 11 178 193 Pledged deposits ...... 45 47 Deferred tax assets ...... 254 259 Other non-current assets ...... 84 86 TOTAL NON-CURRENT ASSETS ...... 6,040 6,112 CURRENT ASSETS Inventories ...... 114 93 Trade receivables, net ...... 343 322 Amounts due from non-controlling interests and joint venture partners ...... 72 81 Prepayments and accrued income ...... 198 140 Current income tax assets ...... 45 39 Supplier advances for capital expenditure ...... 52 44 Advances to non-controlling interest ...... 39 56 Other current assets ...... 109 86 Restricted cash ...... 48 43 Cash and cash equivalents ...... 1,137 1,174 TOTAL CURRENT ASSETS ...... 2,157 2,078 Assets held for sale ...... 5 19 21 TOTAL ASSETS ...... 8,216 8,211
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
F-5 Millicom International Cellular S.A. Interim condensed consolidated statements of financial position as at March 31, 2013 (continued)
March 31, December 31, 2013 2012 Notes (unaudited) (audited) US$ millions EQUITY AND LIABILITIES EQUITY Share capital and premium ...... 641 642 Treasury shares ...... (186) (198) Put option reserve ...... (737) (737) Other reserves ...... (130) (133) Retained profits ...... 2,466 1,942 Profit for the period / year attributable to equity holders ..... 145 508 Equity attributable to owners of the Company ...... 2,199 2,024 Non-controlling interests ...... 263 312 TOTAL EQUITY ...... 2,462 2,336 LIABILITIES Non-current liabilities Debt and financing ...... 13 2,535 2,566 Derivative financial instruments ...... 4 4 Provisions and other non-current liabilities ...... 125 127 Deferred tax liabilities ...... 167 180 Total non-current liabilities ...... 2,831 2,877 Current liabilities Debt and financing ...... 13 760 693 Put option liability ...... 14 678 730 Payables and accruals for capital expenditure ...... 278 411 Other trade payables ...... 273 259 Amounts due to joint ventures partners ...... 19 19 Accrued interest and other expenses ...... 357 341 Current income tax liabilities ...... 207 161 Provisions and other current liabilities ...... 347 379 Total current liabilities ...... 2,919 2,993 Liabilities directly associated with assets held for sale ...... 5 4 5 TOTAL LIABILITIES ...... 5,754 5,875 TOTAL EQUITY AND LIABILITIES ...... 8,216 8,211
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
F-6 Millicom International Cellular S.A. Interim condensed consolidated statements of cash flows for the three month period ended March 31, 2013
Three month Three month period ended period ended March 31, March 31, Notes 2013 2012 US$ millions (unaudited) Cash flows from operating activities Profit before taxes from continuing operations ...... 211 200 Adjustments for non-operating items: Interest expense ...... 66 47 Interest and other financial income ...... (3) (4) (Gain) loss from associates, net ...... 6 – Other non-operating expenses (income), net ...... (42) 52 Adjustments for non-cash items: Depreciation and amortization ...... 209 196 Gain (loss) on disposal and impairment of assets, net ...... 2 (1) Share-based compensation ...... 12 5 5 Changes in working capital: Increase in trade receivables, prepayments and other current assets ...... (62) (39) (Increase) decrease in inventories ...... (22) 2 Increase (decrease) in trade and other payables ...... 5 (1) Changes in working capital (79) (38) Interest paid ...... (55) (48) Interest received ...... 2 4 Taxes paid ...... (52) (38) Net cash provided by operating activities ...... 270 375 Cash flows from investing activities: Acquisition of subsidiaries, and non-controlling interests, net of cash acquired ...... 3 – (13) Purchase of intangible assets and licenses ...... (134) (20) Proceeds from the sale of intangible assets ...... 4 1 Purchase of property, plant and equipment ...... 10 (197) (182) Proceeds from the sale of property, plant and equipment ...... 10 – 70 Net disposal (purchase) of pledge and time deposits ...... (12) (2) Net increase in restricted cash ...... (5) (7) Cash used by other investing activities ...... (52) 23 Net cash used by investing activities ...... (396) (130) Cash flows from financing activities: Proceeds from debt and other financing ...... 190 165 Repayment of debt and financing ...... (102) (187) Net cash used by financing activities ...... 88 (22) Exchange gains (losses) on cash and cash equivalents ...... 1 6 Net (decrease) increase in cash and cash equivalents ...... (37) 229 Cash and cash equivalents at the beginning of the period ...... 1,174 861 Cash and cash equivalents at the end of the period ...... 1,137 1,090
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
F-7 Millicom International Cellular S.A. Interim condensed consolidated statements of changes in equity for the periods ended March 31, 2013, December 31, 2012 and March 31, 2012
Number of shares Retained Put Number of held by Share Share Treasury profits option Other Non-controlling Total shares the Group capital premium shares (i) reserve reserves Total interests equity (000’s) (000’s) (000’s) (000’s) (000’s) (000’s) (000’s) (000’s) (000’s) (000’s) (000’s) US$ 000s Balance as at December 31, 2011 104,939 (3,507) 157,407 505,120 (378,359) 2,811,130 (737,422) (103,492) 2,254,384 191,170 2,445,554 Profit for the period ...... – – – – – 94,606 – – 94,606 14,236 108,842 Cash flow hedge reserve movement ...... – – – – – – – 159 159 (215) (56) Currency translation differences ...... – – – – – – – 9,858 9,858 466 10,324 Total comprehensive income for the period ...... – – – – – 94,606 – 10,017 104,623 14,487 119,110 Share based compensation ...... – – – – – – – 5,105 5,105 – 5,105 Issuance of shares under the LTIPs ...... – 237 – (1,104) 25,452 (11,930) – (12,418) – – – Dividend to non-controlling shareholders ...... – – – – – – – – – (1,937) (1,937) Change in scope of consolidation ...... – – – – – 6,895 – – 6,895 – 6,895 Balance as at March 31, 2012 (unaudited) 104,939 (3,270) 157,407 504,016 (352,907) 2,900,701 (737,422) (100,788) 2,371,007 203,720 2,674,727
F-8 Profit for the period ...... – – – – – 413,700 – – 413,700 (18,954) 394,746 Cash flow hedge reserve movement ...... – – – – – – – (1,277) (1,277) 130 (1,147)) Currency translation differences ...... – – – – – – – (47,567) (47,567) (17,996) (65,563) Total comprehensive income for the year ...... – – – – – 413,700 – (48,844) 364,856 (36,820) 328,036 Dividends ...... – – – – – (541,133) – – (541,133) – (541,133) Purchase of treasury shares ...... – (2,106) – – (189,619) – – – (189,619) – (189,619) Cancellation of treasury shares ...... (3,200) 3,200 (4,800) (15,000) 344,377 (324,577) – – – – – Share based compensation ...... – – – – – – – 16,824 16,824 – 16,824 Non-controlling interests in Rocket Internet (ii) ...... – – – – – – – – – 160,321 160,321 Dividend to non-controlling shareholders ...... – – – – – – – – – (15,032) (15,032) Balance as at December 31, 2012 101,739 (2,176) 152,607 489,014 (198,148) 2,450,458 (737,422) (132,811) 2,023,698 312,189 2,335,887 Profit for the period ...... – – – – – 144,754 – – 144,754 (2,063) 142,691 Cash flow hedge reserve movement ...... – – – – – – – 6,506 6,506 (6) 6,500 Currency translation differences ...... – – – – – – – 4,549 4,549 (5,737) (1,188) Total comprehensive income for the period ...... – – – – – 144,754 – 11,055 155,809 (7,806) 148,003 Share based compensation ...... – – – – – – – 5,271 5,271 – 5,271 Issuance of shares under the LTIPs ...... – 128 – (765) 11,894 (809) – (13,255) (2,935) – (2,935) Non-controlling interests in Rocket Internet (ii) ...... – – – – – 16,894 – – 16,894 (16,894) – Dividend to non-controlling shareholders ...... – – – – – – – – – (24,872) (24,872) Balance as at March 31, 2013 (unaudited) 101,739 (2,048) 152,607 488,249 (186,254) 2,611,297 (737,422) (129,740) 2,198,737 262,617 2,461,354
(i) Includes profit for the period attributable to equity holders of which at March 31, 2013, $139 million (December 31, 2012: $126 million) are undistributable to owners of the Company.
The accompanying notes are an integral part of these interim condensed consolidated financial statements. Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements as at March 31, 2013 and for the three month periods then ended
1. Organization
Millicom International Cellular S.A. (the “Company”), a Luxembourg Société Anonyme, and its subsidiaries, joint ventures and associates (the “Group” or “Millicom”) is an international company providing communications, information, entertainment, solutions, financial, online and e-commerce services in emerging markets, using various combinations of mobile and fixed telephony, cable, broadband and internet businesses in Central America, South America and Africa.
Millicom operates its mobile businesses in El Salvador, Guatemala and Honduras in Central America; in Bolivia, Colombia and Paraguay in South America; in Chad, the Democratic Republic of Congo, Ghana, Mauritius, Rwanda, Senegal and Tanzania in Africa. In addition, Millicom operates cable businesses in El Salvador, Guatemala, Honduras, Costa Rica and Paraguay and online/e-commerce businesses in several countries in Latin America and Africa.
The Company’s shares are traded as Swedish Depositary Receipts on the Stockholm stock exchange under the symbol MIC SDB and over the counter in the US under the symbol MIICF. The Company has its registered office at 2, Rue du Fort Bourbon, L-1249 Luxembourg, Grand Duchy of Luxembourg and is registered with the Luxembourg Register of Commerce under the number RCS B 40 630.
2. Summary of consolidation and accounting policies
The interim condensed consolidated financial statements of the Group are unaudited. They are presented in US dollars and have been prepared in accordance with International Accounting Standard (IAS) 34 ‘Interim Financial Reporting’, as published by the International Accounting Standards Board (“IASB”) and as adopted by the European Union. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments that are necessary for a proper presentation of the results for interim periods. Millicom’s operations are not affected by significant seasonal or cyclical patterns apart from a slight increase in revenues over the festive season in December.
The interim condensed consolidated financial statements should be read in conjunction with the annual report for the year ended December 31, 2012.
The preparation of financial statements in accordance with International Financial Reporting Standards (“IFRS”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The interim condensed consolidated financial statements are prepared in accordance with consolidation and accounting policies consistent with Millicom’s consolidated financial statements as at and for the year ended December 31, 2012, as disclosed in Note 2 of those financial statements.
There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning January 1, 2013 that have a material impact on the Group.
F-9 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
2. Summary of consolidation and accounting policies (continued)
The nature and the impact of each new standard/amendment are described below:
IAS 1 Presentation of Items of Other Comprehensive Income – Amendments to IAS 1
The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income (OCI). Items that could be reclassified (or recycled) to profit or loss at a future point in time (e.g., net gain on hedge of net investment, exchange differences on translation of foreign operations, net movement on cash flow hedges and net loss or gain on available-for-sale financial assets) now have to be presented separately from items that will never be reclassified (e.g., actuarial gains and losses on defined benefit plans and revaluation of land and buildings). The amendment affected presentation only and had no impact on the Group’s financial position or performance.
IAS 32 Tax effects of distributions to holders of equity instruments (Amendment)
The amendment to IAS 32 Financial Instruments: Presentation clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. The amendment removes existing income tax requirements from IAS 32 and requires entities to apply the requirements in IAS 12 to any income tax arising from distributions to equity holders.
IAS 34 Interim financial reporting and segment information for total assets and liabilities (Amendment)
The amendment clarifies the requirements in IAS 34 relating to segment information for total assets and liabilities for each reportable segment to enhance consistency with the requirements in IFRS 8 Operating Segments. Total assets and liabilities for a reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change in the total amount disclosed in the entity’s previous annual consolidated financial statements for that reportable segment. The Group provides this disclosure as total segment assets were reported to the chief operating decision maker (CODM). See Note 7.
The following standards, amendments and interpretations issued are not effective for the financial year beginning January 1, 2013, have not been early adopted and are not expected to have a material impact on the Group.
• Amendment to IAS 32, ‘Financial Instruments: Presentation’, which updates the application guidance in IAS 32, ‘Financial instruments: Presentation’, to clarify certain requirements for offsetting financial assets and financial liabilities on the statement of financial position. The Group is yet to assess the amendments full impact and intends to adopt the amendment no later than its effective date for the accounting period beginning on January 1, 2014.
The following standards, amendments and interpretations issued are not effective for the financial year beginning January 1, 2013, have not been early adopted and are currently being evaluated for impact on the Group.
• IFRS 9, ‘Financial Instruments’, which has yet to be adopted by the European Union, addresses the classification, measurement and recognition of financial assets and financial liabilities.
F-10 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
2. Summary of consolidation and accounting policies (continued)
• Scope of the reporting entity, a group of standards comprising IFRS 10, ‘Consolidated financial statements’ (which replaces all of the guidance on control and consolidation in IAS 27, ‘Consolidated and separate financial statements’, and SIC-12, ‘Consolidation – special purpose entities’), IFRS 11 ‘Joint Arrangements’; IFRS 12, ‘Disclosure of interests in other entities’; and consequential amendments to IAS 28, ‘Investments in associates’.
3. Acquisition of subsidiaries, joint ventures and non-controlling interests 2013
At the end of March 2013 Millicom exercised its first call options increasing its ownership in LIH and AIH from 20% to 35%. Consideration for exercise of the options of Euro 50 million (USD 64 million) for LIH and EUR 35 million (USD 45 million) for AIH will be provided based on cash requirements of each of the businesses, and no later than September 14, 2013.
Effective April 1, 2013 Millicom entered into an agreement with a minority partner of Africa e-Commerce Holding (AEH), a 51.47% subsidiary of AIH (Millicom’s subsidiary in Rocket Africa) providing Millicom the ability to purchase a further 20% interest in AEH upon exercise of the option to reach 100% ownership in AIH and the minority shareholder to sell its 20% stake in AEH upon the same conditions.
2012
During the three month period ended March 31, 2012 Millicom acquired minor investments in businesses for consideration of $13 million and its increase in ownership in Navega El Salvador from 55% to 100% was completed.
4. Disposal of subsidiaries, joint ventures and non-controlling interests
There were no disposals of subsidiaries, joint ventures or non-controlling interests during the three month periods ended March 31, 2013 or March 31, 2012.
5. Discontinued operations and assets held for sale
There were no discontinued operations during the three month periods ended March 31, 2013 or March 31, 2012.
Assets held for sale – Tower Sale and Leaseback Agreements
Between 2009 and 2011, Millicom signed various sale and leaseback agreements with tower companies in Africa and South America whereby Millicom agreed the sale of tower assets and to lease back a dedicated portion of each tower to locate its network equipment.
At March 31, 2013, Millicom had assets held for sale amounting to $19 million relating to its operations in DRC, Colombia, Ghana and Tanzania (December 31, 2012: $21 million relating to its operations in DRC, Colombia, and Tanzania) representing towers sold but yet to be transferred to tower companies in those countries.
F-11 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
5. Discontinued operations and assets held for sale (continued)
The portions of these assets that will not be leased back are classified as assets held for sale, as completion of sale is highly probable. Asset retirement obligations related to the tower assets at March 31, 2013 of $4 million (December 31, 2012: $5 million) are classified as liabilities directly associated with assets held for sale. The portion of towers leased back are capitalized as finance leases and classified under the caption “Property, plant & equipment, net” in the consolidated statement of financial position.
At March 31, 2013 approximately 26 towers are held for sale in Ghana, 47 in Tanzania, 58 in DRC and 584 in Colombia. 6. Joint ventures
The following amounts have been proportionally consolidated into the Group’s financial statements representing the Group’s share of revenue, operating expenses and operating profit in the Group’s joint ventures.
Three month Three month period ended period ended March 31, 2013 March 31, 2012 US$ millions (unaudited) Revenue ...... 166 167 Operating expenses ...... (100) (99) Operating profit ...... 66 68
F-12 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
7. Segment information
Management determines operating and reportable segments based on reports that are used by the Chief Operating Decision Maker (“CODM”) to make strategic and operational decisions from both a business and a geographic perspective. The Group’s risks and rates of return for its operations are predominantly affected by the fact that it operates in different geographical regions. The businesses are predominantly organized and managed according to selected geographical regions. These regions (Central America, South America and Africa) represent the basis for evaluation of past performance and for future allocation of resources.
Revenue, operating profit (loss) and other segment information for the three month periods ended March 31, 2013 and 2012 was as follows:
Total Inter- Three month period ended Central South Unallocated continuing company March 31, 2013 America America(ii)(iii) Africa(ii) item operations elimination Total (US$ millions) (Unaudited) Revenue ...... 467 540 239 – 1,246 – 1,246 Operating profit (loss) .... 148 119 16 (45) 238 – 238 Add back: Depreciation and amortization ...... 77 70 62 – 209 – 209 Loss (gain) on disposal and impairment of property, plant and equipment . . . 1 1 – – 2 – 2 Corporate costs ...... – – – 45 45 – 45 Adjusted operating profit ...... 226 190 78 – 494 – 494 Less additions to: Property, plant and equipment ...... (44) (42) (8) 1 (93) – (93) Intangible assets ...... (2) (73) (23) (2) (100) – (100) Capital expenditure (46) (115) (31) (1) (193) – (193) Tax paid ...... (33) (4) (3) (12) (52) Changes in working capital ...... (11) (68) (1) 1 (79) Other movements ...... (37) (52) (49) 4 (134) Operating free cash flow (i) ...... 99 (49) (6) (8) 36 Total Assets 3,507 2,520 1,983 1,420 9,430 (1,214) 8,216 Total Liabilities 1,857 1,975 2,044 1,082 6,958 (1,204) 5,754
F-13 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
7. Segment information (continued)
Total Inter- Three month period Central South Unallocated continuing company ended March 31, 2012 America America Africa item operations elimination Total (US$ millions) (Unaudited) Revenue ...... 474 455 239 – 1,168 – 1,168 Operating profit (loss) ...... 160 127 35 (27) 295 – 295 Add back: Depreciation and amortization ...... 79 59 58 – 196 – 196 Loss (gain) on disposal and impairment of property, plant and equipment ...... 2 – (3) – (1) – (1) Corporate costs ...... – – – 27 27 – 27 Adjusted operating profit ..... 241 186 90 – 517 – 517 Less additions to: Property, plant and equipment ...... (51) (59) (40) (1) (151) – (151) Intangible assets ...... – (10) (2) (9) (21) – (21) Capital expenditure ...... (51) (69) (42) (10) (172) – (172) Tax paid ...... (23) (12) (3) – (38) Changes in working capital .... (17) (25) 1 3 (38) Other movements ...... (29) 51 19 – 41 Operating free cash flow(i) ..... 121 131 65 (7) 310 Total Assets ...... 3,882 2,073 1,657 1,274 8,886 (1,397) 7,489 Total Liabilities ...... 1,692 1,575 1,744 897 5,908 (994) 4,914
(i) Only for calculating segments’ operating free cash flows, vendor financing of capital equipment is treated as a cash transaction, (ii) Inclusion of Rocket from September 1, 2012 (iii) Inclusion of Cablevision Paraguay from October 1, 2012
8. Other non-operating (expenses) income, net
The Group’s other non-operating (expenses) income, net comprised the following:
Three months ended Three months ended March 31, 2013 March 31, 2012 US$ millions (unaudited) Change in carrying value of put option (see note 14) . . . 52 (64) Change in fair value of derivatives (see note 15) ...... 1 (3) Exchange (losses) gains, net ...... (11) 6 Other non-operating income (expenses), net ...... – 9 Total ...... 42 (52)
F-14 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
9. Earnings per common share
Earnings per common share (EPS) attributable to owners of the Company are comprised as follows:
Three months Three months ended ended March 31, 2013 March 31, 2012 US$ millions (unaudited) Basic and Diluted Net profit attributable to owners of the Company from continuing operations ...... 145 95 Net profit attributable to owners of the Company used to determine the earnings per share ...... 145 95 in thousands Weighted average number of ordinary shares for basic earnings per share ...... 99,690 101,669 Potential incremental shares as a result of share options ...... 88 98 Weighted average number of ordinary shares adjusted for the effect of dilution ...... 99,778 101,767 US$ Basic – EPS for the period attributable to owners of the Company ..... 1.45 0.93 Diluted – EPS for the period attributable to owners of the Company ..... 1.45 0.93
10. Property, plant and equipment
The Group used cash for the purchase of property, plant and equipment as follows:
Three months Three months ended ended March 31, 2013 March 31, 2012 US$ millions (unaudited) Additions ...... 93 151 Increase in suppliers advances ...... 8 5 Decrease in payables for property, plant and equipment ...... 99 31 Increase in vendor financing and finance leases ...... (1) (5) Sale and lease back agreements (see notes 5 and 11) ...... (2) – Cash used for the purchase of property, plant and equipment ... 197 182
The charge for depreciation on property, plant and equipment for the three month period ended March 31, 2013 was $172 million (March 31, 2012: $159 million).
During the three month period ended March 31, 2013, Millicom did not dispose any property, plant and equipment (March 31, 2012: $70 million).
F-15 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
11. Investments in associates
As at March 31, 2013 investments in associates comprised:
As at As at March 31, 2013 December 31, (unaudited) 2012 (audited) US$ millions Helios Towers Tanzania (see note 5) ...... 18 26 Helios Towers DRC (see note 5) ...... 30 29 Helios Towers Ghana (see note 5) ...... 12 17 ATC Colombia BV ...... 18 20 Africa e-Commerce Holding ...... 99 100 Others ...... 1 1 Total ...... 178 193
Options related to Colombia Tower Sale and Leaseback Agreements
In December 2011, Millicom exercised an option to acquire a 40% stake in the holding company (ATC Colombia BV), of the tower company in Colombia (ATC Infraco) in which it is selling and leasing back a portion of its tower assets. By March 2013 Millicom did not invest any cash in ATC Colombia BV. The amount of the investment is derived from the value of the tower assets transferred to ATC Infraco.
Millicom has provided Colombia Móvil’s other shareholders with separate unconditional options to acquire up to half of Millicom’s interest in ATC Colombia BV (“ATC Colombia Option”). As at March 31, 2013 the options have not been exercised. The option expires on July 18, 2013. At March 31, 2013 the fair value of the options was not significant.
12. Share-based compensation
(a) Long-Term Incentive Plans
Long term incentive awards consist of three-year deferred share awards and performance share awards plans. Shares granted under the deferred plans are based on past performance and vest 16.5% at the end of each of the first and second years of the plans and 67% at the end of the final year. Shares granted under the performance plans are based on future performance, subject to various non-market conditions and vest at the end of three-year periods.
F-16 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
12. Share-based compensation (continued)
A summary of the plans at March 31, 2013 is as follows: Actual/expected Shares vested charge over the in 2013 vesting period Plans (unaudited) (Shares 000’s) (US$ millions) 2010 Deferred Plan ...... 81 11 2010 Performance Plan ...... 39 5 Total actual for fully vested plans ...... 120 16 2011 Deferred Plan ...... 19 12 2011 Performance Plan ...... – 7 2012 Deferred Plan ...... 24 15 2012 Performance Plan ...... – 7 2013 Deferred Plan ...... – 15 2013 Performance Plan ...... – 12 Total for other plans ...... 43 68 Total ...... 163 84
(b) Total share-based compensation expense Total share-based compensation for the three month periods ended March 31, 2013 and 2012 was as follows: Three months Three months ended ended March 31, 2012 March 31, 2012 US$ millions (unaudited) 2010 LTIPs ...... – 1 2011 LTIPs ...... 1 2 2012 LTIPs ...... 1 2 2013 LTIPs ...... 3 – Total share-based compensation expense ...... 55
13. Debt and financing Analysis of debt and other financing by maturity The total amount of debt and financing is repayable as follows: As at As at March 31, 2013 December 31, 2012 (unaudited) (audited) US$ millions Due within: One year ...... 760 693 One-two years ...... 469 473 Two-three years ...... 365 348 Three-four years ...... 258 289 Four-five years ...... 882 456 After five years ...... 569 1,000 Total debt ...... 3,303 3,259
F-17 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
13. Debt and financing (continued)
As at March 31, 2013, the Group’s share of total debt and financing secured by either pledged assets, pledged deposits issued to cover letters of credit or guarantees issued was $1,405 million (December 31, 2012: $1,391 million). The assets pledged by the Group for these debts and financings amount to $146 million (December 31, 2012: $131 million).
Millicom has issued guarantees to banks and suppliers as security over debt and financing of a number of its operations. The table below describes the outstanding and maximum exposure under these guarantees and the remaining terms of the guarantees as at March 31, 2013 and December 31, 2012. Amounts issued to cover bank guarantees are recorded in the consolidated statements of financial position under the caption “Debt and other financing”.
Bank and financing guarantees(i) As at March 31, 2013 As at December 31, 2012 (unaudited) (audited) Outstanding Maximum Outstanding Maximum Terms exposure exposure exposure exposure US$ millions 0-1 year ...... 271 418 278 470 1-3 years ...... 192 283 196 305 3-5 years ...... 313 355 315 355 More than 5 years ...... – – – – Total ...... 776 1,056 789 1,130
(i) If non-payment by the obligor, the guarantee ensures payment of outstanding amounts by the Group’s guarantor.
14. Put option reserve
On July 1, 2010, Millicom reached an agreement with its local partner in Honduras whereby Millicom’s local partner granted Millicom an unconditional call option for five years for his 33% stake in the Honduran operation. At the same time, and as consideration for the call option, Millicom granted a put option for the same duration to its local partner. The put option can only be exercised if a change of control occurs in either Millicom International Cellular S.A. or Millicom’s subsidiary that holds the shares in Celtel (except if the change of control is in favour of Investment AB Kinnevik, the current largest shareholder of Millicom, or management of Millicom).
A change of control event which is beyond the control of Millicom may occur. Such an event would enable our local partner to exercise his put option. Accordingly, the put option is accounted for as a financial liability and measured at the present value of its redemption price
The redemption price of the put option is a multiple of the EBITDA of the Honduran operation. The multiple is based on a change of control transaction multiple of Millicom. Management estimated the change of control transaction multiple of Millicom from a trading multiple of Millicom and adding a control premium (based upon comparable transactions from the industry). At March 31, 2013 the redemption price was $678 million (December 31, 2012: $730 million).
The call option fair value is considered immaterial at March 31, 2013 and December 31, 2012.
F-18 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
15. Commitments and contingencies
Litigation & claims
The Company and its operations are contingently liable with respect to lawsuits, tax claims and other matters that arise in the normal course of business. At March 31, 2013, the total amount of claims against Millicom and its operations was $826 million, (December 31, 2012: $955 million), of which $1 million (December 31, 2012: $1 million) relate to joint ventures.
As at March 31, 2013, $13 million (December 31, 2012: $13 million) has been provided for litigation risks in the consolidated statement of financial position. Management is of the opinion that, while it is impossible to ascertain the ultimate legal and financial liability with respect to contingencies for which a provision has not been made, the ultimate outcome is not anticipated to have a material effect on the Group’s financial position and operations.
Included in the total claims is a lawsuit filed against our subsidiary in Ghana by E-Talk Limited in November 2011. The suit alleges that Millicom Ghana terminated a July 2006 contract with insufficient notice. The claim is approximately $30 million, including various general damages, loss of expected revenues and punitive damages. Management considers this claim as opportunistic and without foundation, in so far as it was filed more than four years after the events on which the plaintiff bases its claim, and takes the view that no provision should be made for this claim.
Also included in the total claims is a claim filed with the Civil Chamber of Bogota in Colombia against the entire mobile operator industry of Colombia, including our subsidiary in Colombia, by a group of approximately twenty individuals. The claimants allege damages and losses suffered from third parties through illegal use of cellular phones in extortion attempts against the claimants, and are claiming a collective total of approximately $753 million from the mobile operators. The case has largely been inactive, with the exception of a mandatory settlement conference held among the parties under the court’s supervision, which did not result in any settlement agreement. It is expected that the litigation will move towards an evidence- presentation phase. Management considers this claim to be entirely spurious and without foundation or substance, and is of the view that no provision should be made for this claim.
Capital commitments
As at March 31, 2013, the Company and its subsidiaries and joint ventures have fixed commitments to purchase network equipment and other fixed and intangible assets from a number of suppliers of $331 million (December 31, 2012: $367 million), of which $297 million (December 31, 2012: $334 million) are due within one year and $39 million (December 31, 2012: $50 million) relate to joint ventures.
In addition, Millicom is committed to supporting Colombia Móvil S.A., its operation in Colombia, through loans and warranties. The maximum commitment is $229 million and remains until the time the total support from Millicom equals the support from the founding shareholders of Colombia Móvil S.A.
Following exercise of its first options in LIH and AIH (see note 3), the Group has commitments to downstream $109 million to LIH and AIH at the latest by September 14, 2013.
F-19 Millicom International Cellular S.A. Notes to the interim condensed consolidated financial statements (continued) as at March 31, 2013 and for the three month periods then ended
15. Commitments and contingencies (continued)
Forward and swap contracts
As at March 31, 2013, Colombia Móvil S.A. held a foreign currency forward swap contract to sell Colombian Pesos in exchange for US$ for a nominal amount of $43 million (December 31, 2012: $43 million). The contract matures in July 2013. Gain under the contract amounted to $1 million for the three month period ended March 31, 2013 (March 31, 2012: loss of $3 million).
In October 2010, Millicom entered into separate interest rate swaps to hedge the interest rate risks on floating rate debts in Honduras and Costa Rica. The interest rate swap in Honduras was issued for a nominal amount of $30 million, with maturity in 2015, and in Costa Rica for a nominal amount of $105 million with maturity in 2017. The swaps were assessed as highly effective and cash flow hedge accounting has been applied, with changes in the fair value of the swap recorded in other comprehensive income.
In January 2010, Millicom entered into a three-year $100 million interest rate swap to hedge interest rate risk of floating rate debt in DRC, Ghana and Tanzania. The swaps were initially assessed as highly effective, and thus qualified for cash flow hedge accounting. During the three month period ending September 30, 2012 the Tanzania and Ghana hedges were assessed as ineffective and, as the value of these hedges were not expected to change significantly between September 30, 2012 and their expiry in January 2013, the corresponding cash flow reserve was recycled to the income statement. At December 31, 2012 the DRC hedge was assessed as ineffective and the corresponding cash flow reserve was recycled to the income statement. The hedge contracts ended in January 2013.
In October 2012, Millicom issued senior unsecured floating rate notes of Swedish Kronor (‘SEK’) 1.75 billion and senior unsecured fixed rate notes of SEK 0.25 billion. At the same time Millicom entered into various cross currency interest swap contracts whereby Millicom will sell SEK and receive USD to hedge against exchange rate fluctuations for the notional amount of SEK 2 billion and interest payments on this principal. Millicom also hedged against interest rate fluctuations on the floating rate notes of SEK 1.75 billion by receiving variable interest at STIBOR +3.5% and paying a fixed rate of 5.125%. As the timing and amounts of the cash flows under the swap agreements match the cash flows under the bonds the swaps are assessed as highly effective. Cash flow hedge accounting has been applied and changes in the fair value of the swaps are recorded in other comprehensive income.
******
F-20 Independent auditors’ report Audit report To the Shareholders of Millicom International Cellular S.A.
Report on the consolidated accounts
Following our appointment by the General Meeting of the Shareholders dated 29 May 2012, we have audited the accompanying consolidated accounts of Millicom International Cellular S.A., which comprise the consolidated statement of financial position as at 31 December 2012, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. The consolidated accounts as of December 31, 2011 and for the year then ended were audited by another auditor which issued an unqualified opinion on 1 March 2012.
Board of Directors’ responsibility for the consolidated accounts
The Board of Directors is responsible for the preparation and fair presentation of these consolidated accounts in accordance with International Financial Reporting Standards as adopted by the European Union and for such internal control as the Board of Directors determines is necessary to enable the preparation and presentation of consolidated accounts that are free from material misstatement, whether due to fraud or error.
Responsibility of the “réviseur d’entreprises agréé”
Our responsibility is to express an opinion on these consolidated accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the “Commission de Surveillance du Secteur Financier”. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated accounts are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated accounts. The procedures selected depend on the judgement of the “réviseur d’entreprises agréé”, including the assessment of the risks of material misstatement of the consolidated accounts, whether due to fraud or error. In making those risk assessments, the “réviseur d’entreprises agréé” considers internal control relevant to the entity’s preparation and fair presentation of the consolidated accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated accounts.
F-21 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated accounts give a true and fair view of the financial position of Millicom International Cellular S.A. as of 31 December 2012, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
Report on other legal and regulatory requirements
The consolidated management report, including the corporate governance statement, which is the responsibility of the Board of Directors, is consistent with the consolidated accounts and includes the information required by the law with respect to the corporate governance statement.
ERNST & YOUNG Société Anonyme Cabinet de révision agréé
Olivier LEMAIRE
Luxembourg, 22 March 2013
F-22 Millicom International Cellular S.A. Consolidated income statements for the years ended December 31, 2012, 2011 and 2010
2010 Notes 2012 2011 (As Restated)(i) US$ millions US$ millions US$ millions Revenue ...... 10 4,814 4,530 3,920 Cost of sales ...... (1,737) (1,565) (1,330) Gross profit ...... 3,077 2,965 2,590 Sales and marketing ...... (914) (817) (737) General and administrative expenses ...... (956) (839) (739) Other operating expenses ...... (122) (96) (75) Other operating income ...... 19 44 3 Operating profit ...... 10,11 1,104 1,257 1,042 Interest expense ...... (220) (187) (215) Interest and other financial income ...... 14 15 15 Revaluation of previously held interests ...... 5 – – 1,060 Other non-operating income (expenses), net . . . 13 22 (4) (62) Loss from associates ...... 18 (23) (10) (2) Profit before tax from continuing operations .. 897 1,071 1,838 (Charge) credit for taxes ...... 14 (393) 19 (227) Profit for the year from continuing operations ...... 504 1,090 1,611 Profit for the year from discontinued operations, net of tax ...... 7 –3912 Net profit for the year ...... 504 1,129 1,623 Attributable to: Equity holders of the Company ...... 508 925 1,620 Non-controlling interests ...... (4) 204 3 Earnings per share for the year ...... 15 (US$ per common share) Basic earnings per share – from continuing operations attributable to equity holders ...... 5.02 8.50 14.89 – from discontinued operations attributable to equity holders ...... – 0.37 0.08 – for the year attributable to equity holders .... 5.02 8.87 14.97 Diluted earnings per share – from continuing operations attributable to equity holders ...... 5.01 8.49 14.87 – from discontinued operations attributable to equity holders ...... – 0.37 0.08 – for the year attributable to equity holders .... 5.01 8.86 14.95
(i) Restatement – see note 4
The accompanying notes are an integral part of these consolidated financial statements.
F-23 Millicom International Cellular S.A. Consolidated statements of comprehensive income for the years ended December 31, 2012, 2011 and 2010
2010 2012 2011 (As Restated)(i) US$ millions US$ millions US$ millions Net profit for the year ...... 504 1,129 1,623 Other comprehensive income: Exchange differences on translating foreign operations ...... (55) (47) (6) Cash flow hedges ...... (2) (3) (2) Total comprehensive income for the year ...... 447 1,079 1,615 Attributable to: Equity holders of the Company ...... 469 882 1,617 Non-controlling interests ...... (22) 197 (2)
(i) Restatement – see note 4
The accompanying notes are an integral part of these consolidated financial statements.
F-24 Millicom International Cellular S.A. Consolidated statements of financial position as at December 31, 2012 and 2011
Notes 2012 2011 US$ millions US$ millions ASSETS Non-Current Assets Intangible assets, net ...... 16 2,419 2,170 Property, plant and equipment, net ...... 17 3,108 2,865 Investments in associates ...... 18 193 63 Pledged deposits ...... 19,27 47 50 Deferred tax assets ...... 14 259 317 Other non-current assets ...... 86 37 Total Non-Current Assets ...... 6,112 5,502 Current Assets Inventories ...... 93 75 Trade receivables, net ...... 20 322 277 Amounts due from non-controlling interests and joint ventures ...... 81 159 Prepayments and accrued income ...... 140 119 Current income tax assets ...... 39 24 Supplier advances for capital expenditure ...... 44 32 Advances to non-controlling interest ...... 56 34 Other current assets ...... 86 113 Restricted cash ...... 21 43 20 Cash and cash equivalents ...... 22 1,174 861 Total Current Assets ...... 2,078 1,714 Assets held for sale ...... 7 21 66 TOTAL ASSETS ...... 8,211 7,282
The accompanying notes are an integral part of these consolidated financial statements.
F-25 Millicom International Cellular S.A. Consolidated statements of financial position as at December 31, 2012 and 2011 (continued)
Notes 2012 2011 US$ millions US$ millions EQUITY AND LIABILITIES EQUITY Share capital and premium ...... 23 642 663 Treasury shares ...... 23 (198) (378) Put option reserve ...... 25 (737) (737) Other reserves ...... 26 (133) (104) Retained profits ...... 1,942 1,886 Profit for the year attributable to equity holders ...... 508 925 Equity attributable to owners of the Company ...... 2,024 2,255 Non-controlling interests ...... 312 191 TOTAL EQUITY ...... 2,336 2,446 LIABILITIES Non-current Liabilities Debt and financing ...... 27 2,566 1,817 Derivative financial instruments ...... 35 4 8 Provisions and other non-current liabilities ...... 28 127 114 Deferred tax liabilities ...... 14 180 199 Total non-current liabilities ...... 2,877 2,138 Current Liabilities Debt and financing ...... 27 693 621 Put option liability ...... 28 730 745 Payables and accruals for capital expenditure ...... 411 334 Other trade payables ...... 259 224 Amounts due to joint venture partners ...... 19 93 Accrued interest and other expenses ...... 341 264 Current income tax liabilities ...... 161 105 Provisions and other current liabilities ...... 28 379 303 Total current liabilities ...... 2,993 2,689 Liabilities directly associated with assets held for sale ...... 7 5 9 TOTAL LIABILITIES ...... 5,875 4,836 TOTAL EQUITY AND LIABILITIES ...... 8,211 7,282
The accompanying notes are an integral part of these consolidated financial statements.
F-26 Millicom International Cellular S.A. Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 2010
2010 Notes 2012 2011 (As Restated)(i) US$ millions US$ millions US$ millions Profit before tax from continuing operations ...... 897 1,071 1,838 Adjustments for non-operating items: Interest expense ...... 220 187 215 Interest and other financial income ...... (14) (15) (15) Revaluation of previously held interests ...... – – (1,060) Loss from associates ...... 23 10 2 Other non-operating (income) expenses, net ...... (22) 4 62 Adjustments for non-cash items: Depreciation and amortization ...... 10,11,16,17 811 739 677 Loss (gain) on disposal and impairment of assets, net . . . 10,11 6 (22) 16 Share-based compensation ...... 24 22 17 31 1,943 1,991 1,766 Increase in trade receivables, prepayments and other current assets ...... (103) (57) (31) Increase in inventories ...... (14) (13) (13) Increase in trade and other payables ...... 201 85 45 Changes in working capital ...... 84 15 1 Interest paid ...... (169) (141) (171) Interest received ...... 11 14 15 Tax paid ...... (284) (268) (239) Net cash provided by operating activities ...... 1,585 1,611 1,372 Cash flows from investing activities: Acquisition of subsidiaries, and non-controlling interests, net of cash acquired ...... 5 (172) (20) (5) Proceeds from disposal of subsidiaries and non- controlling interests ...... – 1 5 Purchase of intangible assets and licenses ...... 16 (159) (57) (26) Proceeds from sale of intangible assets ...... 2 – – Purchase of property, plant and equipment ...... 17 (842) (700) (597) Proceeds from sale of property, plant and equipment . . . 115 127 37 Disposal of pledged deposits, net ...... – 9 2 Disposal of time deposits, net ...... – 3 47 Net increase in restricted cash ...... 21 (23) (20) – Cash (used) provided by other investing activities ...... (31) (35) 9 Net cash used by investing activities ...... (1,110) (692) (528) Cash flows from financing activities: Loans to associates ...... (31) – – Short term loans to other non-controlling interests ..... (24) – – Proceeds from issuance of shares ...... – 1 3 Purchase of treasury shares ...... (190) (498) (300) Proceeds from debt and other financing ...... 27 1,545 703 1,148 Repayment of debt and financing ...... 27 (923) (792) (1,397) Advance payments to non-controlling interests ...... – (27) – Payment of dividends ...... (541) (494) (789) Net cash used by financing activities ...... (164) (1,107) (1,335) Cash provided by discontinued operations ...... 7 – 53 – Exchange gains (losses) on cash and cash equivalents .... 2 (27) 3 Net increase (decrease) in cash and cash equivalents ..... 313 (162) (488) Cash and cash equivalents at the beginning of the year ...... 861 1,023 1,511 Cash and cash equivalents at the end of the year ...... 1,174 861 1,023
(i) Restatement – see note 4
The accompanying notes are an integral part of these consolidated financial statements.
F-27 Millicom International Cellular S.A. Consolidated statements of changes in equity for the years ended December 31, 2012, 2011 and 2010
Attributable to equity holders Number of Put Total Equity Non- Number shares held Share Share Treasury Retained option Other Holder’s controlling Total of shares by the Group Capital(i) Premium(i) shares profits(ii) reserve(iv) reserves(v) interests interests(vi) equity ’000 ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Balance as of January 1, 2010 ...... 108,648 – 162,971 497,576 – 1,788,186 – (64,930) 2,383,803 (73,673) 2,310,130 Profit for the year(ix) ...... – – – – – 1,620,277 – – 1,620,277 2,691 1,622,968 Cash flow hedge ...... – – – – – – – (1,700) (1,700) – (1,700) Currency translation differences ...... – – – – – – – (1,090) (1,090) (4,695) (5,785) Total comprehensive income for the year(ix) ...... – – – – – 1,620,277 – (2,790) 1,617,487 (2,004) 1,615,483 Transfer to legal reserve ...... – – – – – (53) – 53 – – – Dividends(vii) ...... – – – – – (653,779) – – (653,779) – (653,779) Purchase of treasury shares ...... – (3,254) – – (300,000) – – – (300,000) – (300,000) Shares issued via the exercise of share options ...... 145 – 218 3,874 – – – (816) 3,276 – 3,276 Share-based compensation(iii) ...... – – – – – – – 30,286 30,286 – 30,286 Directors’ shares(iii) ...... 5 – 8 424 – – – – 432 – 432 F-28 Issuance of shares under the LTIPs(iii) ...... 255 – 381 16,107 – – – (16,488) – – – Change in scope of consolidation(viii) ...... – – – – – – – – – 130,843 130,843 Dividend to non-controlling shareholders ...... – – – – – – – – – (9,616) (9,616) Put option for non-controlling interest(iv)(ix) ...... – – – – – – (737,422) – (737,422) – (737,422) Balance as of December 31, 2010 (As Restated)(ix) .... 109,053 (3,254) 163,578 517,981 (300,000) 2,754,631 (737,422) (54,685) 2,344,083 45,550 2,389,633 For the year ended December 31, 2011(ix) Profit for the year ...... – – – – – 924,515 – – 924,515 204,490 1,129,005 Cash flow hedge reserve movement ...... – – – – – – – (3,015) (3,015) (247) (3,262) Currency translation differences ...... – – – – – – – (39,806) (39,806) (6,892) (46,698) Total comprehensive income for the year ...... – – – – – 924,515 – (42,821) 881,694 197,351 1,079,045 Transfer to legal reserve ...... – – – – – (61) – 61 – – – Dividends(vii) ...... – – – – – (493,909) – – (493,909) – (493,909) Purchase of treasury shares ...... – (4,646) – – (498,274) – – – (498,274) – (498,274) Cancellation of treasury shares ...... (4,200) 4,200 (6,300) (20,070) 401,415 (375,045) – – – – – Shares issued via the exercise of stock options ...... 40 6 59 1,184 592 (435) – (81) 1,319 – 1,319 Share-based compensation(iii) ...... – – – – – – – 17,264 17,264 – 17,264 Issuance of shares under the LTIPs(iii) ...... 46 187 70 6,025 17,908 (773) – (23,230) – – – Sale of Amnet Honduras to non-controlling interests ...... – – – – – 2,207 – – 2,207 11,974 14,181 Disposal of Laos ...... – – – – – – – – – (6,493) (6,493) Dividend to non-controlling shareholders ...... – – – – – – – – – (57,212) (57,212) Balance as of December 31, 2011 ...... 104,939 (3,507) 157,407 505,120 (378,359) 2,811,130 (737,422) (103,492) 2,254,384 191,170 2,445,554
The accompanying notes are an integral part of these consolidated financial statements. Millicom International Cellular S.A. Consolidated statements of changes in equity (continued) for the years ended December 31, 2012, 2011 and 2010
Attributable to equity holders Number of Put Total Equity Non- Number shares held Share Share Treasury Retained option Other Holder’s controlling Total of shares by the Group Capital(i) Premium(i) Shares profits(ii) reserve(iv) reserves(v) interests interests(vi) equity ’000 ‘000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Balance as of January 1, 2012 ...... 104,939 (3,507) 157,407 505,120 (378,359) 2,811,130 (737,422) (103,492) 2,254,384 191,170 2,445,554 Profit for the year ...... – – – – – 508,306 – – 508,306 (4,718) 503,588 Cash flow hedge reserve movement ...... – – – – – – – (1,118) (1,118) (85) (1,203) Currency translation differences ...... – – – – – – – (37,709) (37,709) (17,530) (55,239) Totalcomprehensiveincomefortheyear ...... – – – – – 508,306 – (38,827) 469,479 (22,333) 447,146 Dividends(vii) ...... – – – – – (541,133) – – (541,133) – (541,133) Purchaseoftreasuryshares ...... – (2,106) – – (189,619) – – – (189,619) – (189,619) Cancellationoftreasuryshares...... (3,200) 3,200 (4,800) (15,000) 344,377 (324,577) – – – – – Share-based compensation(iii) ...... – – – – – – – 21,929 21,929 – 21,929 Issuance of shares under the LTIPs(iii) ...... – 237 – (1,106) 25,453 (11,926) – (12,421) – – – Non-controlling interests in Rocket Internet(x) ..... – – – – – – – – – 160,321 160,321
F-29 Dividendtonon-controllingshareholders...... – – – – – – – – – (16,969) (16,969) Change in scope of consolidation(viii) ...... – – – – – 8,658 – – 8,658 – 8,658 Balance as of December 31, 2012 ...... 101,739 (2,176) 152,607 489,014 (198,148) 2,450,458 (737,422) (132,811) 2,023,698 312,189 2,335,887
(i) Share Capital and Share Premium – see note 23.
(ii) Retained Profits – includes profit for the year attributable to equity holders, of which $126 million (2011: $94 million; 2010: $60 million) are not distributable to equity holders.
(iii) Share based compensation – see note 24.
(iv) Put option reserve – see note 25.
(v) Other reserves – see note 26.
(vii) Dividends – see note 29.
(viii) Change of scope of consolidation – see note 5.
(ix) Restatement – see note 4.
(x) See note 5.
The accompanying notes are an integral part of these consolidated financial statements Millicom International Cellular S.A. Notes to the consolidated financial statements as of December 31, 2012, 2011 and 2010
1. Corporate information
Millicom International Cellular S.A. (the “Company”), a Luxembourg Société Anonyme, and its subsidiaries, joint ventures and associates (the “Group” or “Millicom”) is an international group providing communications, information, entertainment, solutions, financial, online and e-commerce services in emerging markets, using various combinations of mobile and fixed telephony, cable, broadband and internet businesses, primarily in 16 countries in Central America, South America and Africa.
Millicom operates its mobile businesses in El Salvador, Guatemala and Honduras in Central America; in Bolivia, Colombia and Paraguay in South America; and in Chad, the Democratic Republic of Congo (“DRC”), Ghana, Mauritius, Rwanda, Senegal and Tanzania in Africa. In addition Millicom operates cable businesses in El Salvador, Guatemala, Honduras, Costa Rica, Nicaragua and Paraguay and online / e-commerce businesses in several countries (see note 5).
The Company’s shares are traded as Swedish Depositary Receipts on the Stockholm stock exchange under the symbol MIC SDB and over the counter in the US under the symbol MIICF. On October 12, 2012 the Company filed a certificate with the US Securities and Exchange Commission (“SEC”) to terminate the registration of its shares. As from that date the Company is no longer subject to the reporting and disclosure requirements of the Exchange Act in the US.
The Company has its registered office at 2, Rue du Fort Bourbon, L-1249 Luxembourg, Grand Duchy of Luxembourg and is registered with the Luxembourg Register of Commerce under the number RCS B 40 630.
On March 22, 2013 the Board of Directors (“Board”) authorized these consolidated financial statements for issuance. The approval will be submitted for ratification by the shareholders at the Annual General Meeting on May 28, 2013.
2. Summary of consolidation and accounting policies 2.1 Basis of preparation
The consolidated financial statements of the Group are presented in US dollars and all values are rounded to the nearest million (US$’ million) except where otherwise indicated. The consolidated financial statements have been prepared on a historical cost basis except for certain financial assets and liabilities measured at fair value.
In accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, the consolidated financial statements for the year ended December 31, 2012 have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”).
As of December 31, 2012, International Financial Reporting Standards as adopted by the European Union are similar to those published by the International Accounting Standards Board (“IASB”), except for IAS 39 – Financial Instruments that has been partially adopted by the European Union and for new standards and interpretations not yet endorsed but effective in future periods. Since the provisions that have not been adopted by the European Union are not applicable to the Group, the consolidated financial statements comply with both International Financial Reporting Standards as issued by the IASB and as adopted by the European Union.
The preparation of financial statements in conformity with IFRS requires management to exercise its judgment in the process of applying the Group’s accounting policies. It also requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets
F-30 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued) and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from these estimates. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3.
2.2 Consolidation The consolidated financial statements of the Group are comprised of the financial statements of the Company and its subsidiaries and joint ventures as at December 31 each year. The financial statements of the subsidiaries and joint ventures are prepared for the same reporting year as the Company, using consistent accounting policies. All intra-group balances, transactions, income and expenses, and profits and losses resulting from intra-group transactions are eliminated. The acquisition method of accounting is used to account for acquisitions where there is a change in control. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement (see accounting policy for Goodwill). All acquisition related costs are expensed.
Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
Non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. Gains or losses on disposals to non-controlling interests are recorded in equity. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is also recorded in equity. Non-controlling interest is measured at the proportionate interest in the net assets of the subsidiary.
Joint ventures Millicom determines the existence of joint control by reference to joint venture agreements, articles of association, structures and voting protocols of the boards of directors of those ventures.
F-31 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Entities that are jointly controlled are consolidated in the financial statements using the proportionate method which includes the Group’s share of the assets, liabilities, income and expenses of the joint ventures.
The Group recognizes the portion of gains or losses on the sale of assets to joint ventures that are attributable to other parties in the joint venture. The Group does not recognize its share of profits or losses from purchase of assets by the Group from a joint venture until it resells the assets to a third party. However, if a loss on a transaction provides evidence of a reduction in the net realizable value of current assets or an impairment loss, the loss is recognized immediately.
Associates
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights.
Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.
The cost of shares acquired in associates from sale and lease back transactions with tower companies are initially measured based on the fair values of the towers sold. The fair value of the towers was derived by using the estimated replacement cost of the towers adjusted by an amount for wear and tear taking into consideration the average age of the towers.
The Group’s share of post-acquisition profits or losses of associates is recognized in the consolidated income statement, and its share of post-acquisition movements in reserves is recognized in reserves. Cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless the Group has incurred obligations or made payments on behalf of the associates.
Gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Dilution gains and losses arising in investments in associates are recognized in the income statement.
2.3 Foreign currency translation
Functional and presentation currencies
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of each subsidiary, joint venture and associate reflects the economic substance of the underlying events and circumstances of these entities. The Company is located in Luxembourg and its subsidiaries, joint ventures and associates operate in different currencies. The Group’s consolidated financial statements are presented in U.S. dollars (the “presentation currency”). The functional currency of the Company is the U.S. dollar because of the significant influence of the U.S. dollar on its operations.
F-32 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Transactions and balances Transactions denominated in a currency other than the functional currency are translated into the functional currency using exchange rates prevailing on transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions, and on translation of monetary assets and liabilities denominated in currencies other than the functional currency at year-end exchange rates, are recognized in the consolidated income statement, except when deferred in equity as qualifying cash flow hedges.
Translation into presentation currency The results and financial position of all Group entities (none of which operate in an economy with a hyperinflationary functional currency) with functional currency other than the US dollar presentation currency are translated into the presentation currency as follows: i) Assets and liabilities are translated at the closing rate at the date of the statement of financial position; ii) Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and iii) All resulting exchange differences are recognized as a separate component of equity (“Currency translation reserve”), in the caption “Other reserves”. On consolidation, exchange differences arising from the translation of net investments in foreign operations, and of borrowing and other currency instruments designated as hedges of such investments, are recorded in equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognized in the consolidated income statement as part of gain or loss on sale. Goodwill and fair value adjustments arising on acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. The following table presents relevant currency translation rates to the U.S. dollar as of December 31, 2012 and 2011 and average rates for the year ended December 31, 2012. 2012 2012 2011 Country Currency Average rate Year-end rate Year-end rate Bolivia ...... Boliviano 6.91 6.91 6.91 Brazil ...... Real 2.08 2.05 N/A Chad and Senegal ...... CFAFranc 508.79 497.50 506.98 Colombia ...... Peso 1,809.80 1768.23 1,942.70 Costa Rica ...... Costa Rican Colon 508.56 514.32 511.84 Ghana ...... Cedi 1.84 1.88 1.64 Guatemala ...... Quetzal 7.84 7.90 7.81 Honduras ...... Lempira 19.57 20.03 19.12 Luxembourg ...... Euro 0.77 0.76 0.77 Mauritius ...... Rupee 29.92 30.54 29.33 Nicaragua ...... Gold Cordoba 23.54 24.13 22.97 Paraguay ...... Guarani 4,428.31 4,224.00 4,478.00 Rwanda ...... Rwandese Franc 614.16 631.46 604.14 Sweden ...... Krona 6.74 6.50 6.88 Tanzania ...... Shilling 1,586.01 1,581.00 1,578.15 UAE (Dubai) ...... Dirham 3.67 3.67 3.67
F-33 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
The effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and end of the year. Millicom’s functional currency in both El Salvador and DRC is the US$.
2.4 Segment reporting
Management determines operating and reportable segments based on the reports that are used by the Chief Operating Decision Maker (“CODM”) to make strategic and operational decisions from both a business and a geographic perspective. The Group’s risks and rates of return for its operations are affected predominantly by the fact that it operates in different geographical regions. The businesses are predominantly organized and managed according to the selected geographical regions, which represent the basis for evaluation of past performance and for making decisions about the future allocation of resources.
2.5 Property, plant and equipment
Items of property, plant and equipment are stated at historical cost or the lower of fair value and the present value of future minimum lease payments for items under finance leases, less accumulated depreciation and accumulated impairment. Historical cost includes expenditure that is directly attributable to acquisition of items. The carrying amount of replaced parts is derecognized.
Depreciation is calculated using the straight-line method over the shorter of the estimated useful life of the asset and the remaining life of the license associated with the assets, unless the renewal of the license is contractually possible.
Estimated useful lives are:
Buildings ...... 40years or lease period, if shorter Networks (including civil works) ...... 5to15years Other ...... 2to7years
The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. The assets’ residual value and useful life is reviewed, and adjusted if appropriate, at each statement of financial position date. An asset’s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount.
Construction in progress consists of the cost of assets, labor and other direct costs associated with property, plant and equipment being constructed by the Group. Once the assets become operational, the related costs are transferred from construction in progress to the appropriate asset category and depreciation commenced.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs and maintenance are charged to the income statement in the financial period in which they are incurred. Costs of major inspections and overhauls are added to the carrying value of property, plant and equipment and the carrying amount of previous major inspections and overhauls is derecognized.
F-34 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Equipment installed on customer premises which is not sold to customers is capitalized and amortized over the customer contract period.
A liability for the present value of the cost to remove an asset on both owned and leased sites is recognized when a present obligation for the removal exists. The corresponding cost of the obligation is included in the cost of the asset and depreciated over the useful life of the asset.
Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of that asset when it is probable that such costs will result in future economic benefits for the Group and the costs can be measured reliably.
2.6 Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is measured at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is charged to the income statement in the year in which expenditure is incurred.
Intangible assets with finite useful lives are amortized over their estimated useful economic lives using the straight-line method and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for intangible assets with finite useful lives are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the assets are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated income statement in the expense category consistent with the function of the intangible assets.
Goodwill
Goodwill represents the excess of cost of an acquisition, over the Group’s share in the fair value of identifiable assets less liabilities and contingent liabilities of the acquired subsidiary, joint venture or associate at the date of the acquisition. If the fair value of identifiable assets, liabilities or contingent liabilities or the cost of the acquisition can only be determined provisionally, then goodwill in initially accounted for using provisional values. Within twelve months of the acquisition date, any adjustments to the provisional values are recognized once the fair value of the identifiable assets, liabilities and contingent liabilities and the cost of the acquisition have been finally determined. Adjustments to provisional fair values are made as if the adjusted fair values had been recognized from the acquisition date. Goodwill on acquisition of subsidiaries and joint ventures is included in “intangible assets, net”. Goodwill on acquisition of associates is included in “investments in associates”. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment losses on goodwill are not reversed.
F-35 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
For the purpose of impairment testing, goodwill acquired in a business combination is, from acquisition date, allocated to each of the Group’s cash generating units or groups of cash- generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated:
• Represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
• Is not larger than an operating segment.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed and the portion of the cash-generating unit retained.
Licenses
Licenses are recorded at either historical cost or, if acquired in a business combination, at fair value at the date of acquisition. Licenses have a finite useful life and are carried at cost less accumulated amortization and any accumulated impairment losses. Amortization is calculated using the straight-line method to allocate the cost of the licenses over their estimated useful lives.
The terms of licenses, which have been awarded for various periods, are subject to periodic review for, amongst other things, rate setting, frequency allocation and technical standards. Licenses are initially measured at cost and are amortized from the date the network is available for use on a straight-line basis over the license period. Licenses held, subject to certain conditions, are usually renewable and generally non-exclusive. When estimating useful lives of licenses, renewal periods are not usually included.
Trademarks and customer bases
Trademarks and customer bases are recognized as intangible assets only when acquired or gained in a business combination. Their cost represents fair value at the date of acquisition. Trademarks and customer bases have finite useful lives and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of the trademarks and customer bases over their estimated useful lives. The estimated useful lives for trademarks and customer bases are based on specific characteristics of the market in which they exist. Trademarks and customer bases are included in “Intangible assets, net”.
Estimated useful lives are:
Trademarks ...... 1to15years Customer bases ...... 4to9years
F-36 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Indefeasible Rights of Use
Indefeasible rights of use (“IRU”) agreements are mainly composed of purchase and / or sale of specified infrastructure, purchase and / or sale of lit fibre capacity and exchange of network infrastructure or lit fibre capacity. These arrangements are either accounted for as leases, service contracts, or partly as leases and partly as service contracts. Determination of the appropriate classification depends on an assessment of the characteristics of the arrangements.
A network capacity contract is accounted for as a lease if, and when:
• The purchaser has an exclusive right to the capacity for a specified period and has the ability to resell (or sub-let) the capacity; and
• The capacity is physically limited and defined; and
• The purchaser bears all costs related to the capacity (directly or not) including costs of operation, administration and maintenance; and
• The purchaser bears the risk of obsolescence during the contract term.
If all of these criteria are not met, the IRU is treated as a service contract.
If the arrangement is, or contains a lease, the lease is accounted for as either an operating lease or a financial lease (see policy note Leases 2.20). A financial lease of an IRU of network infrastructure is accounted for as a tangible asset. A financial lease of an IRU on capacity is accounted for as an intangible asset.
2.7 Impairment of non-financial assets
At each reporting date the Group assesses whether there is an indication that a non-financial asset may be impaired. If any such indication exists, or when annual impairment testing for a non-financial asset is required, the Group makes an estimate of the asset’s recoverable amount. The Group determines the recoverable amount based on the higher of its fair value less cost to sell, and its value in use, for individual assets, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.
Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Where no comparable market information is available, the fair value less cost to sell is determined based on the estimated future cash flows discounted to their present value using a discount rate that reflects current market conditions for the time value of money and risks specific to the asset. The foregoing analysis also evaluates the appropriateness of the expected useful lives of the assets. Impairment losses of continuing operations are recognized in the consolidated income statement in expense categories consistent with the function of the impaired asset.
At each reporting date an assessment is made as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. Other than for goodwill, a previously recognized impairment loss is reversed if there has been a change in the estimate used to determine the asset’s recoverable amount since the last impairment loss was recognized. If so, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in
F-37 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued) profit or loss. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
2.8 Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those maturing more than 12 months after the end of the reporting period. These are classified within non-current assets. Loans and receivables are carried at amortized cost using the effective interest method. Gains and losses are recognized in the income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process.
2.9 Derecognition of Financial Assets and Liabilities
A financial asset (or a part of a financial asset or part of a group of similar financial assets) is derecognised when:
• Rights to receive cash flows from the asset have expired
• Rights to receive cash flows from the asset or obligations to pay the received cash flows in full without material delay have been transferred to a third party under a ‘pass-through’ arrangement; and either transferred:
(a) Substantially all the risks and rewards of the asset, or
(b) Control of the asset.
When rights to receive cash flows from an asset have been transferred or a pass-through arrangement concluded, an evaluation is made if and to what extent the risks and rewards of ownership have been retained. When the Group has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the income statement.
2.10 Financial instruments
Financial instruments at fair value through profit or loss
Financial instruments at fair value through profit or loss are financial instruments held for trading. Their fair value is determined by reference to quoted market prices on the statement of
F-38 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued) financial position date. Where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions, reference to the current market value of a substantially similar instrument, discounted cash flow analysis and option pricing models. A financial instrument is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.
Financial Instruments that contain obligations to purchase own equity instruments
Contracts that contain obligations for the Company to purchase its own equity instruments for cash or other financial assets are initially recorded as financial liabilities based on the present value of the redemption amounts with a corresponding reserve in equity. Subsequently the carrying value of the liability is remeasured at the present value of the redemption amount with changes in carrying value recorded in other non-operating (expenses) income, net. If the contracts expire without delivery, the carrying amounts of the financial liabilities are reclassified to equity.
Financial Instruments that contain call options over non-controlling interests
Call option contracts over non-controlling interests that require physical settlement of a fixed number of own shares for a fixed consideration are classified as equity.
Contracts over non-controlling interests that require gross cash settlement are also classified as equity instruments. Such call options are initially recognized at fair value and not subsequently remeasured. If a call option is exercised, this initial fair value is included as part of the cost of the acquisition of the non-controlling interest. If an unexercised call option expires or otherwise lapses, the fair value of the call option remains within equity.
Call option contracts over non-controlling interests that require net cash settlement or provide a choice of settlement are classified as financial assets.
Contracts over non-controlling interests that require physical settlement of a variable number of own shares for a variable price are classified as financial assets and changes in the fair value are reported in the income statement. If such a call option is exercised, the fair value of the option at that date is included as part of the cost of the acquisition of the non-controlling interest. If an unexercised call option expires or otherwise lapses, its carrying amount is expensed in the income statement.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.
F-39 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Derivative financial instruments and hedging activities
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:
(a) Hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge);
(b) Hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge); or
(c) Hedges of a net investment in a foreign operation (net investment hedge).
For transactions designated and qualifying for hedge accounting, at the inception of the transaction, the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Movements in the hedging reserve are recognized as other comprehensive income. The full fair value of a hedging derivative is classified as a non-current asset or liability when the period to maturity of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability when the remaining period to maturity of the hedged item is less than 12 months.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. Gains or loss relating to any ineffective portion is recognized immediately in the income statement within ‘other non- operating (expenses) income, net’.
Amounts accumulated in equity are reclassified to the income statement in the periods when the hedged item affects profit or loss.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within ‘other non-operating (expenses) income, net’.
2.11 Discontinued operations and non-current assets (or disposal groups) held for sale and related liabilities
Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value (less costs to sell if their carrying amount is expected to be recovered principally through sale, not through continuing use). Liabilities of disposal groups are classified as “Liabilities directly associated with assets held for sale”.
F-40 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Discontinued operations are those with identifiable operations and cash flows (for both operating and management purposes) and represent a major line of business or geographic unit which has been disposed of or is available for sale. Revenues and expenses associated with discontinued operations are presented in a separate line in the consolidated income statement. Comparative figures in the consolidated income statement representing the discontinued operations are reclassified to the separate line.
2.12 Inventories
Inventories (which mainly consist of mobile telephone handsets and related accessories) are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.13 Trade receivables
Trade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment is recorded when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are indicators of impairment. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The provision is recognized in the consolidated income statement within “Cost of sales”.
2.14 Deposits
Time deposits
Cash deposits with banks with maturities of more than 3 months that generally earn interest at market rates are classified as time deposits.
Pledged deposits
Pledged deposits represent contracted cash deposits with banks that are held as security for debts at corporate or operational entity level. Millicom is unable to access these funds until either the relevant debt is repaid or alternative security is arranged with the lender.
2.15 Restricted cash
Cash held with banks related to mobile financial services which is restricted in use due to local regulations, but typically cycled out of the banking system within three months, is denoted as restricted cash.
2.16 Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short- term highly liquid investments with original maturities of three months or less.
F-41 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued) 2.17 Impairment of financial assets
The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. Impairment losses are recognized in the consolidated income statement.
2.18 Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.
Where any Group company purchases the Company’s share capital, the consideration paid including any directly attributable incremental costs is shown under “Treasury shares” and deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.
2.19 Borrowings
Borrowings are initially recognized at fair value, net of directly attributable transaction costs. Borrowings are subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on acquisition and any fees or costs that are an integral part of the effective interest rate. Any difference between the initial amount and the maturity amount is recognized in the consolidated income statement over the period of the borrowing.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months from the statement of financial position date.
2.20 Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and involves an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and whether or not the arrangement conveys a right to use the asset.
Finance leases
Finance leases, which transfer substantially all risks and benefits incidental to ownership of the leased item to the lessee, are capitalized at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Where a finance lease results from a sale and leaseback transaction, any excess of sales proceeds over the carrying amount of the assets is deferred and amortized over the lease term.
Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets, or the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.
F-42 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Operating leases
Operating leases are all other leases that are not finance leases. Operating lease payments are recognized as expenses in the consolidated income statement on a straight-line basis over the lease term.
Tower sale and leaseback transactions
The sale and leaseback of towers and related site operating leases and service contracts are accounted for in accordance with the underlying characteristics of the assets, and the terms and conditions of the lease agreements.
When sale and lease back agreements are concluded, the portions of assets that will not be leased back by Millicom are classified as assets held for sale as completion of their sale is highly probable. Asset retirement obligations related to the towers are classified as liabilities directly associated with assets held for sale.
On transfer to the tower companies, the portion of the towers leased back are accounted for as operating leases or finance leases according to the criteria set out above. The portion of towers being leased back represents the dedicated part of each tower on which Millicom’s equipment is located and was derived from the average technical capacity of the towers. Rights to use the land on which the towers are located are accounted for as operating leases, and costs of services for the towers are recorded as operating expenses.
2.21 Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain.
The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, risks specific to the liability. Where discounting is used, increases in the provision due to the passage of time are recognized as interest expenses.
2.22 Trade payables
Trade payables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method where the effect of the passage of time is material.
2.23 Revenue recognition
Revenue comprises the fair value of consideration received or receivable for the sale of goods and services, net of value added tax, rebates and discounts and after eliminating intra-group sales.
F-43 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized. Recurring revenue consist of monthly subscription fees, airtime usage fees, interconnection fees, roaming fees, revenue from online product and service sales, mobile finance service commissions and fees from other telecommunications services such as data services, short message services and other value added services. Recurring revenues are recognized on an accrual basis, i.e. as the related services are rendered. Unbilled revenue for airtime usage and subscription fees resulting from services provided from the billing cycle date to the end of each month are estimated and recorded. Subscription products and services are deferred and amortized over the estimated life of the customer relationship. Related costs are also deferred, to the extent of the revenues deferred, and amortized over the estimated life of the customer relationship. The estimated life of the customer relationship is calculated based on historical disconnection percentage for the same type of customer. Where customers purchase a specified amount of airtime in advance, revenue is recognized as airtime credit is used. Unused airtime credit is carried in the statement of financial position as deferred revenue within “other current liabilities”. Revenue from value added content services such as video messaging, ringtones, games etc., are recognised net of payments to the providers under certain conditions including if the providers are responsible for the content and determining the price paid by the customer. For such services the Group is considered to be acting in substance as an agent. Other revenue is recognised gross. Revenue from the sale of handsets and accessories are recognized when the significant risks and rewards of ownership of handsets and accessories have been passed to the buyer. Revenue arrangements with multiple service deliverables (“Bundled Offers” such as various services sold together) are divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. The arrangement consideration is then allocated among the separate units of accounting based on their relative fair values or on the residual method. Revenue is then recognized separately for each unit of accounting. Revenue from the sale of online and e-commerce services is recognized as and when the service is provided or on delivery of products to customers, less provision for product returns, based on the amounts expected to be received from customers. Revenue from sale of capacity is recognized when the capacity has been delivered to the customers, based on the amounts expected to be received from customers. Revenue from lease of tower space is recognised over the period of the underlying lease contracts. For finance leases revenue is apportioned between the lease of the tower space and interest income (other operating income). Revenue from provision of mobile financial services is recognized once the primary service has been provided to the customer.
2.24 Cost of sales The primary cost of sales incurred by the Group in relation to the provision of services relate to interconnection costs, roaming costs, rental of leased lines and tower infrastructure, costs of handsets and other accessories sold, royalties, commissions, and cost of goods sold. Cost of sales is recorded on an accrual basis.
F-44 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
Cost of sales also includes depreciation and any impairment of network equipment and trade receivables.
2.25 Customer acquisition costs
Specific customer acquisition costs, including dealer commissions and handset subsidies, are charged to sales and marketing when the customer is activated.
2.26 Employee benefits
Pension obligations
Pension obligations can result from either a defined contribution plan or a defined benefit plan.
A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity No further payment obligations exist once the contributions have been paid. The contributions are recognized as employee benefit expenses when they are due. Prepaid contributions are recognized as assets to the extent that a cash refund or a reduction in future payments is available.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit pension plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the statement of financial position in respect of the defined benefit pension plan is the present value of the defined benefit obligation at the statement of financial position date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using an appropriate discount rate based on maturities of the related pension liability.
Share based compensation
Share awards are granted to management and key employees.
The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employee becomes fully entitled to the award (the vesting date). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vested irrespective of whether or not the market conditions are satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expense is recognized as if the terms had not been modified. In addition, an expense is recognized for any modification that increases the total fair value of the share based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.
F-45 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued) 2.27 Taxation
Current tax
Current tax assets and liabilities for current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rate and tax laws used to compute the amount are those enacted or substantively enacted by the statement of financial position date.
Deferred tax
Deferred income tax is provided using the liability method and calculated from temporary differences at the statement of financial position date between the tax base of assets and liabilities and their carrying amount for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting, nor taxable, profit or loss.
Deferred income tax assets are recognized for all deductible temporary differences and carry- forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference and the carry-forward of unused tax credits and unused tax losses can be utilized, except where the deferred tax assets relate to deductible temporary differences from initial recognition of an asset or liability in a transaction that is not a business combination, and, at the time of the transaction, affects neither accounting, nor taxable, profit or loss.
The carrying amount of deferred income tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to utilize the deferred income tax asset. Unrecognized deferred income tax assets are reassessed at each statement of financial position date and are recognized to the extent it is probable that future taxable profit will enable the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rate expected to apply in the year when the assets are realized or liabilities settled, based on tax rates and tax laws that have been enacted or substantively enacted at the statement of financial position date. Income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated income statement. Deferred tax assets and deferred tax liabilities are offset where legally enforceable set off rights exist and the deferred taxes relate to the same taxable entity and the same taxation authority.
2.28 Changes in accounting policies
The consolidated financial statements as of December 31, 2012 are prepared in accordance with consolidation and accounting policies consistent with those of the previous financial years.
The following standards, amendments and interpretations issued are not effective for the financial year beginning January 1, 2012 and have not been early adopted.
• IFRS 9, ‘Financial Instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial
F-46 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
2. Summary of consolidation and accounting policies (continued)
instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value, and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2015 or at the date of endorsement by the EU if later.
• IFRS 10, ‘Consolidated Financial Statements’ build on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Group is yet to assess IFRS 10’s full impact and intends to adopt IFRS 10 no later than the accounting period beginning on or after January 1, 2014.
• IFRS 11, ‘Joint Arrangements’, sets out the core principle that a party to a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations in accordance with that type of joint arrangement. The standard removes the option for an interest in a jointly controlled entity using proportionate consolidation, and requires equity accounting to be applied to investments in a joint venture. The standard is effective for annual periods beginning on or after January 1, 2014.
• IFRS 12, ‘Disclosure of interests in other entities’ includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The Group does not expect IFRS 12 to have a significant impact and intends to adopt IFRS 12 in the accounting period beginning on January 1, 2014.
• IFRS 13. ‘Fair Value Measurement’ aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS’s. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. The Group does not expect IFRS 13 to have a significant impact and intends to adopt IFRS 13 in the accounting period beginning on or after January 1, 2013.
• IAS 27, Consolidated and Separate Financial Statements, reissued as IAS 27 Separate Financial Statements, as a result of issuance of IFRS 10, Consolidated Financial Statements. The standard is effective for annual periods beginning on or after January 1, 2014.
• IAS 28, Investments in Associates and, reissued as IAS 28 Investments in Associates, as a result of issuance of IFRS 11, Joint Arrangements. The standard is effective for annual periods beginning on or after January 1, 2014.
There are no other IFRS’s or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.
F-47 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
3. Significant accounting judgments and estimates Contingent liabilities Contingent liabilities are potential liabilities that arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of Millicom. Provisions for liabilities are recorded when a loss is considered probable and can be reasonably estimated. The determination of whether or not a provision should be recorded for any potential liabilities is based on management’s judgment.
Estimates Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Because of inherent uncertainties in this evaluation process, actual results may be different from originally estimated amounts. In addition, significant estimates are involved in the determination of impairments, provisions related to taxes and litigation risks. These estimates are subject to change as new information becomes available and may significantly affect future operating results. Accounting for property, plant and equipment, and intangible assets involves the use of estimates for determining fair values at acquisition dates, particularly in the case of such assets acquired in a business combination. Furthermore, the expected useful lives of these assets must be estimated. The determination of fair values of assets and liabilities, as well as of useful lives of the assets is based on management judgment. Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies (see note 14). For critical accounting estimates reference is made to the relevant individual notes to these consolidated financial statements, more specifically note 5 – Acquisition of subsidiaries, joint ventures and non-controlling interests; note 7 – Discontinued operations and assets held for sale; note 14 – Taxes; note 16 – Intangible assets, note 17 – Property, plant and equipment, note 20 – Trade receivables, note 24 – Share-based compensation (relating to long-term incentive plans); note 28 – Other noncurrent and current provisions and liabilities (relating to the put option); note 32 – Commitments and contingencies; and note 35 – Financial instruments.
4. Restatement of previously issued financial statements On January 26, 2012, the Board of Directors of the Company, based on the recommendation of the Audit Committee and in consultation with management, concluded that, due to a misstatement in the Group’s previously issued consolidated financial statements for the year ended December 31, 2010, and for the quarters ending on September 30, 2010 to September 30, 2011, the Group should restate its consolidated financial statements for the periods then ended. The restatement followed a reassessment of the accounting treatment of the put option provided to Millicom’s partner who holds a 33.3% non-controlling interest in the Honduran operation. As a result, it was determined that, as the put option could be exercised under certain change of control events which could be outside the control of Millicom, the option met the criteria under IAS 32 for recognition as a liability and corresponding equity reserve. Therefore a liability for the put option at July 1, 2010 of $737 million was retroactively recorded.
F-48 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests Year ended December 31, 2012 During the year ended December 31, 2012 Millicom made investments in Rocket Internet businesses in Latin America and Africa (together ‘Rocket Acquisitions’) and in Cablevisión Paraguay (‘Cablevisión Acquisition’). During the year Millicom also completed the increase of ownership in Navega El Salvador from 55% to 100% and completed other minor acquisitions for consideration of $16 million.
Cablevisión Acquisition On October 2, 2012 Millicom completed its acquisition of the debt and cash free operating businesses of Cable Vision Comunicaciones S.A., Television Dirigida S.A., Consorcio Multipunto Multicanal S.A., Producciones Unicanal S.A. and 100% of the shares of Teledeportes Paraguay S.A. (together “Cablevisión”) for combined cash consideration of $172 million. The acquired interests provide Millicom with the ability to govern the operating and financial policies of Cablevisión which has been fully consolidated into the Millicom Group financial statements from October 1, 2012. Millicom provisionally allocated the purchase price of $172 million to the assets acquired, liabilities assumed and contingent liabilities and recognized the following amounts:
Cablevisión Fair value US$ millions Tangible and intangible assets, net ...... 107 Fair value of the net assets acquired and contingent liabilities ...... 107 Cash consideration ...... 172 Goodwill ...... 65
The provisional allocation will be changed on the basis of additional information and assessment of Millicom’s share of the fair values of the assets and liabilities acquired. The goodwill, which is not expected to be tax deductible, is attributable to future customers, know-how, and potential synergies. Cablevisión contributed revenues of $15 million and net profit of $6 million for the period from acquisition to December 31, 2012. If the acquisition had occurred on January 1, 2012, Group revenues from continuing operations for the year ended December 31, 2012 would have been $54 million higher, and the net profit from continuing operations for the same period would have been $17 million higher. These amounts have been calculated using the Group accounting policies.
Rocket Acquisitions On August 29, 2012 Millicom acquired, for Euro 85 million, and by way of issuance of new shares, 20% interests in two subsidiaries of Rocket Internet GmbH, Latin America Internet Holding (“LIH”) and Africa Internet Holding (“AIH”) and unconditional options to acquire the remaining shares in each of LIH and AIH (LIH and AIH own several operating entities in Latin America and Africa respectively). The options can be exercised from the August 29, 2012 acquisition date. The first options expire in September 2013 (‘First Options’) and enable Millicom to increase its stakes to 35%, the second to 50% with expiry in September 2014 (‘Second Options’) and the third to increase its stakes to 100% with expiry in September 2016 (‘Third Options’).
F-49 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) The acquired 20% interests, combined with unconditional rights to exercise the First, Second and Third Options, as well as a number of protective governance mechanisms in the LIH and AIH shareholders agreements provide Millicom with the ability to govern the operating and financial policies of AIH, and LIH. While Millicom controls AIH, certain minority shareholder rights per shareholder agreements, including blocking rights, result in Millicom having significant influence in the operating entities in the AIH Group. Millicom’s economic ownership of these entities is treated as “investments in associates” (note 18). Investment Kinnevik AB, Millicom’s largest shareholder, holds minority interests in certain subsidiaries of LIH and AIH.
As a result of the acquisition and option agreements Millicom has the right to control LIH and AIH, which have been fully consolidated into the Millicom Group financial statements from September 1, 2012.
LIH
Millicom provisionally allocated the LIH purchase price of Euro 50 million ($64 million) to the assets acquired, liabilities assumed and contingent liabilities and recognized the following amounts:
LIH Group Fair value 100% US$ millions Intangible assets, net ...... 14 Property, plant and equipment, net ...... 1 Current assets ...... 9 Cash and cash equivalents ...... 65 89 Current liabilities ...... 8 Deferred tax liabilities ...... 5 13 Fair value of the net assets acquired and contingent liabilities ...... 76 Non-controlling interests: In net assets acquired and contingent liabilities ...... 62 Less fair value of options (equity instruments) ...... (15) 47 Controlling interest ...... 29 Cash consideration ...... 64 Goodwill ...... 35
The provisional allocation will be changed on the basis of additional information and assessment of Millicom’s share of the fair values of the assets and liabilities acquired.
The goodwill, which is not expected to be tax deductible, is attributable to future customers, know-how, potential synergies and the value of development stage projects. The non-controlling interest has been measured as a proportion of the net assets acquired.
LIH contributed revenues of $13 million and net loss of $9 million for the period from acquisition to December 31, 2012.
F-50 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) AIH
Millicom provisionally allocated the AIH purchase price of Euro 35 million ($45 million) to the assets acquired, liabilities assumed and contingent liabilities and recognized the following amounts:
AIH Fair value 100% US$ millions Investment in associates ...... 100 Cash and cash equivalents ...... 45 Fair value of the net assets acquired and contingent liabilities ...... 145 Non-controlling interests: In net assets acquired and contingent liabilities ...... 126 Less fair value of options (equity instruments) ...... (13) 113 Controlling interest ...... 32 Cash consideration ...... 45 Goodwill ...... 13
The provisional allocation will be changed on the basis of additional information and assessment of Millicom’s share of the fair values of the assets and liabilities acquired.
The investment in associates represents investments in entities in which AIH has significant influence. The fair value of these investments has been determined based on a discounted cash flow model. The goodwill, which is not expected to be tax deductible, is attributable to future customers, know-how, potential synergies and the value of development stage projects. The non- controlling interest has been measured as a proportion of the net assets acquired.
Rocket Options
At December 31, 2012 the options to acquire the remaining shares in AIH and LIH had not been exercised. These call options are financial instruments which are accounted for in accordance with IAS 32 and 39.
The exercise prices of the First and Second Options of Euro 85 million and Euro 170 million respectively are based on the original equity values of AIH and LIH. The cash invested by Millicom (capital increases) in each of AIH and LIH has increased the equity value of each of the businesses such that the equity value exceeds the exercise prices. As these options are exercisable at fixed prices they are accounted for as equity instruments in accordance with IAS 32. Accordingly, for LIH a provisional value of $15 million and for AIH a provisional value of $12 million has been assigned to the options against non-controlling interests in the consolidated statement of financial position.
The exercise prices of the Third Options are based on the fair market value of the shares at the time of exercise, and as such the option itself does not have any standalone value.
F-51 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) Year ended December 31, 2011
Millicom did not acquire any subsidiaries, joint ventures or non-controlling interests during the year ended December 31, 2011. At December 31, 2011, the agreement entered into on August 20, 2010 to increase Millicom’s ownership in Navega El Salvador from 55% to 100% remained subject to completion.
Year ended December 31, 2010
In 2010, Millicom gained control over Telefonica Cellular S.A. DE CV, its mobile phone operation in Honduras, and acquired control of Navega S.A. DE CV, its cable operation in Honduras.
Telefonica Cellular S.A. DE CV
On July 1, 2010 Millicom reached agreement with its local partner in Honduras whereby Millicom’s local partner granted Millicom an unconditional call option for the next five years for his 33% stake in Telefonica Cellular S.A. DE CV (“Celtel”) and as consideration, Millicom granted a put option for the same duration to the local partner (see notes 28 and 35). The put option can only be exercised in case of a change of control of Millicom International Cellular S.A. or Millicom’s subsidiary that holds the shares in Celtel (except if the change of control is in favor of Investment AB Kinnevik, the current largest shareholder of Millicom, or management of Millicom).
Prior to entering into the agreement, Millicom was dependent on the consent of its local partner for strategic decisions related to its Honduran operation, as the shareholders agreement required a vote of 75% of the shares to authorize and approve significant financial and operating policies of Celtel. The call option allows Millicom, unconditionally at any time during the five year period from July 1, 2010 to exercise its right to acquire the 33% stake (and voting rights) of our local partner at a price which Millicom believes represents the strategic value of the asset. The call option therefore conferred to Millicom control over Celtel through its ability to influence and exercise the power to govern the financial and operating policies (develop the future business in Honduras).
Accordingly, Celtel has been fully consolidated into the Millicom Group financial statements from July 1, 2010. Previously, the Honduras operations were proportionately consolidated.
F-52 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) Millicom completed the allocation of the purchase price to the assets acquired, liabilities assumed and contingent liabilities during the year ended December 31, 2010. The recognized amounts of identified assets acquired and liabilities assumed as of July 1, 2010 were as follows:
Fair value (100%) Previously held interests (66.7%) US$ millions US$ millions Intangible assets, net (i) ...... 435 23 Other investments ...... 21 14 Property, plant and equipment, net ...... 339 226 Trade receivables ...... 14 9 Prepayments and accrued income ...... 7 4 Other current assets ...... 34 24 Cash and cash equivalents ...... 25 16 875 316 Other non-current liabilities (ii) ...... 265 100 Current debt and other financing ...... 75 50 Trade payables ...... 6 4 Accrued interests and other expenses ...... 13 9 Current income tax liabilities ...... 17 12 Other current liabilities ...... 52 36 428 211 Non-controlling interests ...... 147 Fair value of the net assets acquired and contingent liabilities ...... 300 Goodwill arising on change of control ...... 855 Previously held interests in Celtel ...... (105) Revaluation of the previously held interests in Celtel ...... 1,049
(i) Intangible assets not previously recognized are trademarks for an amount of $40 million, with estimated useful life of 10 years, customers’ list for an amount of $335 million, with estimated useful life of 8-9 years, and telecommunications license for an amount of $21 million, with estimated useful life of 11 years.
(ii) Deferred tax liabilities related to differences between the tax base and the fair value of the identifiable assets acquired amount to $114 million.
The goodwill, which is not expected to be tax deductible, is attributable to the profitability potential of Celtel and the synergies expected to arise. The fair value of the customers’ list was ascertained using the discounted excess earnings method, the fair value of the trademark was ascertained using the relief from royalty approach, and the fair value of the telecommunications license against comparable transactions.
The change of control contributed revenues of $100 million and net profit of $1,049 million (including the gain on revaluation of the previously held interest) for the period from acquisition to December 31, 2010. If the change of control had occurred on January 1, 2010, unaudited pro forma Group revenues from continuing operations for the year ended December 31, 2010 would have been $4,018 million, and the unaudited pro forma net profit from continuing operations for the same period, as restated, would have been $1,633 million. These amounts have been calculated using the Group accounting policies.
F-53 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) Millicom revalued at fair value its previously held 66.7% interest in Celtel recognizing a gain of $1,049 million, recorded under the caption “Revaluation of previously held interests”. The fair value of the previously held interests was determined based on discounted cash flows. The cash flow projections used (adjusted operating profit margins, income tax, working capital and capital expenditure) were estimated by management covering 6 years. Cash flows beyond this period were extrapolated using a perpetual growth rate of 2%. The valuation was determined using a discount rate of 14.3%.
Navega S.A. DE CV
As part of a regional shareholding alignment agreement with its local partner in Honduras, on August 20, 2010 Millicom reached agreement with its local partner in Honduras whereby Millicom acquired a further 6% of Navega S.A. DE CV (“Navega Honduras”) (formerly Metrored S.A.). As a result of this agreement Millicom has the right to control Navega Honduras, which has been fully consolidated into the Millicom Group financial statements from August 20, 2010. Previously, the results of Navega Honduras were proportionately consolidated. The agreement is expected to facilitate further integration of the cable business and to create synergies.
Millicom completed the allocation of the purchase price to the assets acquired, liabilities assumed and contingent liabilities during the year ended December 31, 2010 and recognized the following amounts:
Previously Fair value held interests 100% 60.72% US$ ’000 US$ ’000 Intangible assets, net ...... 19,563 11,879 Property, plant and equipment, net ...... 22,875 13,890 Other non-current assets ...... 180 109 Trade receivables ...... 1,988 1,207 Prepayments and accrued income ...... 40 25 Other current assets ...... 482 293 Cash and cash equivalents ...... 3,050 1,852 48,178 29,255 Other non-current liabilities ...... 3,178 1,930 Current debt and other financing ...... 1,152 699 Trade payables ...... 357 217 Accrued interests and other expenses ...... 1,135 689 Current income tax liabilities ...... 1,035 628 Other current liabilities ...... 2,211 1,343 9,068 5,506 Non-controlling interests ...... 13,037 Fair value of the net assets acquired and contingent liabilities ...... 26,073 Goodwill arising on change of control ...... 13,866 Previously held interests in Navega Honduras ...... (23,748) Revaluation of the previously held interests in Navega Honduras ...... 10,726 Cost of change of control ...... 5,465
F-54 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) The goodwill, which is not expected to be tax deductible, is attributable to the profitability potential of Navega Honduras and the synergies expected to arise. The fair value of the customers’ list was ascertained using the discounted excess earnings method, and the fair value of the trademark was ascertained using the relief from royalty approach. Navega Honduras contributed revenues of $1 million and net profit of $20 million (including gain on revaluation) for the period from acquisition to December 31, 2010. If the acquisition had occurred on January 1, 2010, unaudited pro forma Group revenues from continuing operations for the year ended December 31, 2010 would have been $3,924 million, and the unaudited pro forma net profit from continuing operations for the same period, as restated, would have been $1,612 million. These amounts have been calculated using the Group accounting policies. Millicom revalued at fair value its previously held 60% interest in Navega Honduras recognizing a gain of $11 million, recorded under the caption “Revaluation of previously held interests”.
6. Disposals of subsidiaries and joint ventures and non-controlling interests Year ended December 31, 2012 There were no disposals of subsidiaries, joint ventures or non-controlling interests during 2012.
Year ended December 31, 2011 Millicom Lao Co Ltd On September 16, 2009 Millicom announced that it signed an agreement for the sale of its 74.1% holding in Millicom Lao Co. Ltd., its Laos operation, to VimpelCom for approximately $65 million in total cash proceeds, payable on completion. The transaction valued the entire Laos operation at an enterprise value of approximately $102 million. On March 9, 2011 Millicom completed the transaction and received proceeds (net of transaction costs and taxes) from the sale of $53 million, realizing a gain on sale of $37 million. From that date the Laos operation is no longer included in the consolidated financial statements of the Group.
Amnet Honduras As part of a regional shareholding alignment agreement with its local partner in Honduras, on March 21, 2011, Millicom reduced its shareholding in Amnet Honduras from 100% to 66.7%, realizing a gain on sale of $2 million, which is recorded in equity as gain on sale to non- controlling interests. The proceeds from the sale amount to $17 million, of which $5 million was received in 2011 and 2012 and $4 million will be received each year for the next three years (in March 2013, March 2014 and March 2015).
Year ended December 31, 2010 As part of the regional shareholding alignment agreement with its local partner in Guatemala, on August 20, 2010, Millicom disposed of 45% of its interest in Newcom Guatemala (“Amnet Guatemala”). From that date Amnet Guatemala has been accounted for as a joint venture and proportionately consolidated into the Millicom Group financial statements. Previously, the results of the Amnet Guatemala were fully consolidated. There was no significant impact on profit and loss from the disposal.
F-55 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
7. Discontinued operations and assets held for sale Discontinued operations There were no discontinued operations in 2012. The results of discontinued operations for the years ended December 31, 2011, and 2010 are presented below:
2011 2010 US$ millions US$ millions Revenues ...... 6 30 Operating expenses(i) ...... (3) (17) Profit before tax ...... 313 Tax charge ...... – (1) Gain from disposal, net ...... 36 – Net profit for the year ...... 39 12
The cash (used) provided by discontinued operations for the years ended December 31, 2011 and 2010 is presented below:
2011 2010 US$ millions US$ millions Net cash used by operating activities ...... – 11 Net cash used by investing activities ...... – (16) Net cash provided by financing activities ...... – 6 Transfer of cash to assets held for sale ...... – (1) Proceeds from the sale of discontinued operations ...... 53 – Cash provided (used) by discontinued operations ...... 53 –
There were no non-cash investing and financing activities of discontinued operations for the years ended December 31, 2011 and 2010.
Assets held for sale Between 2009 and 2011, Millicom signed various sale and leaseback agreements with tower companies in Africa and South America whereby Millicom agreed the sale of tower assets and to lease back a dedicated portion of each tower to locate its network equipment (see note 18). The portions of these assets that will not be leased back by Millicom are classified as assets held for sale as completion of their sale is highly probable. At December 31, 2012, towers sold but yet to be transferred to tower companies (assets held for sale) of $21 million related to operations in DRC, Colombia, Ghana and Tanzania (December 31, 2011: $66 million related to operations in DRC, Colombia, Ghana and Tanzania). Asset retirement obligations related to the towers of $5 million (December 31, 2011: $9 million) are classified as liabilities directly associated with assets held for sale. The major classes of assets and liabilities classified as held for sale as at December 31, 2012, and 2011 are as follows:
2012 2011 US$ millions US$ millions Assets held for sale Property, plant and equipment, net ...... 21 66 Liabilities directly associated with assets held for sale Other non-current liabilities ...... (5) (9) Net assets directly associated with assets held for sale ...... 16 57
F-56 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
8. Subsidiaries
The Group has the following significant subsidiaries, which are consolidated:
Holding Holding Name of the company Country December 31, 2012 December 31, 2011 % of ownership % of ownership interest interest Central America Telemovil El Salvador S.A...... ElSalvador 100.0 100.0 Cable El Salvador S.A. de C.V...... ElSalvador 100.0 100.0 Navega.com SA, Succursal El Salvador . . . El Salvador 100.0 55.0 Telefonica Celular S.A...... Honduras 66.7 66.7 Navega S.A. de CV (formerly Metrored S.A) (see note 5)...... Honduras 66.7 66.7 Cable Costa Rica S.A...... Costa Rica 100.0 100.0 South America Telefonica Celular de Bolivia S.A...... Bolivia 100.0 100.0 Telefonica Celular del Paraguay S.A. .... Paraguay 100.0 100.0 Colombia Movil S.A. E.S.P...... Colombia 50.0 + 1 share 50.0 + 1 share LATAM Internet Holding GmbH ...... Germany 20.0 – Africa Millicom Ghana Company Limited ...... Ghana 100.0 100.0 Sentel GSM S.A...... Senegal 100.0 100.0 MIC Tanzania Limited ...... Tanzania 100.0 100.0 Oasis S.P.R.L...... Democratic Republic of Congo 100.0 100.0 Millicom Tchad S.A...... Chad 100.0 100.0 Millicom Mauritius Limited ...... Mauritius 100.0 100.0 Millicom Rwanda Limited ...... Rwanda 87.5 87.5 Africa Internet Holding GmbH ...... Germany 20.0 – Unallocated Millicom International Operations S.A. . . Luxembourg 100.0 100.0 Millicom International Operations B.V...... Netherlands 100.0 100.0 MIC Latin America B.V...... Netherlands 100.0 100.0 Millicom Africa B.V...... Netherlands 100.0 100.0 Millicom Holding B.V...... Netherlands 100.0 100.0 Millicom Ireland Limited ...... Ireland 100.0 100.0
F-57 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
9. Interests in joint ventures
The following amounts have been proportionally consolidated into the Group’s accounts from continuing operations representing the Group’s share of revenue, operating expenses and operating profit in the Group’s joint ventures:
Holding Holding Name of the company Country December 31, 2012 December 31, 2011 % of ownership % of ownership interest interest Central America Comunicaciones Celulares S.A...... Guatemala 55.0 55.0 Navega.com S.A. (see note 5) ...... Guatemala 55.0 55.0 Africa Emtel Limited ...... Mauritius 50.0 50.0
The share of assets and liabilities of the jointly controlled entities at December 31, 2012 and 2011, which are included in the consolidated financial statements, are as follows:
2012 2011 US$ millions US$ millions Current assets ...... 197 235 Non-current assets ...... 445 419 Total assets ...... 642 654 Current liabilities ...... 185 206 Non-current liabilities ...... 241 175 Total liabilities ...... 426 381
The share of revenue and operating expenses of the jointly controlled entities for the years ended December 31, 2012, 2011, and 2010, which are included in the consolidated income statements from continuing operations, are as follows:
2012 2011 2010 US$ millions US$ millions US$ millions Revenue ...... 663 650 799 Total operating expenses ...... (389) (365) (413) Operating profit ...... 274 285 386
F-58 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
10. Segment information
The Group has businesses in three regions: Central America, South America and Africa. Revenue, operating profit (loss) and other segment information for the years ended December 31, 2012, 2011 and 2010 is as follows:
Total Inter- December 31, Central South Unallocated continuing company 2012 America America Africa items operations elimination Total US$ millions US$ millions US$ millions US$ millions US$ millions US$ millions US$ millions Revenue ...... 1,901 1,939 974 – 4,814 – 4,814 Operating profit (loss) ...... 639 491 122 (148) 1,104 – 1,104 Add back: Depreciation and amortization .... 320 257 233 1 811 – 811 Loss (gain) of disposal and impairment ..... (1) – 4 3 6 – 6 Corporate costs .... – – – 144 144 – 144 Adjusted operating profit (loss)(i) .... 958 748 359 – 2,065 – 2,065 Additions to: Property, plant and equipment ...... (290) (303) (272) (5) (870) – (870) Intangible assets . . . (6) (70) (158) (16) (250) – (250) Capital expenditure ..... (296) (373) (430) (21) (1,120) – (1,120) Taxes paid ...... (131) (76) (32) (45) (284) Changes in working capital ...... 42 3 46 (7) 84 Other movements ..... (45) 91 142 48 236 Operating free cash flow(ii) ...... 528 393 85 (25) 981 Total Assets(iii) ..... 3,570 2,604 2,050 1,068 9,292 (1,081) 8,211 Total Liabilities .... 1,696 1,913 2,073 1,253 6,935 (1,060) 5,875
(i) Adjusted operating profit is used by the management to monitor the segmental performance and for capital management (see note 34).
(ii) Operating free cash flow by segment includes vendor financing of capital equipment as a cash transaction.
(iii) Segment assets include goodwill and other intangibles.
F-59 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
10. Segment information (continued)
TotalDiscontinued Inter- Central South Unallocated continuing operations company December 31, 2011 America America Africa items operations (note 7) elimination Total US$ millionsUS$ millionsUS$ millionsUS$ millionsUS$ millions US$ millionsUS$ millionsUS$ millions Revenue ...... 1,842 1,706 982 – 4,530 6 – 4,536 Operating profit (loss) ...... 650 505 216 (114) 1,257 3 – 1,260 Add back: Depreciation and amortization .... 303 231 204 1 739 2 – 741 Loss (gain) of disposal and impairment ..... 5 (10) (17) – (22) – – (22) Corporate costs .... – – – 113 113 – – 113 Adjusted operating profit (loss)(i) .... 958 726 403 – 2,087 5 – 2,092 Additions to: Property, plant and equipment ...... (220) (295) (288) – (803) – – (803) Intangible assets . . . (1) (29) (9) (6) (45) – – (45) Capital expenditure ..... (221) (324) (297) (6) (848) – – (848) Taxes paid ...... (146) (77) (14) (31) (268) Changes in working capital ...... (67) 15 92 (25) 15 Other movements ..... 17 85 79 37 218 Operating free cash flow(ii) ...... 541 425 263 (25) 1,204 Total Assets(iii) ..... 4,074 2,008 1,630 830 8,542 – (1,260) 7,282 Total Liabilities .... 1,673 1,388 1,705 927 5,693 – (857) 4,836
(i) Adjusted operating profit is used by the management to monitor the segmental performance and for capital management (see note 34).
(ii) Operating free cash flow by segment includes vendor financing of capital equipment as a cash transaction.
(iii) Segment assets include goodwill and other intangibles.
F-60 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
10. Segment information (continued)
TotalDiscontinued Inter- December 31, 2010 Central South Unallocated continuing operations company (As restated)(iv) America(v) America Africa items operations (note 7) elimination Total US$ millionsUS$ millionsUS$ millionsUS$ millionsUS$ millions US$ millionsUS$ millionsUS$ millions Revenue ...... 1,641 1,374 905 – 3,920 30 – 3,950 Operating profit (loss) ...... 639 362 148 (107) 1,042 13 – 1,055 Add back: Depreciation and amortization .... 250 223 203 1 677 – – 677 Loss (gain) of disposal and impairment ..... 4 5 7 – 16 – – 16 Corporate costs .... – – – 106 106 – – 106 Adjusted operating profit (loss)(i) .... 893 590 358 – 1,841 13 – 1,854 Additions to: Property, plant and equipment ...... (187) (216) (274) – (677) (16) – (693) Intangible assets . . . (21) (28) (4) (1) (54) – – (54) Capital expenditure ..... (208) (244) (278) (1) (731) (16) – (747) Taxes paid ...... (139) (63) (9) (28) (239) Changes in working capital ...... 34 (31) (28) 26 1 Other movements ..... 7 60 102 (25) 144 Operating free cash flow(ii) ...... 587 312 145 (28) 1,016 Total Assets(iii) ..... 3,618 1,504 1,600 650 7,372 72 (449) 6,995 Total Liabilities .... 2,320 1,258 1,630 803 6,011 47 (1,453) 4,605
(i) Adjusted operating profit is used by the management to monitor the segmental performance and for capital management (see note 34).
(ii) Operating free cash flow by segment includes vendor financing of capital equipment as a cash transaction.
(iii) Segment assets include goodwill and other intangibles.
(iv) Restatement – see note 4.
(v) Includes cable which in 2010 was reported as a separate segment which has now been integrated with mobile operations.
Revenue from continuing operations for the years ended December 31, 2012, 2011 and 2010 by country are as follows:
2012 2011 2010 US$ millions US$ millions US$ millions Colombia ...... 849 756 612 Honduras ...... 705 673 532 Guatemala ...... 654 647 571 Paraguay ...... 649 593 463 Bolivia ...... 429 357 299 El Salvador ...... 408 414 453 Other ...... 1,120 1,090 990 Total ...... 4,814 4,530 3,920
F-61 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
10. Segment information (continued)
Non-current assets (intangible assets and property, plant and equipment) as at December 31, 2012 and 2011 by country are as follows:
2012 2011 US$ millions US$ millions Colombia ...... 713 596 Honduras ...... 1,554 1,669 Guatemala ...... 399 392 Paraguay ...... 474 256 Bolivia ...... 274 260 El Salvador ...... 424 438 Other ...... 1,689 1,424 Total ...... 5,527 5,035
11. Analysis of operating profit
The Group’s operating income and expenses from continuing operations by nature of expense is as follows:
2012 2011 2010 US$ millions US$ millions US$ millions Revenue ...... 4,814 4,530 3,920 Cost of services rendered and goods sold ...... (1,134) (1,007) (810) Depreciation and amortization (notes 10, 16 and 17) .... (811) (739) (677) Dealer commissions ...... (417) (398) (355) Employee related costs (note 12) ...... (345) (299) (294) Sites and network maintenance ...... (220) (208) (176) Advertising and promotion ...... (130) (127) (120) Phone subsidies ...... (179) (139) (124) External services ...... (190) (155) (110) Operating lease expense (note 32) ...... (108) (96) (83) Billing and payments ...... (36) (33) (28) Gain (loss) on disposal and impairment of assets, net (note 10) ...... (6) 22 (16) Other income ...... 19 44 3 Other expenses ...... (153) (138) (88) Operating profit ...... 1,104 1,257 1,042
The following table summarizes the aggregate amounts paid to Millicom’s auditors for the years ended December 31, 2012, 2011 and 2010.
2012 2011 2010 US$ millions US$ millions US$ millions Audit fees ...... 4.8 3.6 4.2 Audit related fees ...... – 0.2 0.6 Tax fees ...... 0.2 0.1 – Other fees ...... 0.8 – 0.1 Total ...... 5.8 3.9 4.9
F-62 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
12. Employee related costs
2012 2011 2010 US$ millions US$ millions US$ millions Wages and salaries ...... (238) (209) (196) Social security ...... (29) (24) (21) Share based compensation (see note 24) ...... (22) (17) (31) Other employee related costs(i) ...... (56) (49) (46) Total ...... (345) (299) (294)
(i) Includes pension costs and other benefits.
The average number of permanent employees during the years ended December 31, 2012, 2011 and 2010 was as follows:
2012 2011 2010 Continuing operations ...... 8,273 6,526 6,109 Discontinued operations ...... – 128 237 Total average number of permanent employees ...... 8,273 6,654 6,346
13. Other non-operating (expenses) income, net
2010 2012 2011 (As restated)(i) US$ millions US$ millions US$ millions Change in carrying value of put option(i) ...... 15 24 (32) Change in fair value of derivatives ...... (6) (2) (15) Revaluation of previously held interest (see note 5) .... 9 – – Other exchange (losses), net ...... 2 (26) (15) Other non-operating expenses ...... 2 – – Other non-operating (expenses) income, net ...... 22 (4) (62)
(i) Restatement – see note 4.
14. Taxes
Taxes mainly comprise income taxes of subsidiaries and joint ventures. As a Luxembourg commercial company, the Company is subject to all taxes applicable to a Luxembourg Société Anonyme. Due to losses incurred and brought forward, no taxes based on income in Luxembourg have been computed for 2012, 2011 and 2010.
The effective tax rate on continuing operations is 44% (2011: (2%), 2010: 12%). Currently Millicom operations are in jurisdictions with income tax rates of 6% to 40% (2011 and 2010: 10% to 40%).
F-63 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
14. Taxes (continued)
The reconciliation between the weighted average statutory tax rate and the effective average tax rate is as follows:
2012 2011 2010 %%% Weighted average statutory tax rate(i) ...... 16 24 23 Recognition of previously unrecorded tax losses ...... – (29) – Unrecognized current year tax losses(ii) ...... 2 1 7 Non-taxable income and non-deductible expenses, net ...... 6 1 – Taxes based on revenue ...... 2 (6) (7) Income taxes at other than statutory tax rates ...... 3 4 2 Withholding taxes on transfers between operating and non-operating entities ...... 8 3 3 Write-back of tax provision ...... 3 – – Non-taxable gain arising from revaluation of previously held interests ...... – – (16) Effect on change in tax rate ...... 4 – – Effective tax rate ...... 44 (2) 12
(i) The weighted average statutory tax rate has been determined by dividing the aggregate statutory tax charge of each subsidiary and joint venture, which was obtained by applying the statutory tax rate to the profit or loss before tax, by the aggregate profit before tax excluding the impact of the revaluation of Honduras in 2010 (see note 5).
(ii) Unrecognized current year tax losses mainly consist of tax losses at the Company level and tax losses recorded in the Group’s operations in the DRC, Rwanda and Tanzania (2011: DRC and Rwanda; 2010: DRC, Rwanda and Colombia).
The credit (charge) for income taxes from continuing operations is shown in the following table and recognizes that revenue and expense items may affect the financial statements and tax returns in different periods (temporary differences):
2012 2011 2010 US$ millions US$ millions US$ millions Current income tax credit (charge) ...... (326) (278) (223) Net deferred income tax benefit (expense) ...... (67) 297 (4) Credit / (charge) for taxes ...... (393) 19 (227)
F-64 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
14. Taxes (continued)
2012 2011 US$ millions US$ millions (A) Profit After Tax ...... 504 1,090 (1) Current Income Tax ...... (326) (278) (2) Deferred Income Tax ...... (67) 297 (B) Total income tax (1) + (2) ...... (393) 19 (C) Profit Before Tax = (A)+(B) ...... 897 1,071 (3) Effective tax rate (B)/(C) ...... 44% (2%) (4) Weighted average tax rate ...... 16% 24% (D) Theoretical Income Tax (C)*(4) ...... (142) (262) Difference to explain =(B)-(D) ...... (251) 281 Non taxable and deductible items ...... (52) 6 Items taxed with another tax rate ...... (24) (49) Withholding tax ...... (72) (39) Provision PY underestimate ...... (24) – Tax based on revenues and other taxes ...... (24) 50 Impact of changes in tax rates on DTA ...... (39) – Unrecognized tax losses ...... (16) (6) (Use)/recognition of DTA ...... – 319 Total ...... (251) 281
The tax effects of significant items of the Group’s deferred income tax asset and liability as of December 31, 2012 and 2011 are as follows: Consolidated balance Consolidated income sheets statements 2012 2011 2012 2011 2010 US$ millions US$ millions US$ millions US$ millions US$ millions Loss carry-forwards ...... 134 182 (48) 182 (6) Provision for doubtful debtors ..... 14 9 5 5 1 Temporary differences between book and tax basis of intangible assets and property, plant and equipment ...... (56) 5 (61) 50 (2) Deferred tax liabilities recognized as part of the acquisition of Celtel (see note 5) ...... (81) (94) 13 11 8 Deferred tax liabilities recognized as part of the acquisition of Amnet (see note 5) ...... (13) (19) 6 6 6 Deferred tax liabilities recognized as part of the acquisition of Navega (see note 5) ...... (2) (2) – 1 1 Deferred tax liabilities recognized as part of the acquisition of LIH Group (see note 5) ...... (5) – (5) – – Other temporary and translation differences ...... 88 37 51 41 (12) Deferred tax benefit (expense) .... (39) 296 (4) Deferred tax assets (liabilities), net ...... 79 118 Reflected in the statements of financial position as: Deferred tax assets ...... 259 317 Deferred tax liabilities ...... (180) (199)
F-65 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
14. Taxes (continued)
Deferred income tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
As the Group was in a position to control the timing of the reversal of the temporary differences and it was unlikely that such differences would reverse in a foreseeable future, no deferred tax liability was recognized in respect of $3,826 million (2011: $3,352 million) of unremitted earnings of subsidiaries and joint ventures. Furthermore, it was not practicable to estimate the amount of unrecognized deferred tax liabilities in respect of these unremitted earnings.
At December 31, 2012 the deferred tax assets of $207 million in our Colombian operation represent the expected and remaining unutilised portion of a tax credit of $308 million that was recognized in our Colombian operation in 2011. The credit related to expected utilization of tax loss carry-forwards and other temporary differences related mainly to property, plant and equipment and intangible assets. The expected utilisation of the tax loss carry-forwards was based on an assessment by management that sufficient taxable profit will be available to allow the benefit of the deferred tax asset to be utilised. A change in the corporate income tax rate in Colombia from 33% to 25% effective January 1, 2013 resulted in a write – down in the value of the deferred tax asset by $25 million in 2012.
Total unrecognized tax loss carry-forwards relating to continuing operations amounted to $267 million as at December 31, 2012 (2011: $169 million, 2010: $775 million) of which $236 million expire within one to five years (2011: $169 million, 2010: $775 million and $31 million which have no expiry (2011: nil, 2010: nil). In addition the Company has unrecognized net tax losses of $1,793 million (2011: $1,742 million) that do not expire for which deferred tax assets have not been recognised as taxable profits may not be available to utilize these losses.
15. Earnings per share
Basic earnings per share are calculated by dividing net profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share are calculated by dividing the net profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of dilutive potential shares.
F-66 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
15. Earnings per share (continued)
Net profit and share data used in the basic and diluted earnings per share computations are as follows:
2010 2012 2011 (As restated)(i) US$ millions US$ millions US$ millions Basic Net profit attributable to equity holders from continuing operations ...... 508 886 1,611 Net profit attributable to equity holders from discontinued operations ...... – 39 9 Net profit attributable to equity holders to determine the basic earnings per share ...... 508 925 1,620 Diluted Net profit attributable to equity holders from continuing operations ...... 508 886 1,611 Net profit attributable to equity holders from continuing operations used to determine the diluted earnings per share ...... 508 886 1,611 Net profit attributable to equity holders from discontinued operations ...... – 39 9 Net profit attributable to equity holders to determine the diluted earnings per share ...... 508 925 1,620
2012 2011 2010 ’000 ’000 ’000 Weighted average number of ordinary shares (excluding treasury shares) for basic earnings per share ...... 101,332 104,196 108,219 Effect of dilution: Potential incremental shares as a result of share options ...... 93 105 177 Weighted average number of ordinary shares (excluding treasury shares) adjusted for the effect of dilution ...... 101,425 104,301 108,396
(i) Restatement – see note 4
To calculate earnings per share amounts for discontinued operations, the weighted average number of shares for both basic and diluted amounts is as per the table above.
F-67 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
16. Intangible assets
Movements in intangible assets in 2012 were as follows:
Goodwill Licenses Customers’ lists Other(ii) Total US$ millions US$ millions US$ millions US$ millions US$ millions Opening balance, net ...... 1,415 213 370 172 2,170 Change in the composition of the Group (see note 5) ...... 130 – 44 21 195 Additions (see note 10) ...... – 155 – 95 250 Amortization charge(i) ...... – (41) (69) (44) (154) Transfers ...... – 3 – (3) – Other movements ...... – – – 3 3 Exchange rate movements ..... (37) (3) (10) 5 (45) Closing balance, net ...... 1,508 327 335 249 2,419 As at December 31, 2012 Cost or valuation ...... 1,508 571 532 518 3,129 Accumulated amortization ..... – (244) (197) (269) (710) Net ...... 1,508 327 335 249 2,419
(i) The amortization charge for Licenses and Other is recorded under the caption “General and administrative expenses”.
(ii) The caption “Other” includes mainly those intangible assets identified in business combinations (i.e. trademarks). See note 5.
Movements in intangible assets in 2011 were as follows:
Goodwill Licenses Customers’ lists Other(ii) Total US$ millions US$ millions US$ millions US$ millions US$ millions Opening balance, net ...... 1,428 238 433 184 2,283 Change in the composition of the Group (see note 5) ...... – – 5 – 5 Additions (see note 10) ...... – 13 – 32 45 Amortization charge(i) ...... – (35) (65) (41) (141) Transfers ...... – 4 – (4) – Other movements ...... – (1) – – (1) Exchange rate movements ..... (13) (6) (3) 1 (21) Closing balance, net ...... 1,415 213 370 172 2,170 As at December 31, 2011 Cost or valuation ...... 1,415 409 503 362 2,689 Accumulated amortization ..... – (196) (133) (190) (519) Net ...... 1,415 213 370 172 2,170
(i) The amortization charge for Licenses and Other is recorded under the caption “General and administrative expenses”.
(ii) The caption “Other” includes mainly those intangible assets identified in business combinations (i.e. trademarks).
F-68 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
16. Intangible assets (continued)
The following table provides details of cash used for intangible asset additions:
2012 2011 2010 US$ millions US$ millions US$ millions Additions ...... 250 45 54 Change in suppliers advances ...... 1 – – Change in capex accruals and payables ...... (92) 12 (28) Cash used from continuing operations for intangible asset additions ...... 159 57 26
Impairment test of goodwill
As at December 31, 2012, management tested goodwill for impairment. The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill is allocated.
The recoverable amount of a cash-generating unit (“CGU”) or group of CGUs is determined based on discounted cash flows. The cash flow projections used (adjusted operating profit margins, income tax, working capital, capital expenditure and license renewal cost) are extracted from financial budgets approved by management and the Board covering a period of three years apart from our new business in Rwanda where six years has been used (2011: six years). The planning horizon reflects industry practice in the countries where the Group operates. Cash flows beyond this period are extrapolated using a perpetual growth rate of 2% (2011: 2%). No impairment losses were recorded on goodwill for the years ended December 31, 2012, 2011 and 2010.
Sensitivity analysis was performed on key assumptions within the impairment tests. The sensitivity analysis determined that sufficient margin exists from realistic changes to the assumptions that would not impact the overall results of the testing. For DRC and Senegal, the estimated recoverable amount exceeded the carrying value by less than 10 per cent. As a consequence, a negative change including change in price, volume, cost discount rate and / or future capital expenditure could cause the estimated recoverable amount to decline below carrying value and trigger an impairment which would be recorded in the income statement.
The recoverable amounts have been determined for the cash generating units based on the following discount rates for the years ended December 31, 2012 and 2011:
Discount rate after tax 2012 2011 Central America ...... 7.5% – 11.4% 8.2% – 12.7% South America ...... 7.4% – 10.8% 8.0% – 11.2% Africa ...... 8.4% – 15.2% 8.9% – 14.6%
F-69 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
16. Intangible assets (continued)
The allocation of goodwill to cash generating units, net of exchange rate movements, is shown below:
2012 2011 Millicom’s operations in: US$ millions US$ millions Honduras (see note 5) ...... 883 926 El Salvador ...... 194 185 Costa Rica ...... 137 138 Paraguay ...... 76 4 Colombia ...... 57 52 Guatemala ...... 40 36 Senegal ...... 35 34 DRC ...... 11 11 Other ...... 75 29 Total Goodwill ...... 1,508 1,415
17. Property, plant and equipment
Movements in tangible assets in 2012 were as follows:
Network Land and Construction equipment Buildings in Progress Other(i) Total US$ millions US$ millions US$ millions US$ millions US$ millions Opening balance, net ...... 2,428 69 240 128 2,865 Change in the composition of the Group (note 5)(iii) ...... 20 2 1 8 31 Additions (including sale and leaseback) ...... 52 8 793 49 902 Impairments and net disposals .... (97) (1) (2) (4) (104) Depreciation charge(ii) ...... (584) (8) – (65) (657) Asset retirement obligations ..... 6 – – – 6 Transfers ...... 659 7 (718) 52 – Transfer from assets held for sale (see note 7) ...... 44 – – – 44 Exchange rate movements ...... 12 – 8 1 21 Closing Balance at December 31, 2012 ...... 2,540 77 322 169 3,108 Cost or valuation ...... 5,213 99 322 422 6,056 Accumulated depreciation ...... (2,673) (22) – (253) (2,948) Net ...... 2,540 77 322 169 3,108
(i) “Other” mainly includes office equipment and motor vehicles.
(ii) The depreciation charge for network equipment is recorded under the caption “Cost of sales” and the depreciation charge for Land and Buildings and Other is recorded under “General and administrative expenses”.
(iii) The change in the composition of the Group corresponded to the acquisition of Cablevisión Paraguay and other minor investments.
F-70 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
17. Property, plant and equipment (continued)
The net carrying amount of network equipment under finance leases at December 31, 2012, mainly comprising towers from sale and lease back transactions with tower companies, was $195 million.
Movements in tangible assets in 2011 were as follows:
Network Land and Construction equipment(iv) Buildings in Progress Other(i) Total US$ millions US$ millions US$ millions US$ millions US$ millions Opening balance, net ...... 2,396 54 207 111 2,768 Change in the composition of the Group (note 5)(iii) ...... 2 – 3 – 5 Additions (including sale and leaseback) ...... 127 9 721 22 879 Impairments and net disposals . . . (99) (1) (7) (2) (109) Depreciation charge(ii) ...... (550) (3) – (45) (598) Asset retirement obligations ..... 5 – – – 5 Transfers ...... 630 12 (685) 43 – Transfer to assets held for sale (see note 7) ...... (56) – – – (56) Exchange rate movements ...... (27) (2) 1 (1) (29) Closing balance at December 31, 2011 ...... 2,428 69 240 128 2,865 Cost or valuation ...... 4,557 85 240 345 5,227 Accumulated depreciation ...... (2,129) (16) – (217) (2,362) Net ...... 2,428 69 240 128 2,865
(i) “Other” mainly includes office equipment and motor vehicles.
(ii) The depreciation charge for network equipment is recorded under the caption “Cost of sales” and the depreciation charge for Land and Buildings and Other is recorded under “General and administrative expenses”.
(iii) The change in the composition of the Group corresponded to other minor investments.
The net carrying amount of network equipment under finance leases at December 31, 2011, mainly comprising towers mainly comprising towers from sale and lease back transactions with tower companies, was $133 million.
Borrowing costs capitalized for the years ended December 31, 2011 and 2010 were not significant.
F-71 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
17. Property, plant and equipment (continued)
The following table provides details of cash used for the purchase of property, plant and equipment:
2012 2011 2010 US$ millions US$ millions US$ millions Additions ...... 870 803 693 Additions from discontinued operations ...... – – (16) Subtotal ...... 870 803 677 Change in suppliers advances ...... 3 (2) (12) Change in capex accruals and payables ...... (21) (63) 23 Vendor financing and finance leases (see note 31) ...... (10) (38) (91) Cash used from continuing operations for purchase of property, plant and equipment ...... 842 700 597
18. Investments in associates 2012 2011 US$ millions US$ millions Helios Towers Tanzania ...... 26 29 Helios Towers DRC ...... 29 16 Helios Towers Ghana ...... 17 17 ATC Colombia BV ...... 20 – Africa e-Commerce Holding (see note 5) ...... 100 – Others ...... 1 1 Total ...... 193 63
Helios Towers Tanzania, DRC and Ghana The carrying value of the 40% investment stakes in Helios Tower companies in Tanzania, DRC and Ghana comprises initial cost, measured at Millicom’s interest in the fair value of the tower sites transferred to the tower companies (see note 7), after elimination of intercompany gains on sale. The carrying values have subsequently been changed to reflect Millicom’s share in the losses of the tower companies which amounted to $18 million in 2012 (2011: $10 million). Revenue in 2012 of the tower companies amounted to $82 million. At December 31, 2012 total assets amounted to $295 million and total liabilities $124 million.
ATC Colombia BV In December 2011, Millicom exercised an option to acquire a 40% stake in the holding company (ATC Colombia BV), of ATC Infraco (the company to which Millicom sold its towers). By December, 2012 Millicom had invested cash of $35 million in ATC Colombia BV. The amount of the investment is derived from the value of the tower assets transferred to ATC Infraco (see note 7). Through a Millicom subsidiary, Millicom also had an unconditional option to acquire a minority equity interest of up to 40% in ATC Sitios de Colombia S.A.S. (ATC Sitios), another tower subsidiary of American Tower in Colombia. The option expired on December 21, 2012. Millicom has provided Colombia Móvil’s other shareholders with separate unconditional options to acquire up to half of Millicom’s interest in ATC Colombia BV. The options expire on July 18, 2013. At December 31, 2012 the fair values of the options were not significant.
F-72 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
19. Non-current pledged deposits
As at December 31, 2012, non-current pledged deposits amounted to $47 million (2011: $50 million) and mainly related to security over financing of Millicom’s operation in Chad (see note 27).
20. Trade receivables, net
2012 2011 US$ millions US$ millions Gross trade receivables ...... 430 349 Less: provisions for impairment of receivables ...... (108) (72) Trade receivables, net ...... 322 277
Nominal value less impairment is assumed to approximate the fair value of trade receivables (see note 34).
As at December 31, 2012 and 2011, the ageing analysis of trade receivables is as follows:
Neither past due nor Past due (net of impairments) Total impaired <30 days 30–90 days >90 days Total US$ millions US$ millions US$ millions US$ millions US$ millions 2012 Telecom operators ...... 72 21 23 – 116 Own customers ...... 94 19 21 – 134 Others ...... 40 23 9 – 72 Total ...... 206 63 53 – 322 2011 Telecom operators ...... 73 31 21 1 126 Own customers ...... 71 15 13 3 101 Others ...... 34 9 6 – 50 Total ...... 178 55 40 4 277
21. Restricted cash
2012 2011 US$ millions US$ millions Mobile financial services ...... 43 20 Restricted cash ...... 43 20
Mobile financial services cash where restricted based on local regulations.
F-73 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
22. Cash and cash equivalents and restricted cash Cash and cash equivalents are comprised as follows:
2012 2011 US$ millions US$ millions Cash and cash equivalents in U.S. dollars ...... 628 510 Cash and cash equivalents in other currencies ...... 546 351 Total cash and cash equivalents ...... 1,174 861
Cash balances are diversified among leading international banks and in domestic banks within the countries where we operate.
23. Share capital Share capital and share premium The authorized registered share capital of the Company is 133,333,200 shares (2011: 133,333,200). As at December 31, 2012, the total subscribed and fully paid-in share capital and premium was $642 million (2011: $663 million) consisting of 101,739,217 (2011: 104,939,217) registered common shares with par value of $1.50 (2011: $1.50) each. The following table summarizes movements in issued share capital for the years ended December 31, 2012 and 2011:
2012 2011 Number of Number of shares shares Issued share capital as of January 1 ...... 104,939,217 109,053,120 Exercise of share options(i) ...... – 39,622 Shares to employees and directors(i) ...... – 46,475 Total issuance of shares during the year ...... – 86,097 Cancellation of shares during the year ...... (3,200,000) (4,200,000) Issued share capital as of December 31 ...... 101,739,217 104,939,217
(i) In addition, 236,150 LTIP shares were issued from treasury shares during 2012 (2011: 6,179 of share options and 186,681 of LTIP shares) During 2012 the Company repurchased 2,106,070 shares for $190 million under a share buy-back program (2011: 4,646,241 shares for $498 million). The Company reduced its issued share capital by $5 million in 2012 (2011: $6 million), by way of cancellation of 3.2 million treasury shares (2011: 4.2 million shares) having a par value of $1.50 each.
24. Share based compensation Share-based compensation comprises share options and long term incentive plans.
Share options Until May 30, 2006, share options were granted to directors, senior executives, officers and selected employees. The exercise price of the granted options was equal to or higher than the market price of the shares on the date of grant. The options were conditional on the employee or director completing one to five years of service (the vesting period) and were exercisable starting from one year to five years from the grant date.
F-74 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
24. Share based compensation (continued)
Options granted prior to 2005 have an indefinite life and in 2005 a twenty year life. Shares issued when share options are exercised have the same rights as common shares.
The following table summarizes information about share options outstanding and exercisable at December 31, 2012. The market price of the Company’s shares as at December 31, 2012 was SEK 562.50 (2011: SEK 698.50), approximately $86.48 (2011: $100.20).
Options outstanding Options exercisable Weighted Number Weighted Number average outstanding at average exercisable at Range of exercise price $ exercise price December 31, 2012 exercise price December 31, 2012 20.56 ...... 20.56 35,000 20.56 35,000 25.05 – 29.75 ...... 26.93 33,332 26.93 33,332 31.88 – 35.91 ...... 35.16 66,664 35.16 66,664 20.56 – 35.91 ...... 29.34 134,996 29.34 134,996
Share options outstanding at the end of the year have the following expiry dates, exercise prices and terms:
Number of options outstanding as at Date issued December 31, 2012 Exercise price $ Terms May 1996, May 1997, May Exercisable immediately. Options 1998, and May 2004 ...... 99,996 25.05 – 35.91 have an indefinite life. May 2005 ...... 35,000 20.56 Exercisable immediately. Options have a twenty year life.
The following table summarizes the Company’s share options as of December 31, 2012, 2011 and 2010, and changes during the years then ended:
2012 2011 2010 Average exercise Average exercise Average exercise price in $ per Number of price in $ per Number of price in $ per Number of share options share options share options Outstanding at beginning of year ...... 29.34 134,996 29.06 183,797 26.21 329,788 Expired/forfeited . . – – 20.56 (3,000) 25.05 (686) Exercised ...... – – 28.80 (45,801) 22.58 (145,305) Outstanding at end of year ...... 29.34 134,996 29.34 134,996 29.06 183,797 Exercisable at end of year ...... 29.34 134,996 29.34 134,996 29.06 183,797
Long-term incentive plans
2009
Long term incentive awards for 2009 (“2009 LTIPs”) were approved by the Board on June 16, 2009. The 2009 LTIPs consist of a deferred share awards plan and a performance shares plan.
Shares granted under the deferred plan are based on past performance and vested 16.5% on each of January 1, 2010 and January 1, 2011 and 67% on January 1, 2012.
F-75 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
24. Share based compensation (continued)
Shares granted under the performance plan vested at the end of the three year period ended January 1, 2012 and were 50% subject to a market condition that was based on the Total Shareholder Return (TSR) of Millicom compared to the TSR of a peer group of companies during the three-year period of the plan, and 50% subject to a performance condition, based on EPS. A fair value per share subject to the market condition was determined and applied to the total potential number of performance shares, and expensed over the vesting period.
In 2012, 101,101 treasury shares were issued under the 2009 performance shares plan and 89,519 treasury shares issued under the deferred share plan.
The total charge for the 2009 LTIPs of $12 million was recorded over the service period (2009 to 2011).
2010
Long term incentive awards for 2010 (“2010 LTIPs”) were approved by the Board on November 27, 2009. The 2010 LTIPs consist of a deferred share awards plan and a performance shares plan, the mechanisms of which are the same as the 2009 LTIPs.
In 2012, no shares were issued under the 2010 performance shares plan and 23,248 treasury shares issued under the deferred share plan.
The total charge for the 2010 LTIPs of $16 million was recorded over the service period (2010 to 2012).
2011
Long term incentive awards for 2011 (“2011 LTIPs”) were approved by the Board on February 1, 2011. The 2011 LTIPs consist of a deferred share awards plan and a performance shares plan.
Shares granted under the deferred share awards plan are based on past performance and vest 16.5% on each of January 1, 2012 and January 1, 2013 and 67% on January 1, 2014.
Shares granted under the performance plan vest at the end of the three year period ending January 1, 2014, subject to performance conditions, 50% based on Return on Capital Investment (ROIC) and 50% based on EPS. Prior to September 2011, the vesting conditions were 50% based on EPS and 50% on a market condition that was based on the ranking of the TSR of Millicom compared to the FTSE Global Telecoms Index adjusted to add three peer companies (“Adjusted Global Telecoms Index”). As this index was discontinued during 2011, the Compensation Committee approved the replacement of this condition with the ROIC condition.
In 2012, no shares were issued under the 2011 performance share plan and 22,282 treasury shares were issued under the deferred share plan.
The total charge for the 2011 LTIPs was estimated as of December 31, 2011 at $22 million, and is being recorded over the service period (2011 to 2013).
2012
Long term incentive awards for 2012 (“2012 LTIPs”) were approved by the Board on January 27, 2012. The 2012 LTIP’s consist of a deferred share awards plan and a performance shares plan, the mechanisms of which are the same as the 2011 LTIPs.
F-76 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
24. Share based compensation (continued)
Shares granted under the deferred share awards plan are based on past performance and vest 16.5% on each of January 1, 2013 and January 1, 2014 and 67% on January 1, 2015. Shares under the performance plan vest at the end of the three year period ending January 1, 2015.
In 2012, no shares were issued under either the performance share plan or the deferred share plan.
The total charge for the 2012 LTIPs estimated at $25 million, is being recorded over the service period (2012 to 2014).
The number of share awards expected to vest under the long term incentive plans is as follows:
Deferred Deferred Deferred Performance share awards Performance share awards Performance share awards shares 2012 2012 shares 2011 2011 shares 2010 2010 Plan share awards ...... 104,178 161,787 106,947 146,556 81,862 153,960 Share awards granted(i) ...... 3,763 5,658 6,640 7,727 9,368 15,274 Revision for actual and expected forfeitures ..... (3,756) (7,520) (11,054) (20,572) (18,735) (28,966) Revision for expectations in respect of performance conditions ..... – – – – – – Shares issued ..... – – – (22,282) (706) (48,881) Share awards expected to vest ...... 104,185 159,925 102,533 111,429 71,789 91,387
(i) Additional shares granted including consideration for the impact of the special dividends paid in 2012, 2011 and 2010 (see note 29), and vest at the end of the performance and deferred share plans
Total share based compensation expense
Total share-based compensation for years ended December 31, 2012, 2011 and 2010 was as follows:
2012 2011 2010 US$ millions US$ millions US$ millions 2008 LTIPs ...... – – 21 2009 LTIPs ...... – 3 4 2010 LTIPs ...... 5 5 6 2011 LTIPs ...... 7 9 – 2012 LTIPs ...... 10 – – Total share-based compensation expense ...... 22 17 31
F-77 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
25. Put option reserve
On July 1, 2010, in exchange for an unconditional 5 year call option, the Company granted to its non-controlling interest in our operation in Honduras a 5 year conditional put option over his 33.3% shareholding (see note 28). A put option reserve in the amount of $737 million was recognised representing the present value of the redemption price of the put option at that date.
26. Other reserves
Equity-settled Currency Legal transaction Hedge translation reserve reserve reserve reserve Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 As at January 1, 2010 ...... 16,245 25,754 – (106,929) (64,930) Transfer from retained profits ...... 53 – – – 53 Shares issued via the exercise of share options ...... – (816) – – (816) Share based compensation ...... – 30,286 – – 30,286 Issuance of shares – 2007, 2008, and 2009 LTIPs ...... – (16,488) – – (16,488) Cash flow hedge reserve movement .... – – (1,700) – (1,700) Currency translation movement ...... – – – (1,090) (1,090) As at December 31, 2010 ...... 16,298 38,736 (1,700) (108,019) (54,685) Transfer from retained profits ...... 61 – – – 61 Shares issued via the exercise of share options ...... – (81) – – (81) Share based compensation ...... – 17,264 – – 17,264 Issuance of shares – 2008, 2009, and 2010 and LTIPs ...... – (23,230) – – (23,230) Cash flow hedge reserve movement .... – – (3,015) – (3,015) Currency translation movement ...... – – – (39,806) (39,806) As at December 31, 2011 ...... 16,359 32,689 (4,715) (147,825) (103,492) Share based compensation ...... – 21,929 – – 21,929 Issuance of shares – 2009, 2010, and 2011 LTIPs ...... – (12,421) – – (12,421) Cash flow hedge reserve movement .... – – (1,118) – (1,118) Currency translation movement ...... – – – (37,709) (37,709) As at December 31, 2012 ...... 16,359 42,197 (5,833) (185,534) (132,811)
Legal reserve
If the Company reports an annual net profit on a non-consolidated basis, Luxembourg law requires appropriation of an amount equal to at least 5% of the annual net profit to a legal reserve until such reserve equals 10% of the issued share capital. This reserve is not available for dividend distribution.
No appropriation was required in 2012 as the 10% minimum level was reached in 2011 and maintained in 2012. At the Company’s Annual General Meeting in May 2011, the shareholders voted to transfer $61 thousand from retained profits to the legal reserve.
F-78 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
26. Other reserves (continued)
Equity-settled transaction reserve
The cost of share options and LTIPs is recognized as an increase in the equity-settled transaction reserve over the period in which the performance and/or service conditions are rendered. When the options are exercised their cost is transferred from the equity-settled transaction reserve to share premium. When shares under the different LTIPs vest and are issued the corresponding reserve is transferred to share capital and share premium.
Currency translation reserve
For the purposes of consolidating joint ventures, associates and subsidiaries with functional currencies other than the U.S. dollar, statements of financial position are translated to U.S. dollars using the closing exchange rate. Income statements are translated to U.S. dollars at the average exchange rates during the year. The currency translation reserve includes foreign exchange gains and losses arising from the translation of financial statements.
27. Borrowings
Borrowings due after more than one year:
2012 2011 US$ millions US$ millions Debt and financing: El Salvador 8% Senior Notes(ii) ...... 440 437 SEK Senior Notes(xii) ...... 304 – Paraguay 6.75% Senior Notes(ix) ...... 293 – Bank financing ...... 1,461 1,411 Non-controlling shareholders ...... 243 264 Finance leases ...... 200 138 Vendor financing ...... 40 43 Total non-current other debt and financing ...... 2,981 2,293 Less: portion payable within one year ...... (415) (476) Total other debt and financing due after more than one year ...... 2,566 1,817
Borrowings due within one year:
2012 2011 US$ millions US$ millions Debt and financing: Bank financing ...... 236 121 Vendor financing ...... 10 6 Finance leases ...... 32 18 Total current other debt and financing ...... 278 145 Portion of non-current debt payable within one year ...... 415 476 Total other debt and financing due within one year ...... 693 621
F-79 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued)
Other Debt and Financing
Millicom share of total other debt and financing analyzed by location is as follows:
2012 2011 US$ millions US$ millions Colombia(i) ...... 547 543 El Salvador(ii) ...... 440 437 Honduras(iii) ...... 229 258 Tanzania(iv) ...... 183 197 Guatemala(v) ...... 219 221 Ghana(vi) ...... 76 118 Other Central America(vii) ...... 172 132 Chad(viii) ...... 98 108 Paraguay(ix) ...... 379 98 Bolivia(x) ...... 198 71 DRC(xi) ...... 124 96 Luxembourg (xii) ...... 304 – Other ...... 290 159 Total other debt and financing ...... 3,259 2,438 Of which: Due after more than 1 year ...... 2,566 1,817 Due within 1 year ...... 693 621
Significant individual financing facilities are described below:
(i) Colombia
In March 2008, Colombia Móvil S.A. E.S.P (“Colombia Móvil”), Millicom’s operation in Colombia, entered into a COP391 billion, Club Deal 5 year facility with Colombian banks. This facility bears interest at Deposits to Fixed Terms (“DTF”) plus 4.5% and is 50% guaranteed by the Company. As at December 31, 2012, $34 million (2011: $93 million) was outstanding on this facility.
Colombia Móvil S.A. E.S.P. also had local currency loans from its non-controlling shareholders outstanding as at December 31, 2012 of $243 million (2011: $264 million). These loans bear interest at DTF plus 4.15% and mature between 2014 and 2015.
In addition, as at December 31, 2012 Colombia Móvil S.A. E.S.P. had $169 million (2011: $116 million) of other debt and financing, in US$ and local currency as well as finance lease payables of $68 million relating to lease of tower space from ATC Sitios Infraco S.A.S. (2011: $52 million).
(ii) El Salvador
On September 23, 2010, Telemóvil Finance Co. Ltd., a fully owned subsidiary of Millicom in the Cayman Islands issued $450 million aggregate principal amount of 8% Senior Unsecured Guaranteed Notes (the “8% Senior Notes”) due on October 1, 2017. The 8% Senior Notes were issued for $444 million representing 98.68% of the aggregate principal amount. Distribution and other transaction fees of $9 million reduced the total proceeds from issuance to $435 million. The 8% Senior Notes have an 8% per annum coupon with an 8.25% yield and are payable semi- annually in arrears on April 1 and October 1. The effective interest rate is 8.76%.
F-80 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued)
The 8% Senior Notes are general unsecured obligations of Telemóvil Finance Co. Ltd and rank equal in right of payment with all future unsecured and unsubordinated obligations of Millicom. The 8% Senior Notes are guaranteed by Telemóvil El Salvador, S.A., a Millicom subsidiary. Telemóvil Finance Co. Ltd has options to partially or fully redeem the 8% Senior Notes as follows: (i) Full or partial redemption at any time prior to October 1, 2014 for 100% of the principal to be redeemed, or the present value of the remaining scheduled payments of principal to be redeemed and interest, whichever is higher. (ii) Full or partial redemption at any time on or after October 1, 2014 for the following percentage of principal to be redeemed, plus accrued and unpaid interest and all other amounts dues, if any: October 1, 2014 104% October 1, 2015 102% October 1, 2016 100% These options represent embedded derivatives which, in accordance with IAS 39 have been valued and determined to be closely related to the underlying bond. (iii) Redemption of up to 35% of the original principal of the 8% Senior Notes if, prior to October 1, 2013, Telemóvil El Salvador receives proceeds from issuance of shares, at a repurchase price of 108% of the principal amount to be redeemed plus accrued and unpaid interest and all other amounts due, if any, on the redeemed notes. If either Millicom, Telemóvil Finance Co. Ltd or Telemóvil El Salvador, S.A. experience a Change of Control Triggering Event, defined as a rating decline resulting from a change in control, each holder will have the right to require repurchase of its notes at 101% of their principal amount plus accrued and unpaid interest and all other amounts due, if any.
(iii) Honduras Telefonica Celular S.A., Millicom’s operation in Honduras, has facilities with several local and international banks maturing between 2013 and 2020. These facilities are in dollars and in Lempiras and are unsecured. Interest rates are either fixed or variable, ranging as of December 31, 2011 and 2012 between 3.9% and 10.5%. As at December 31, 2012, the amount of outstanding debt under these facilities was $229 million.
(iv) Tanzania In December 2008, Millicom Tanzania Limited entered into facilities totalling $228 million comprising of a five year local currency syndicated tranche for TZS95 billion at the 180 days treasury Bill rate plus 3%, a seven year $116 million EKN guaranteed financing with 45% of the facility fixed at 4.1% and 55% of the facility at $ LIBOR plus 0.665% and a seven year $40 million tranche with Proparco at $ LIBOR plus 2.5%. All tranches are 100% guaranteed by the Company. As at December 31, 2012, the amount outstanding under these facilities was $103 million (2011: $155 million). In December 2010, the operation signed a sale and lease-back agreement with Helios Towers Tanzania (note 18), a direct subsidiary of Helios Towers Africa, for most of its cell sites transferred to Helios Towers in 2011 and 2012. As at December 31, 2012, $80 million was outstanding on the finance lease as part of the lease back agreement (2011: $40 million).
F-81 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued)
In March 2007, Millicom Tanzania Limited entered into a 5 year Citi-Opic facility, bearing interest at a rate of $ LIBOR plus 2.5%, composed of a $17.4 million $ Tranche and a Tranche in local currency up to the equivalent of $5 million. The outstanding US$ amount under these facilities as at December 31, 2011 amounted to $2 million (2010: $7 million). This loan was fully repaid in March 2012.
(v) Guatemala
In 2011 Comcel and its sister companies Asesoria en Telecomunicaciones S.A. (Asertel), Distribuidora Central de Comunicaciones, S.A. (COCENSA), Distribuidora Internacional de Comunicaciones, S.A. (INTERNACOM) and Distribuidora de Comunicaciones de Occidente, S.A. (COOCSA) entered into a $215 million syndicated loan with Citibank, Scotiabank, Banco General, RBC and HSBC which was fully disbursed in 2011, Millicom’s share of the facility at December 31, 2012 amounted to $129 million.
As at December 31, 2012, Comcel had financing of $33 million (Millicom’s share of outstanding debt) with Citibank bearing a fixed rate of 5.35% in OPIC Trance A, Variable rate of 1.40% in EKN, Variable Rate of 4.37% in a Syndicated loan (2011: $27 million), and $43 million with Bancolombia maturing in 2017 bearing a floating interest rate at 4.31% (2011: $53 million) and other financing with local banks of the equivalent of $6 million (2011: $6 million).
Comcel also had another 5 year facility with IFC for $100 million, bearing interest at $ LIBOR plus 4.50%. This loan was fully repaid during 2011.
(vi) Ghana
In December 2007 Millicom (Ghana) Limited, Millicom’s operation in Ghana, entered into a $60 million local 5 year Facility. The loan bears interest at $ LIBOR plus 2%. In parallel a $80 million offshore 7 year DFI (Development Finance Institution) financing which bears interest at $ LIBOR plus 2.25% was arranged. As at December 31, 2011, $72 million (2010: $102 million) was outstanding under these facilities. In August 2012, Millicom Ghana breached certain financial covenants under the loan agreement. In September 2012, it obtained a waiver for these covenants for 12 months. These loans were fully repaid during 2012.
In December 2009 the operation entered into a 3.5 year $22 million Ericsson arranged financing with EKN and Nordea priced at $ LIBOR + 0.85% fully guaranteed by the Company. As at December 31, 2012, $6 million was outstanding under this facility (2011: $19 million).
An additional facility of $9M was provided by Nordea in May 2011 priced at Cost of Funds plus 2.5% fully guaranteed by the Company. As at December 31, 2011, $5 million was outstanding under this facility. This loan was fully repaid during 2012.
In January 2010, the operation signed a sale and lease-back agreement with Helios Towers Ghana, a direct subsidiary of Helios Towers Africa, for most of its cell sites, transferred to Helios Towers in 2010 and 2011. As at December 31, 2012, $20 million was outstanding on the finance lease as part of the lease back agreement (2011: $27 million). In June 2012, the operation entered into a one year facility for $50 million with Standard Bank bearing interest at $ LIBOR 1 month plus 1.95%.
F-82 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued)
(vii) Cable Central America
In September 2009, Millicom Cable N.V., a subsidiary of the Company, refinanced with a 2 year, $250 million senior term loan facility fully guaranteed by the Company with Standard Bank, RBS, Nordea, DnB Nor, and Morgan Stanley. This loan agreement is allocated to the 3 main Amnet operating entities in Costa Rica, El Salvador, and Honduras. The loan bore interest for the first six months at $ LIBOR plus 4.5%, for months seven to twelve at $ LIBOR plus 4.75% and thereafter the margin increases by an incremental 25 basis points per quarter.
During the course of 2010 Millicom’s cable businesses in Honduras and Costa Rica obtained financing under a $105 million 7 year club deal fixed rate facility with HSBC, Bancocolombia and Citibank bearing interest at 6.7% in Costa Rica and a $30 million 7 year bilateral fixed rate financing from Banco Industrial bearing interest at 7% in Honduras. As at December 31, 2012, $94 million was outstanding under the facility in Costa Rica (2011: $99 million) and $32 million for the facility in Honduras (2011: $33 million).
(viii) Chad
In May and August 2007, Millicom’s operation in Chad signed respectively a $31 million 5 year Facility with China Development Bank bearing interest at $ LIBOR +2% and a Euro 15 million 5 year Facility with Proparco bearing interest at Euribor +2%. As at December 31, 2012 the amount outstanding under this facility was $1 million which was repaid in January 2013 (2011: $4 million).
In May 2009, Millicom Chad entered into a XAF6 billion 5 year Facility co-arranged by Societe Generale Cameroun and Financial Bank priced at a fixed interest rate of 7%, fully guaranteed by the Company. At the same date, Millicom Chad signed a XAF21 billion 5 year Subordinated Facility with Societe Generale Tchad with interest at TIAO +1.85% and guaranteed by Nordea. This guarantee is secured by a pledged deposit of $44 million by the Company (see note 19). As at December 31, 2012 $8 million and $42 million respectively were outstanding under these facilities (2011: $12 million and $41 million respectively).
In December 2009 the operation signed a XAF9.25 billion 5 year fixed rate financing with the IFC bearing interest at 8%. This facility is guaranteed by Millicom. As at December 31, 2012 the amount outstanding under this facility was $18 million (2011: $17 million).
In January 2010 the operation entered into a 3 year deferred payment agreement with Huawei for $50 million, guaranteed by Millicom and bearing interest at LIBOR +3.75%. As at December 31, 2012 the amount outstanding under this agreement was $14 million (2011: $15 million).
In July 2010, Millicom Chad signed a XAF 8 billion 5 year Facility co-arranged by Proparco and BICEC (Banque Internationale du Cameroun pour l’Epargne et Le Credit) at a fixed interest rate of 8%, guaranteed by Millicom. As at December 31, 2012 the amount outstanding under this facility was $12 million (2011: $15 million).
(ix) Paraguay
On December 7, 2012, Telefónica Celular del Paraguay S.A., Millicom’s fully owned subsidiary in Paraguay issued $300 million aggregate principal amount of 6.75% Senior Unsecured Notes (the “6.75% Senior Notes”) due on December 13, 2022. The 6.75% Senior Notes were issued at 100%
F-83 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued) of the aggregate principal amount. Distribution and other transaction fees of $7 million reduced the total proceeds from issuance to $293 million. The 6.75% Senior Notes have a 6.75% per annum coupon with interest payable semi-annually in arrears on June 13 and December 13. The effective interest rate is 7.12%.
The 6.75% Senior Notes are general unsecured obligations of Telefónica Celular del Paraguay S.A. and rank equal in right of payment with all future unsecured and unsubordinated obligations of Telefónica Celular del Paraguay S.A. The 6.75% Senior Notes are unguaranteed.
Telefónica Celular del Paraguay S.A. has options to partially or fully redeem the 6.75% Senior Notes as follows:
(i) Full or partial redemption at any time prior to December 13, 2017, for the highest of, 100% of the principal to be redeemed or, the present value of the remaining scheduled payments of principal to be redeemed and interest.
(ii) Full or partial redemption at any time on or after December 13, 2017 for the following percentage of principal to be redeemed, plus accrued and unpaid interest and all other amounts dues, if any:
December 13, 2017 103.375% December 13, 2018 102.25% December 13, 2019 101.125% December 13, 2020 100.00% December 13, 2021 100.00%
These options represent embedded derivatives which, in accordance with IAS 39 have been valued and determined to be closely related to the underlying bond.
(iii) Redemption of up to 35% of the original principal of the 6.75% Senior Notes if, prior to December 13, 2015, Telefónica Celular del Paraguay S.A. receives proceeds from issuance of shares, at a redemption price of 106.75% of the principal amount to be redeemed plus accrued and unpaid interest and all other amounts due, if any, on the redeemed notes.
If Telefónica Celular del Paraguay S.A. experiences a Change of Control Triggering Event, defined as a rating decline resulting from a change in control, each holder will have the right to require repurchase of its notes at 101% of their principal amount plus accrued and unpaid interest and all other amounts due, if any.
In July 2008, Telefonica Cellular Del Paraguay S.A. (Telecel), Millicom’s operation in Paraguay entered into a $100 million, 8 year loan with the European Investment Bank (“EIB”). The loan bears interest at rates between $ LIBOR plus 0.234% and $ LIBOR plus 0.667%. The outstanding amount as at December 31, 2012 was $85 million (2011: $95 million). The EIB loan is guaranteed for commercial risks by a group of banks. The commission guarantee fee is 1.25% per annum.
In addition as at December 31, 2012 Telecel had $0.5 million (2011: $3 million) of other debt and financing outstanding.
(x) Bolivia
In December 2007, Telefonica Celular de Bolivia SA (“Telecel Bolivia”), Millicom’s operation in Bolivia, signed a financing agreement for $40 million with the Nederlandse Financieringsmaatschappij Voor Ontwikkelingslanden, N.V. (FMO), also known as the
F-84 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued)
Netherlands Development Finance Company. The A tranche of $20 million was provided directly by the FMO, is repayable over 7 years and bears interest at $ LIBOR plus 2.25%. The B tranche of $20 million is provided equally by Nordea and Standard Bank, is repayable over 5 years and bears interest at $ LIBOR plus 2%. Both tranches are guaranteed by the Company. As of December 31, 2012, $7 million of this financing agreement corresponding to the “A” tranche of the FMO’s loan was outstanding (2011: $16 million).
In March 2008, Telecel Bolivia signed a 4 year and 9 months financing agreement for $30 million with International Finance Corporation. The loan bears interest at $ LIBOR plus 2% and is fully guaranteed by the Company. As at December 31, 2012, this loan was fully repaid.
In May 2012, Telecel Bolivia repaid entirely its 7 bilateral loans in local currency bearing a fixed rate ranging from 4.5% to 6.5% that amounted $46 million in 2011 (2010: $44 million).
In May 2012, Telecel Bolivia issued Bs1.36 billion aggregate principal amount of 4.75% due on April 2, 2020. Distribution and other transaction fees of Bs5 million reduced the total proceeds from issuance to Bs1.32 billion or US$191 million. The bond has a 4.75% per annum coupon with interest payable semi-annually in arrears in May and November. The effective interest rate is 4.79%.
(xi) Democratic Republic of Congo
In September 2006, Oasis S.P.R.L. (“Oasis”), Millicom’s operation in the Democratic Republic of Congo, entered into a $106 million, 7 year loan from the China Development Bank to finance equipment purchases from Huawei. The loan bears interest at $ LIBOR plus 2% and is repayable over 17 equal quarterly installments commencing in 2009. This financing is 100% guaranteed by the Company. As of December 31, 2012, $15 million was outstanding under this facility (2011: $35 million).
In September 2009, Oasis entered into a 7 year $80 million financing with the IFC guaranteed by Millicom and bearing interest at LIBOR +5%. As at December 31, 2012 the outstanding amount under this facility was $78 million (2011: $28 million).
In addition at December 31, 2012, Oasis had other debt and financing of $31 million (2011: $33 million), mainly consisting of $24 million of finance leases related to towers and $7 million of vendor financing from Huawei, bearing interest at Libor + 3% and guaranteed by Millicom.
(xii) Luxembourg
On October 30, 2012 Millicom issued senior unsecured floating rate notes of Swedish Kronor (‘SEK’) 1.75 billion and senior unsecured fixed rate notes of SEK 0.25 billion. The floating rate notes were issued for 100% of the principal amount and the fixed rate notes for 99.699% of the principal amount and both are repayable in five years. The floating rate notes bear interest at the three month Swedish Interbank Offering rate (‘STIBOR’) + 3.5% per annum and the fixed rate notes bear interest at 5.125% per annum. At the same time Millicom entered into various cross currency interest swap contracts whereby Millicom will sell SEK and receive USD to hedge against exchange rate fluctuations (see note 34).
The bonds can be early redeemed between October 2013 and October 2016 at 101% of the issuance price. These options represent embedded derivatives which, in accordance with IAS 39 have been valued and determined to be closely related to the underlying bond.
F-85 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued)
Fair value of financial liabilities Borrowings are recorded at amortized cost. The fair value of borrowings as at December 31, 2012 and 2011 is as follows:
2012 2011 US$ millions US$ millions Other debt and financing ...... 2,682 2,263 Fair value of total debt ...... 2,682 2,263
When the quoted price of the borrowings in an active market is not available, the fair value of the borrowings is calculated by discounting the expected future cash flows at market interest rates. The nominal value of the other financial liabilities is deemed to approximate their fair values (see note 35).
Guarantees Millicom has issued guarantees to secure certain obligations of some of its operations under financing agreements. Outstanding amounts under the guarantees and the guarantee periods as of December 31, 2012 and 2011 are shown below. Amounts covered by bank guarantees are recorded in the consolidated statements of financial position under the caption “Other debt and financing” and amounts covered by supplier guarantees are recorded under the caption “Trade payables” or “Other debt and financing” depending on the underlying terms and conditions.
As of December 31, 2012
Bank and other financing guarantees(i) Outstanding Maximum Terms exposure exposure US$ millions US$ millions 0–1 year ...... 278 470 1–3 years ...... 196 305 3–5 years ...... 315 355 Total ...... 789 1,130
As of December 31, 2011
Bank and other financing guarantees(i) Outstanding Maximum Terms exposure exposure US$ millions US$ millions 0–1 year ...... 29 105 1–3 years ...... 231 383 3–5 years ...... 272 355 More than 5 years ...... 186 225 Total ...... 718 1,068
(i) The guarantee ensures payment by the guarantor of outstanding amounts of the underlying loans in the case of non-payment by the obligor.
F-86 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
27. Borrowings (continued)
Pledged assets
The Group’s share of total debt and financing secured by either pledged assets, pledged deposits issued to cover letters of credit, or guarantees issued by the Company as at December 31, 2012 is $1,391 million (2011: $1,384 million). Assets pledged by the Group over this debt and financing at the same date amount to $131 million (2011: $383 million) of which $87 million (2011: $335 million) were pledged over property, plant and equipment.
The following table provides details of net debt change for the years 2012, 2011 and 2010:
2012 2011 2010 US$ millions US$ millions US$ millions Total Debt and financing ...... 3,259 2,438 2,352 Less: Financial instruments (assets) related to debt ...... (6) – – Less: cash and short-term deposits ...... (1,262) (931) (1,084) Net debt at the end of the year ...... 1,991 1,507 1,268
Net debt includes interest bearing loans and borrowings, less cash and cash equivalents and pledged and time deposits related to bank borrowings.
28. Other non-current and current provisions and liabilities
Provisions and other non-current liabilities are comprised as follows:
2012 2011 US$ millions US$ millions Non-current legal provisions (note 32) ...... 6 5 Long-term portion of asset retirement obligations ...... 62 51 Long-term portion of deferred income on tower deals ...... 51 51 Other ...... 8 7 Total ...... 127 114
Provisions and other current liabilities are comprised as follows:
2012 2011 US$ millions US$ millions Put option ...... 730 745 Deferred revenues ...... 151 133 Customer deposits ...... 22 22 Current legal provisions (note 32) ...... 7 2 Other tax payables ...... 71 70 Current provisions(i) ...... 16 15 Derivative financial instruments ...... 7 15 Customer and distributor cash balances (Tigo cash) ...... 47 19 Other ...... 58 27 Total ...... 1,109 1,048 (i) Includes tax and other contingencies for $4 million (2011: $4 million) that were assumed as part of the Amnet and Navega acquisitions. The former shareholders of Amnet and Navega placed in escrow $35 million and $3 million respectively to cover these contingencies. Therefore a corresponding financial asset of $4 million (2011: $4 million) has been recorded within “Other current assets”.
F-87 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
28. Other non-current and current provisions and liabilities (continued)
Put option
On July 1 2010, Millicom reached an agreement with its local partner in Honduras whereby Millicom’s local partner granted Millicom an unconditional call option for duration of five years for his 33% stake in Celtel, the Honduran operation (see notes 5 and 35). At the same time, and as consideration for the call option, Millicom granted a put option for the same duration to its local partner. The put option becomes exercisable on a change of control of Millicom International Cellular S.A., or Millicom’s subsidiary that holds the shares in Celtel (except if the change of control is in favor of Investment AB Kinnevik, the current largest shareholder of Millicom, or management of Millicom).
A change of control event may occur at Millicom level which is beyond the control of Millicom. Such an event would trigger the ability of our local partner to exercise his put option at his discretion. Therefore, the put option is a financial liability as defined in IAS 32 and is recorded as a current liability. The liability is measured at the present value of the redemption price of the put option which amounted to $730 million at December 31, 2012 (2011: $745 million).
The redemption price of the put option is based on a multiple of the EBITDA of Celtel. The multiple is based on a change of control transaction multiple of Millicom. Management estimated the change of control transaction multiple of Millicom from a trading multiple of Millicom adding a control premium (based upon comparable transactions from the industry).
29. Dividends
On December 5, 2012 an extraordinary dividend of $3.00 per share from Millicom’s retained profits as at December 31, 2011 was approved at an Extraordinary General Meeting and distributed in December 2012. On May 29, 2012 a dividend distribution of $2.40 per share from Millicom’s retained profits as at December 31, 2011 was approved by the shareholders at the Annual General Meeting and distributed in June 2012.
On December 2, 2011 an extraordinary dividend of $3.00 per share from Millicom’s retained profits as at December 31, 2010 was approved at an Extraordinary General Meeting and distributed in December 2011. On May 31, 2011 a dividend distribution of $1.80 per share from Millicom’s retained profits as at December 31, 2010 was approved by the shareholders at the Annual General Meeting and distributed in June 2011.
30. Directors’ and officers’ remuneration
Directors
The remuneration of the members of the Board of Directors of the Company comprises an annual fee. Between May 2006 and May 2010 Directors’ remuneration also included share based compensation (restricted shares). Director remuneration is proposed by the Nominations Committee and approved by the shareholders at the Annual General Meeting of Shareholders (the “AGM”).
F-88 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
30. Directors’ and officers’ remuneration (continued)
The remuneration charge for the Board for the years ended December 31, 2012, 2011 and 2010 was as follows:
Other members of the Chairman board Total No. of shares US$ ’000 No. of shares US$ ’000 US$ ’000 2012 Fees ...... 210 787 997 2011 Fees ...... 203 697 900 2010 Fees ...... 77 444 521 Restricted share based compensations(i) ...... 1,007 82 4,270 350 432 Total ...... 159 794 953
(i) See note 24. Restricted shares could not be sold for one year from date of issue.
The number of shares and share options beneficially owned by the Directors as at December 31, 2012 and 2011 was as follows:
Other members of Chairman the Board Total 2012 Shares ...... 2,318 18,950 21,268 Share options ...... – 10,000 10,000 2011 Shares ...... 2,318 19,560 21,878 Share options ...... – 10,000 10,000
Officers
The remuneration of the Officers of the Company (“Officers”) comprises an annual base salary, an annual bonus, share based compensation, social security contributions, pension contributions and other benefits. The bonus and share based compensation plans are based on actual performance (including individual and Group performance). Up until May 2006, the Officers were issued share options. Subsequent to May 2006, the Officers were issued restricted shares. Share based compensation is granted once a year by the Compensation Committee of the Board. The annual base salary and other benefits of the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) are proposed by the Compensation Committee and approved by the Board.
On October 31, 2012 the Board appointed Hans-Holger Albrecht, who was a Director of Millicom since May 2010, to succeed Mikael Grahne as President and CEO.
F-89 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
30. Directors’ and officers’ remuneration (continued)
The remuneration charge for the Officers for the years ended December 31, 2012, 2011 and 2010 was as follows: Current Former Current Chief Chief Chief Executive Executive Financial Officer Officer Officer US$ ’000 US$ ’000 US$ ’000 2012 Base salary ...... 633 1,265 662 Bonus ...... – 1,554 719 Pension ...... 134 379 108 Other benefits ...... 44 187 59 Total ...... 811 3,385 1,548 Share based compensation:(i)(ii) ...... – 3,431 1,533 2011 Base salary ...... – 1,323 676 Bonus ...... – 1,915 798 Pension ...... – 406 105 Other benefits ...... – 158 71 Total ...... – 3,802 1,650 Share based compensation:(i)(ii) ...... – 2,862 1,267 2010 Base salary ...... – 1,261 614 Bonus ...... – 1,823 624 Pension ...... – 385 112 Other benefits ...... – 178 74 Total ...... – 3,647 1,424 Share based compensation:(i) ...... Shares issued/charge under long term incentive plans (ii) ...... – 2,874 1,243 Charge for share options ...... – 5 –
(i) See note 24 (ii) Share awards of 33,209 and 13,964 were granted in 2012 under the 2012 LTIPs to the former CEO and CFO. Share awards of 34,937 and 14,814 were granted in 2011 under the 2011 LTIPs to the former CEO and CFO. Share awards of 41,628 and 19,891 were granted in 2010 under the 2010 LTIPs to the former CEO and CFO.
The number of shares and unvested share awards beneficially owned by senior management as at December 31, 2012 and 2011 was as follows: Former Chief Chief Chief Executive Executive Financial Officer Officer Officer Total 2012 Shares ...... 610 – 23,402 24,012 Share awards not vested ...... – – 46,044 46,044 2011 Shares ...... 610 666,193 7,800 674,603 Share awards not vested ...... – 105,063 45,228 150,291
F-90 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
30. Directors’ and officers’ remuneration (continued)
Severance payments If employment of the executives is terminated by Millicom, severance payment of up to 12 month’s salary is payable.
31. Non-cash investing and financing activities The following table gives details of non-cash investing and financing activities for continuing operations for the years ended December 31, 2012, 2011 and 2010.
2012 2011 2010 US$ millions US$ millions US$ millions Investing activities Acquisition of property, plant and equipment (see note 17) ...... (10) (38) (91) Asset retirement obligations (see note 17) ...... (6) (5) 17 Financing activities Vendor financing and finance leases (see note 17) ...... 10 38 91 Share based compensation (see note 24) ...... 22 17 31
32. Commitments and contingencies Operational environment Millicom operates in emerging markets, namely Latin America and Africa, characterized by evolving regulatory, political, technological and economic environments. These characteristics result in uncertainties that may affect future operations, the ability to conduct business, transact foreign exchange, repatriate funds and repay debt and which may impact agreements with other parties. In the normal course of business, Millicom faces uncertainties regarding taxation, interconnect rates, license renewal and tariff arrangements, which can have a significant impact on the long-term economic viability of its operations.
Litigation The Company and its operations are contingently liable with respect to lawsuits and other matters that arise in the normal course of business. As of December 31, 2012, the total amount of claims against Millicom’s operations was $955 million (December 31, 2011: $127 million) of which $1 million (December 31, 2011: $1 million) relate to joint ventures. As at December 31, 2012, $13 million (December 31, 2011: $7 million) has been provided for these claims in the consolidated statement of financial position. Management is of the opinion that while it is impossible to ascertain the ultimate legal and financial liability with respect to these claims, the ultimate outcome of these contingencies is not anticipated to have a material effect on the Group’s financial position and operations.
Ghana Included in the total claims above is a lawsuit which was filed against our subsidiary in Ghana (Millicom Ghana) by E-Talk Limited (E-Talk) in November 2011, alleging that Millicom Ghana terminated a July 2006 contract with insufficient notice. The total value of the claim is approximately $30 million, including various general damages, loss of expected revenues and punitive damages. Pre-trial talks were held with the plaintiff with no resolution in the
F-91 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
32. Commitments and contingencies (continued)
Commercial Court in Accra on April 28, 2012 and the Court has asked the parties to provide more information. Management considers this claim as opportunistic and without foundation, in so far as it was filed more than four years after the events on which the plaintiff bases its claim and takes the view that no provision should be made for this claim.
Colombia Also included in the total claims is a claim filed with the Civil Chamber of Bogota in Colombia against the entire mobile operator industry of Colombia, including our subsidiary in Colombia, by a group of approximately twenty individuals. The claimants allege damages and losses suffered from third parties through illegal use of cellular phones in extortion attempts against the claimants, and are claiming a collective total of approximately $753 million from the mobile operators. The case has been inactive, with the exception of a mandatory settlement conference held among the parties under the court’s supervision, which did not result in any settlement agreement. It is expected that the litigation will move towards an evidence-presentation phase. Management considers this claim to be entirely spurious and without foundation or substance. As a result, management is of the view that no provision should be made for this claim.
Sentel GSM S.A. (“Sentel”) license In 2012, Millicom and the government of the Republic of Senegal signed an agreement whereby the validity of the license of Millicom’s subsidiary in Senegal was recognized by both parties, and all existing legal claims and current law suits were withdrawn. In addition, Millicom was granted a technological neutral, global license, including a 3G license, an alignment of its license terms with those of the other operators, additional rights over spectrum, certain investment protection rights, and its current license term is extended until 2028. In consideration for these additional license and spectrum rights Millicom paid $103 million to the government of the Republic of Senegal (see note 16).
Taxation The Group faces regular tax investigations in the countries where it operates. As of December 31, 2012, the Group estimates potential tax claims amounting to $85 million of which a tax provision of $11 million has been recorded. Management is of the opinion that while it is impossible to quantify the ultimate financial liability with respect to these assessments, the ultimate outcome of these contingencies is not anticipated to have a material effect on the Group’s financial position and operations.
Lease commitments Operating Leases: The Group has the following annual commitments lease as of December 31, 2012 and 2011.
2012 2011 US$ millions US$ millions Operating lease commitments Within: one year ...... 82 62 Between: one to five years ...... 187 158 After: five years ...... 130 19 Total ...... 399 239
F-92 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
32. Commitments and contingencies (continued)
Operating leases mainly comprise agreements containing commitments relating to land and buildings including towers sold and leased back. The operating lease terms and conditions reflect normal market conditions. Total operating lease expense from continuing operations was $108 million in 2012 (2011: $96 million, 2010: $83 million – see note 11).
Finance leases: The Group’s future minimum payments on finance leases were $512 million at December 31, 2012 (2011: $453 million) and mainly comprised leased towers in Ghana, Tanzania, DRC and Colombia under 12 year leases (see note 17) and tower sharing in other countries. Other financial leases are not material and mainly consist of lease agreements relating to vehicles used by the Group. The Group has the following finance lease commitments as of December 31, 2012 and 2011.
2012 2011 US$ millions US$ millions Finance lease commitments Within: one year ...... 45 37 Between: one to five years ...... 187 153 After: five years ...... 280 263 Total ...... 512 453
Lease liabilities connected to these leases were $232 million at December 31, 2012 (2011: $156 million).
Capital commitments As of December 31, 2012 the Company and its subsidiaries and joint ventures have fixed commitments to purchase network equipment, land and buildings, other fixed assets and intangible assets (including approximately $53 million in Colombia for a license renewal) for a value of $367 million (2011: $370 million), of which $50 million (2011: $46 million) relate to joint ventures, from a number of suppliers. Millicom is also committed to supporting Colombia Móvil S.A., its operation in Colombia, through loans and warranties. The maximum commitment is $238 million and remains until the time the total support from Millicom equals the support from the founding shareholders of Colombia Móvil S.A.
Dividends The ability of the Company to make dividend payments is subject to, among other things, the terms of indebtedness, legal restrictions and the ability to repatriate funds from Millicom’s various operations. As at December 31, 2012, $126 million (December 31, 2011: $94 million) of Millicom’s retained profits represent statutory reserves and are unable to be distributed to owners of the Company.
Foreign currency forward contracts As of December 31, 2012, the Group held foreign currency forward contracts to sell Colombian Pesos in exchange for United States Dollars for a nominal amount of $43 million (2011: $84 million). Net exchange losses on these forward contracts for the year were $6 million (2011: $2 million).
F-93 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
33. Related party transactions
The Company conducts transactions with its principal shareholder, Investment AB Kinnevik (“Kinnevik”) and subsidiaries, with tower companies in which it holds a direct or indirect equity interest in Ghana, DRC, Tanzania and Colombia (see note 7), and with a subsidiary of a non- controlling interest in Colombia. Transactions with related parties are conducted on normal commercial terms and conditions.
Kinnevik
The Company’s principal shareholder is Kinnevik. Kinnevik is a Swedish holding company with interests in the telecommunications, media, publishing, paper and financial services industries. As of December 31, 2012, Kinnevik owned approximately 38% of Millicom (2011: 36%). During 2012 and 2011, Kinnevik did not purchase any Millicom shares. There are no significant loans made by Millicom to or for the benefit of these related parties.
During 2012 and 2011 the Company purchased services from Kinnevik subsidiaries including fraud detection, procurement and professional services.
Helios Towers and American Towers
The Group acquired a 40% equity investment in the associate company Helios Towers Ghana in 2010 and in the associate companies Helios Towers DRC, Helios Towers Tanzania and ATC Colombia B.V. in 2011 (“Tower companies”). Millicom sold and leased back a portion of its tower assets in each of these countries and received related tower operation and management services (see notes 7 and 18). The Group has future lease commitments in respect of the Tower companies (see note 32).
On October 18, 2011, DRC provided Helios Towers DRC with a financing facility for maximum of $38 million (of which principal of $30 million). Amounts under the facility are guaranteed by Helios Towers Africa, the parent company of Helios Towers DRC, as well as by pledge of its shares in Helios Towers DRC. Outstanding amounts under the facility bear interest at LIBOR + 7.5% per annum until October 17, 2012 and thereafter increase by 100bps each year until the maturity date of October 17, 2015. Interest is either repayable on June 15 and December 15 of each year or add to the principal.
UNE EPM Telecomunicaciones S.A.
The Group operation in Colombia leases portions of its tower assets under finance leases to UNE EPM Telecomunicaciones S.A. (UNE), a minority shareholder in Millicom’s Colombian operation.
The following transactions were conducted with related parties:
2012 2011 2010 US$ millions US$ millions US$ millions Purchases of goods and services (Kinnevik) ...... 8 6 4 Lease of towers and related services (Associates) ...... 107 22 9 Gain on sale of towers (Associates) ...... 16 54 7 Revenue from lease of towers (UNE) ...... 11 – – Interest income (Helios Towers DRC loan) ...... 2 – – Total ...... 144 82 20
F-94 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
33. Related party transactions (continued)
As at December 31, the Company had the following balances with related parties:
2012 2011 US$ millions US$ millions Payables Finance lease payables ...... 188 127 Other accounts payable ...... 12 10 Total ...... 200 137 Receivables from sale of towers ...... – 77 Loan to Helios Towers DRC ...... 32 – Total ...... 32 77
34. Financial risk management
Terms, conditions and risk management policies
Exposure to interest rate, foreign currency, non-repatriation, liquidity, capital management and credit risks arise in the normal course of Millicom’s business. The Group analyses each of these risks individually as well as on an interconnected basis and defines and implements strategies to manage the economic impact on the Group’s performance in line with its financial risk management policy. Millicom’s risk management strategies may include the use of derivatives. Millicom’s policy prohibits the use of such derivatives in the context of speculative trading.
Interest rate risk
Interest rate risk generally arises on borrowings. Borrowings issued at floating rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group’s exposure to risk of changes in market interest rates relates to both of the above. To manage the risk, the Group’s policy is to maintain a combination of fixed and floating rate debt with target for the debt to be equally distributed between fixed and variable rates. The Group actively monitors borrowings against target and applies a dynamic interest rate hedging approach. The target mix between fixed and floating rate debt is reviewed periodically. The purpose of Millicom’s policy is to achieve an optimal balance between cost of funding and volatility of financial results, while taking into account market conditions as well as our overall business strategy. At December 31, 2012, approximately 55% of the Group’s borrowings are at a fixed rate of interest or for which variable rates have been swapped for fixed rates with interest rate swaps (2011: 51%).
Interest Rate Swaps
To comply with internal policies, in January 2010 Millicom entered into an interest rate swap to hedge the interest rate risk of the floating rate debt in three different countries (Tanzania, DRC and Ghana). The interest rate swap was issued in January 2010 for a nominal amount of $100 million, with maturity January 2013. During the three month period ending September 30, 2012 the Tanzania and Ghana hedges were assessed as ineffective and, as the value of these hedges are not expected to change significantly between September 30, 2012 and their expiry in January 2013, the corresponding cash flow reserve was recycled to the income statement. At December 31, 2012 the DRC hedge was assessed as ineffective and the corresponding cash flow reserve was recycled to the income statement.
F-95 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
34. Financial risk management (continued)
In 2010 Millicom entered into interest rate swaps to hedge the interest rate risks on floating rate debts in Honduras and Costa Rica. The interest rate swap in Honduras was issued for a nominal amount of $30 million, with maturity in 2015, and in Costa Rica for a nominal amount of $105 million with maturity in 2017.
In October 2012, Millicom issued senior unsecured floating rate notes of Swedish Kronor (‘SEK’) 1.75 billion and senior unsecured fixed rate notes of SEK 0.25 billion (see note 27). At the same time Millicom entered into various cross currency interest swap contracts whereby Millicom will sell SEK and receive USD to hedge against exchange rate fluctuations for the notional amount of SEK 2 billion and interest payments on this principal.
Millicom will also hedge against interest rate fluctuations on the floating rate notes of SEK 1.75 billion by receiving variable interest at STIBOR +3.5% and paying a fixed rate of 5.125%. As the timing and amounts of the cash flows under the swap agreements match the cash flows under the bonds the swaps assessed as highly effective, thus qualified for cash flow hedge accounting, and, as a result, the effective portion of the fair value change of the swap was recorded against other comprehensive income. Cash flows under the swaps amount to approximately SEK 101 million per year for the years 2013 through to 2017 related to interest on the bond and SEK 2 billion in 2017 related to the principal.
The table below summarizes, as at December 31, 2012, our fixed rate debt and floating rate debt:
Amounts due within 1 year 1–2 years 2–3 years 3–4 years 4–5 years >5 years Total (in millions of U.S. Dollars, except percentages) Fixed rate ...... 305 140 94 102 109 928 1,678 Weighted average nominal interest rate ...... 4.34% 7.34% 7.35% 5.78% 6.39% 9.16% 7.64% Floating rate ...... 388 333 254 187 347 72 1,581 Weighted average nominal interest rate ...... 5.61% 6.92% 7.33% 5.22% 5.30% 12.43% 6.36% Total ...... 693 473 348 289 456 1,000 3,259 Weighted average nominal interest rate ...... 5.05% 7.04% 7.33% 5.42% 5.56% 9.36% 7.45%
The table below summarizes, as at December 31, 2011, our fixed rate debt and floating rate debt:
Amounts due within 1 year 1–2 years 2–3 years 3–4 years 4–5 years >5 years Total (in millions of U.S. Dollars, except percentages) Fixed rate ...... 261 119 135 97 45 585 1,242 Weighted average nominal interest rate ...... 4.37% 6.02% 6.13% 5.66% 6.02% 8.85% 6.98% Floating rate ...... 360 194 191 194 199 58 1,196 Weighted average nominal interest rate ...... 5.31% 5.50% 4.75% 6.27% 5.98% 2.17% 5.37% Total ...... 621 313 326 291 244 643 2,438 Weighted average nominal interest rate ...... 4.91% 5.70% 5.32% 6.06% 5.99% 5.19% 6.97%
F-96 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
34. Financial risk management (continued)
A one hundred basis point fall or rise in market interest rates for all currencies in which the Group had borrowings at December 31, 2012, would increase or reduce profit before tax from continuing operations for the year by approximately $16 million (2011: $12 million).
Foreign currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures where the Group operates. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations.
Millicom seeks to reduce its foreign currency exposure through a policy of matching, as far as possible, assets and liabilities denominated in foreign currencies. In some cases, Millicom may borrow in US dollars where it is either commercially more advantageous for joint ventures and subsidiaries to incur debt obligations in US dollars or where US dollar denominated borrowing is the only funding source available to a joint venture or subsidiary. In these circumstances, Millicom accepts the remaining currency risk associated with financing its joint ventures and subsidiaries, principally because of the relatively high cost of forward cover, when available, in the currencies in which the Group operates.
The following table summarizes debt denominated in US$ and other currencies at December 31, 2012 and 2011.
2012 2011 US$ millions US$ millions Total US$ ...... 2,191 1,606 Colombia ...... 507 504 Chad ...... 84 86 Tanzania ...... 97 35 Honduras ...... 96 89 Bolivia ...... 191 46 Ghana ...... 19 19 Guatemala ...... 53 11 Other ...... 21 42 Total non-US$ currencies ...... 1,068 832 Total ...... 3,259 2,438
At December 31, 2012, if the US$ had weakened/strengthened by 10% against the other functional currencies of our operations and all other variables held constant, then profit before tax from continuing operations would have increased/decreased by $99 million and $121 million respectively (2011: $112 million and $137 million respectively). This increase/decrease in profit before tax would have mainly been as a result of the conversion of the results of our operations with functional currencies other than the US dollar.
Non-repatriation risk
Most of the operations receive substantially all of their revenue in the currency of the countries in which they operate. The Group derives substantially all its revenue through funds generated by local operations and, therefore, Millicom is dependent on their ability to transfer funds to the Company.
F-97 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
34. Financial risk management (continued)
Although there are foreign exchange controls in some of the countries in which Millicom Group companies operate, none of these countries currently significantly restrict the ability of these operations to pay interest, dividends, technical service fees, royalties or repay loans by exporting cash, instruments of credit or securities in foreign currencies. However, existing foreign exchange controls may be strengthened in countries where the Group operates, or foreign exchange controls may be introduced in countries where the Group operates that do not currently impose such restrictions, in which case, the Company’s ability to receive funds from the operations will subsequently be restricted, which would impact the Company’s ability to pay dividends to its shareholders.
In addition, in some countries, it may be difficult to convert large amounts of local currency into foreign currency because of limited foreign exchange markets. The practical effects of this are time delays in accumulating significant amounts of foreign currency and exchange risk, which could have an adverse effect on the Group’s results of operations.
Credit and Counterparty risk
Financial instruments that potentially subject the Group to credit risk are primarily cash and cash equivalents, pledged deposits, letters of credit, trade receivables, amounts due from joint venture partners, supplier advances and other current assets and derivatives. Counterparties to agreements relating to the Group’s cash and cash equivalents, pledged deposits and letters of credit are significant financial institutions with investment grade ratings. Management does not believe there are significant risks of non-performance by these counterparties. Management has taken steps to diversify its banking partners. We are also managing the allocation of deposits across banks so that the Group’s counterparty risk with a given bank stays within limits which have been set based on each banks credit rating. This way we are avoiding any significant exposure to a specific party.
A large portion of turnover comprises prepaid airtime. For customers for whom telecom services are not prepaid, the Group follows risk control procedures to assess the credit quality of the customer, taking into account its financial position, past experience and other factors.
Accounts receivable are mainly derived from balances due from other telecom operators. Credit risk of other telecom operators is limited due to the regulatory nature of the telecom industry, in which licenses are normally only issued to credit worthy companies. The Group maintains a provision for impairment of trade receivables based upon expected collectability of all trade receivables.
As the Group has a large number of internationally dispersed customers, there is no significant concentration of credit risk with respect to trade receivables.
Liquidity risk
Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group has incurred significant indebtedness but also has significant cash balances. Millicom evaluates its ability to meet its obligations on an ongoing basis using a recurring liquidity planning tool. This tool considers the operating net cash flows generated from its operations and the future cash needs for borrowing and interest payments and capital and operating expenditures required in maintaining and developing local business.
F-98 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
34. Financial risk management (continued)
The Group manages its liquidity risk through use of bank overdrafts, bank loans, vendor financing, Export Credit Agencies and Development Finance Institutions (“DFI”) loans, bonds and finance leases. Millicom believes that there is sufficient liquidity available in the markets to meet ongoing liquidity needs. Additionally, Millicom is able to arrange offshore funding through the use of Export Credit Agency guarantees and DFIs (IFC, PROPARCO, DEG and FMO), who have been established specifically to finance development in the Group’s markets. Millicom is diversifying its financing with commercial banks representing about 38% of its gross financing, Bonds 38%, Development Finance Institutions 8%, partners 8%, financial leases 7% and suppliers 1%. The Group is therefore not dependent on a few sources of financing but is relying on various financing opportunities. The tables below summarize the maturity profile of the Group’s net financial liabilities at December 31, 2012 and 2011.
Less than Year ended 31 December 2012 1 year 1 to 5 years >5 years Total US$ millions US$ millions US$ millions US$ millions Total borrowings (see note 27) ...... (693) (1,566) (1,000) (3,259) Cash and cash equivalent ...... 1,174 – – 1,174 Restricted cash ...... 43 – – 43 Pledged deposit (relating to bank borrowings) ...... 3 47 – 50 Net cash (debt) ...... 527 (1,519) (1,000) (1,992) Future interest commitments(i) ...... (211) (558) (47) (816) Trade payables (excluding accruals) ...... (404) – – (404) Derivative financial instruments ...... (7) (4) – (11) Put option ...... (730) – – (730) Other financial liabilities (including accruals) ...... (998) – – (998) Trade receivables ...... 322 – – 322 Other financial assets ...... 199 86 – 285 Net financial asset (liability) ...... (1,302) (1,995) (1,047) (4,344)
Less than Year ended 31 December 2011 1 year 1 to 5 years >5 years Total US$ millions US$ millions US$ millions US$ millions Total borrowings (see note 27) ...... (621) (1,174) (643) (2,438) Cash and cash equivalent ...... 861 – – 861 Restricted cash ...... 20 – – 20 Pledged deposit (relating to bank borrowings) ...... – 50 – 50 Net cash (debt) ...... 260 (1,124) (643) (1,507) Future interest commitments(i) ...... (136) (342) (26) (504) Trade payables (excluding accruals) ...... (341) – – (341) Derivative financial instruments ...... (15) (8) – (23) Put option ...... (745) – – (745) Other financial liabilities (including accruals) ...... (862) – – (862) Trade receivables ...... 277 – – 277 Other financial assets ...... 335 37 – 372 Net financial asset (liability) ...... (1,227) (1,437) (669) (3,333)
(i) Includes unamortized difference between carrying amount and nominal amount of debts.
F-99 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
34. Financial risk management (continued)
Capital management
The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value.
The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions and imposed restrictions such as debt covenants and local regulations. To maintain or adjust the capital structure, the Group may make dividend payments to shareholders, return capital to shareholders or issue new shares. Millicom has a Ba1 rating by one independent rating agency, namely Moody’s, which is just one notch below investment grade. The Group monitors capital using primarily a net debt to adjusted operating profit ratio, as well as a set of other indicators.
2012 2011 US$ millions US$ millions Net debt (see note 27) ...... 1,991 1,507 Adjusted operating profit (see note 10) ...... 2,065 2,087
Ratio Ratio Net debt to adjusted operating profit ratio ...... 1.0 0.7
The Group reviews it gearing ratio (net debt divided by total capital plus net debt) periodically. Net debt includes interest bearing loans and borrowings, less cash and cash equivalents and pledged deposits related to bank borrowings. Capital represents equity attributable to the equity holders of the parent.
2012 2011 US$ millions US$ millions Net debt (see note 27) ...... 1,991 1,507 Equity ...... 2,336 2,446 Net debt and equity ...... 4,327 3,953 Gearing ratio ...... 46% 38%
35. Financial instruments
The fair value of Millicom’s financial instruments is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair value of all financial assets and all financial liabilities except debt and financing approximate their carrying value largely due to the short-term maturities of these instruments. The fair values of all debt and financing have been estimated by the Group based on discounted future cash flows at market interest rates.
F-100 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
35. Financial instruments (continued)
The following table shows the carrying and fair values of financial instruments as at December 31, 2012 and 2011:
Carrying value Fair value 2012 2011 2012 2011 US$ millions US$ millions US$ millions US$ millions FINANCIAL ASSETS Loans and receivables Pledged deposits ...... 47 50 47 50 Other non-current assets ...... 86 37 86 37 Trade receivables, net ...... 322 277 322 277 Amounts due from non-controlling interests and JV partners ...... 81 159 81 159 Prepayments and accrued income ...... 140 119 140 119 Advances to non-controlling interest ...... 56 34 56 34 Other current assets ...... 86 113 86 113 Restricted cash ...... 43 20 43 20 Cash and cash equivalents ...... 1,174 861 1,174 861 Total ...... 2,035 1,670 2,035 1,670 Current ...... 1,903 1,583 1,903 1,583 Non-current ...... 132 87 132 87 FINANCIAL LIABILITIES Debt and financing (see note 27) ...... 3,259 2,438 2,682 2,263 Trade payables ...... 259 224 259 224 Payables and accruals for capital expenditure ...... 411 334 411 334 Derivative financial instruments ...... 11 23 11 23 Put option ...... 730 745 – – Amounts due to non-controlling interests and JV partners ...... 19 93 19 93 Accrued interest and other expenses ...... 341 264 341 264 Other liabilities ...... 140 74 140 74 Total ...... 5,170 4,195 3,863 3,275 Current ...... 2,591 2,364 1,861 1,619 Non-current ...... 2,579 1,831 2,002 1,656
Call option and put option related to Telefonica Cellular S.A. DE CV (Celtel)
As described in note 5, on July 1, 2010 Millicom reached agreement with its local partner in Honduras whereby Millicom’s local partner granted Millicom an unconditional call option for the next five years for his 33% stake in Telefonica Celtel and as consideration, Millicom granted a conditional put option for the same duration to the local partner.
The put option can only be exercised on a change of control of Millicom International Cellular S.A. or Millicom’s subsidiary that holds the shares in Celtel (except if the change of control is in favour of Investment AB Kinnevik, the current largest shareholder of Millicom, or management of Millicom). Millicom believe that a change of control transaction that triggers the local partner’s right to exercise his put is currently highly unlikely to happen during the term of the put option and have therefore determined the fair value of the put option to be immaterial at both December 31, 2012 and 2011.
F-101 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2012, 2011 and 2010
35. Financial instruments (continued)
The call option price is a fixed multiple of the EBITDA of Celtel in the year the option is exercised. As the fixed multiple exceeded the fair value multiples (based on comparable transactions and including a control premium) at December 31, 2012 and 2011, and as there were no expectations that the Honduran market characteristics would significantly change over the term of the call option, Millicom determined the fair value of the call option to be immaterial at both December 31, 2012 and 2011.
Fair value measurement hierarchy
Effective January 1, 2009, Millicom adopted the amendment to IFRS 7 for financial instruments that are measured in the Statement of Financial Position at fair value, which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
• Level 3 – Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
Derivative financial instruments are measured with reference to Level 2, except for the call options in Colombia (see note 7), the call and put options in Honduras (see note 5 and note 28) and the call options for Rocket (see note 5) which are measured with reference to level 3. The Honduras put option liability is carried at the present value of the redemption amount and is therefore excluded from the fair value hierarchy. No other financial instruments are measured at fair value.
36. Subsequent events
Deregistration from NASDAQ US
As described in note 1, on October 12, 2012 the Company filed a certificate with the US Securities and Exchange Commission (“SEC”) to terminate the registration of its shares. As from January 11, 2013 the termination of our reporting and disclosure obligations under the US Exchange Act became fully effective. Millicom shares will continue to trade in the USA over the counter.
Dividend
On February 12, 2013 Millicom announced that the Board will propose to the Annual General Meeting of the Shareholders a dividend distribution of $2.64 per share to be paid out of Millicom’s profits for the year ended December 31, 2012 subject to the Board’s approval of the 2011 Consolidated Financial Statements of the Group.
F-102 F-103 Millicom International Cellular S.A. Consolidated income statements for the years ended December 31, 2011, 2010 and 2009
2010 Notes 2011 (As Restated)(i) 2009 US$ ’000 US$ ’000 US$ ’000 Revenues ...... 10 4,529,597 3,920,249 3,372,727 Cost of sales ...... (1,564,401) (1,330,308) (1,202,902) Gross profit ...... 2,965,196 2,589,941 2,169,825 Sales and marketing ...... (816,715) (737,691) (647,009) General and administrative expenses ...... (839,423) (738,779) (606,213) Other operating expenses ...... (95,737) (74,933) (65,580) Other operating income ...... 43,700 3,192 – Operating profit ...... 10,11 1,257,021 1,041,730 851,023 Interest expense ...... (186,523) (214,810) (173,475) Interest and other financial income ...... 14,576 14,748 11,573 Revaluation of previously held interests ...... 5 – 1,060,014 32,319 Other non operating expenses, net ...... 13 (4,290) (61,658) (32,181) (Loss) profit from associates ...... 18 (9,591) (1,817) 2,329 Profit before tax from continuing operations .... 1,071,193 1,838,207 691,588 Credit (charge) for taxes ...... 14 18,347 (227,096) (187,998) Profit for the year from continuing operations ... 1,089,540 1,611,111 503,590 Profit for the year from discontinued operations, netoftax ...... 7 39,465 11,857 300,342 Net profit for the year ...... 1,129,005 1,622,968 803,932 Attributable to: Equity holders of the company ...... 924,515 1,620,277 850,788 Non-controlling interest ...... 204,490 2,691 (46,856) Earnings per share for the year ...... 15 (expressed in US$ per common share) Basic earnings per share – from continuing operations attributable to equity holders ...... 8.50 14.89 5.09 – from discontinued operations attributable to equity holders ...... 0.37 0.08 2.75 – for the year attributable to equity holders ..... 8.87 14.97 7.84 Diluted earnings per share – from continuing operations attributable to equity holders ...... 8.49 14.87 5.08 – from discontinued operations attributable to equity holders ...... 0.37 0.08 2.74 – for the year attributable to equity holders ..... 8.86 14.95 7.82
(i) Restatement – see note 4
The accompanying notes are an integral part of these consolidated financial statements.
F-104 Millicom International Cellular S.A. Consolidated statements of comprehensive income for the years ended December 31, 2011, 2010 and 2009
2010 2011 (As Restated)(i) 2009 US$ ’000 US$ ’000 US$ ’000 Net profit for the year ...... 1,129,005 1,622,968 803,932 Other comprehensive income: Exchange differences on translating foreign operations .... (46,698) (5,785) (14,529) Cash flow hedges ...... (3,262) (1,700) – Total comprehensive income for the year ...... 1,079,045 1,615,483 789,403 Attributable to: Equity holders of the Company ...... 881,694 1,617,487 837,124 Non-controlling interests ...... 197,351 (2,004) (47,721)
(i) Restatement – see note 4
The accompanying notes are an integral part of these consolidated financial statements.
F-105 Millicom International Cellular S.A. Consolidated statements of financial position as at December 31, 2011 and 2010
2010 Notes 2011 (As Restated)(i) US$ ’000 US$ ’000 ASSETS Non-Current Assets Intangible assets, net ...... 16 2,170,353 2,282,845 Property, plant and equipment, net ...... 17 2,865,117 2,767,667 Investments in associates ...... 18 62,984 18,120 Pledged deposits ...... 19,27 49,371 49,963 Deferred taxation ...... 14 316,966 23,959 Other non-current assets ...... 37,359 17,754 Total Non-Current Assets ...... 5,502,150 5,160,308 Current Assets Inventories ...... 74,593 62,132 Trade receivables, net ...... 20 276,944 253,258 Amounts due from non controlling interests and joint ventures ...... 158,782 99,497 Prepayments and accrued income ...... 119,362 89,477 Current income tax assets ...... 23,645 10,748 Supplier advances for capital expenditure ...... 32,324 36,189 Other current assets ...... 21 146,615 75,311 Cash and cash equivalents(ii) ...... 22 881,279 1,023,487 Total Current Assets ...... 1,713,544 1,650,099 Assets held for sale ...... 7 66,252 184,710 TOTAL ASSETS ...... 7,281,946 6,995,117
(i) Restatement – see note 4
(ii) Including $20 million of restricted cash at December 31, 2011
The accompanying notes are an integral part of these consolidated financial statements.
F-106 Millicom International Cellular S.A. Consolidated statements of financial position as at December 31, 2011 and 2010 (continued)
2010 Notes 2011 (As Restated)(i) US$ ’000 US$ ’000 EQUITY AND LIABILITIES EQUITY Share capital and premium ...... 23 662,527 681,559 Treasury shares ...... 23 (378,359) (300,000) Put option reserve ...... 25 (737,422) (737,422) Other reserves ...... 26 (103,492) (54,685) Retained profits ...... 1,886,615 1,134,354 Profit for the year attributable to equity holders ...... 924,515 1,620,277 Parents ownership interests ...... 2,254,384 2,344,083 Non-controlling interests ...... 191,170 45,550 TOTAL EQUITY ...... 2,445,554 2,389,633 LIABILITIES Non-current Liabilities Debt and financing ...... 27 1,816,852 1,796,572 Derivative financial instruments ...... 35 8,016 18,250 Provisions and other non-current liabilities ...... 28 113,613 79,767 Deferred taxation ...... 14 199,066 195,919 Total non-current liabilities ...... 2,137,547 2,090,508 Current Liabilities Debt and financing ...... 27 621,426 555,464 Put option liability ...... 28 745,145 769,378 Payables and accruals for capital expenditure ...... 333,551 278,063 Other trade payables ...... 224,089 202,707 Amounts due to joint venture partners ...... 92,677 97,919 Accrued interest and other expenses ...... 263,747 228,360 Current income tax liabilities ...... 105,217 79,861 Provisions and other current liabilities ...... 28 303,335 242,457 Total current liabilities ...... 2,689,187 2,454,209 Liabilities directly associated with assets held for sale ...... 7 9,658 60,767 TOTAL LIABILITIES ...... 4,836,392 4,605,484 TOTAL EQUITY AND LIABILITIES ...... 7,281,946 6,995,117
(i) Restatement – see note 4
The accompanying notes are an integral part of these consolidated financial statements.
F-107 Millicom International Cellular S.A. Consolidated statements of cash flows for the years ended December 31, 2011, 2010 and 2009
2010 Notes 2011 (As Restated)(i) 2009 US$ ’000 US$ ’000 US$ ’000 Profit before tax from continuing operations ...... 1,071,193 1,838,207 691,588 Adjustments for non-operating items: Interest expense ...... 186,523 214,810 173,475 Interest and other financial income ...... (14,576) (14,748) (11,573) Revaluation of previously held interests ...... – (1,060,014) (32,319) Loss (profit) from associates ...... 9,591 1,817 (2,329) Other non operating expenses, net ...... 4,290 61,658 32,181 Adjustments for non-cash items: Depreciation and amortization ...... 10,11,16,17 738,980 676,986 611,435 Loss (gain) on disposal and impairment of assets ...... 10,11 (21,785) 16,257 7,246 Share-based compensation ...... 24 17,264 30,718 10,175 1,991,480 1,765,691 1,479,879 Decrease (increase) in trade receivables, prepayments and other current assets ...... (56,668) (31,282) 73,380 Decrease (increase) in inventories ...... (13,143) (12,606) 8,812 Increase (decrease) in trade and other payables ...... 84,350 44,773 (4,669) Changes to working capital ...... 14,539 885 77,523 Interest expense paid ...... (141,138) (170,604) (148,038) Interest received ...... 14,647 14,639 11,316 Taxes paid ...... (268,071) (238,723) (195,851) Net cash provided by operating activities ...... 1,611,457 1,371,888 1,224,829 Cash flows from investing activities: Acquisition of subsidiaries, JV, associates, net of cash acquired ...... 5 (20,369) (5,284) (53,086) Proceeds from disposal of subsidiaries, joint ventures and associates ...... 1,000 5,335 – Purchase of intangible assets and license renewals ...... 16 (56,473) (26,238) (46,004) Purchase of property, plant and equipment ...... 17 (699,681) (596,900) (726,565) Proceeds from sale of property, plant and equipment ...... 126,832 36,617 3,708 Disposal (purchase) of pledged deposits ...... 8,683 2,462 (45,652) Disposal (purchase) of time deposits ...... 2,837 46,953 (50,061) Cash (used) provided by other investing activities ...... (35,307) 9,334 (12,275) Net cash used by investing activities ...... (672,478) (527,721) (929,935) Cash flows from financing activities: Proceeds from issuance of shares ...... 1,319 3,276 2,856 Purchase of treasury shares ...... (498,274) (300,000) – Proceeds from issuance of debt and other financing ...... 27 703,073 1,147,585 627,872 Repayment of debt and financing ...... 27 (791,940) (1,396,997) (506,588) Advance payments to non controlling interests ...... (27,542) – – Payment of dividends ...... (493,909) (788,526) – Net cash (used) provided by financing activities ...... (1,107,273) (1,334,662) 124,140 Cash provided by discontinued operations ...... 7 53,102 – 416,755 Exchange gains (losses) on cash and cash equivalents ...... (27,016) 2,820 1,178 Net increase (decrease) in cash and cash equivalents ...... (142,208) (487,675) 836,967 Cash and cash equivalents at the beginning of the year ..... 1,023,487 1,511,162 674,195 Cash and cash equivalents at the end of the year ...... 881,279 1,023,487 1,511,162
(i) Restatement – see note 4
The accompanying notes are an integral part of these consolidated financial statements.
F-108 Millicom International Cellular S.A. Consolidated statements of changes in equity for the years ended December 31, 2011, 2010 and 2009
Attributable to equity holders Number of Put Total Non- Number shares held Share Share Treasury Retained option Other parent’s controlling Total of shares by the Group capital(i) premium(i) shares profits(ii) reserve(iv) reserves(v) interests interests(vi) equity ’000 ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Balance as of January 1, 2009 ...... 108,297 – 162,446 480,098 – 1,082,548 – (47,174) 1,677,918 (25,841) 1,652,077 Profit for the year ...... – – – – – 850,788 – – 850,788 (46,856) 803,932 Currency translation differences ...... – – – – – – – (13,664) (13,664) (865) (14,529) Totalcomprehensiveincomefortheyear ...... – – – – – 850,788 – (13,664) 837,124 (47,721) 789,403 Transfertolegalreserve...... – – – – – (880) – 880 – – – Dividends(vii) ...... – – – – – (134,747) – – (134,747) – (134,747) Shares issued via the exercise of share options . . . 139 – 208 3,536 – – – (888) 2,856 – 2,856 Share-based compensation(iii) ...... – – – – – – – 9,807 9,807 – 9,807 Directors’ shares(iii)(viii) ...... 7 – 10 358 – – – – 368 – 368 Issuance of shares – 2006, 2007 and 2009 LTIPs(iii) ...... 205 – 307 13,584 – – – (13,891) – – – F-109 Acquisition of non-controlling interests in Chad(ix) ...... – – – – – (9,523) – – (9,523) (111) (9,634) Balance as of December 31, 2009 ...... 108,648 – 162,971 497,576 – 1,788,186 – (64,930) 2,383,803 (73,673) 2,310,130 For the year ended December 31, 2010(x) Profit for the year(x) ...... – – – – – 1,620,277 – – 1,620,277 2,691 1,622,968 Cash flow hedge ...... – – – – – – – (1,700) (1,700) – (1,700) Currency translation differences ...... – – – – – – – (1,090) (1,090) (4,695) (5,785) Total comprehensive income for the year(x) ...... – – – – – 1,620,277 – (2,790) 1,617,487 (2,004) 1,615,483 Transfertolegalreserve...... – – – – – (53) – 53 – – – Dividends(vii) ...... – – – – – (653,779) – – (653,779) – (653,779) Purchaseoftreasuryshares...... – (3,254) – – (300,000) – – – (300,000) – (300,000) Shares issued via the exercise of share options . . . 145 – 218 3,874 – – – (816) 3,276 – 3,276 Share-based compensation(iii) ...... – – – – – – – 30,286 30,286 – 30,286 Directors’ shares(iii)(viii) ...... 5 – 8 424 – – – – 432 – 432 Issuance of shares – 2007, 2008, 2009 and 2010 LTIPs(iii) ...... 255 – 381 16,107 – – – (16,488) – – – Change in scope of consolidation(ix) ...... – – – – – – – – – 130,843 130,843 Dividendtonon-controllingshareholders...... – – – – – – – – – (9,616) (9,616) Put option of non-controlling interest(iv)(x) ...... – – – – – – (737,422) – (737,422) – (737,422) Balance as of December 31, 2010 (As Restated)(x) ...... 109,053 (3,254) 163,578 517,981 (300,000) 2,754,631 (737,422) (54,685) 2,344,083 45,550 2,389,633
The accompanying notes are an integral part of these consolidated financial statements. Millicom International Cellular S.A. Consolidated statements of changes in equity (continued) for the years ended December 31, 2011, 2010 and 2009
Attributable to equity holders Number of Put Total Non- Number shares held Share Share Treasury Retained option Other Parent’s controlling Total of shares by the Group capital(i) premium(i) shares profits(ii) reserve(iv) reserves(v) interests interests(vi) equity ’000 ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Balance as of January 1, 2011 ...... 109,053 (3,254) 163,578 517,981 (300,000) 2,754,631 (737,422) (54,685) 2,344,083 45,550 2,389,633 Profit for the year ...... – – – – – 924,515 – – 924,515 204,490 1,129,005 Cash flow hedge reserve movement ...... – – – – – – – (3,015) (3,015) (247) (3,262) Currency translation differences ...... – – – – – – – (39,806) (39,806) (6,892) (46,698) Totalcomprehensiveincomefortheyear...... – – – – – 924,515 – (42,821) 881,694 197,351 1,079,045 Transfertolegalreserve...... – – – – – (61) – 61 – – – Dividends(vii) ...... – – – – – (493,909) – – (493,909) – (493,909) Purchaseoftreasuryshares ...... – (4,646) – – (498,274) – – – (498,274) – (498,274) Cancellationoftreasuryshares ...... (4,200) 4,200 (6,300) (20,070) 401,415 (375,045) – – – – – Sharesissuedviatheexerciseofstockoptions...... 40 6 59 1,184 592 (435) – (81) 1,319 – 1,319 (iii)
F-110 Share-based compensation ...... – – – – – – – 17,264 17,264 – 17,264 Issuance of shares under the LTIPs(iii) ...... 46 187 70 6,025 17,908 (773) – (23,230) – – – SaleofAmnetHondurastonon-controllinginterests..... – – – – – 2,207 – – 2,207 11,974 14,181 DisposalofLaos...... – – – – – – – – – (6,493) (6,493) Dividendtonon-controllingshareholders ...... – – – – – – – – – (57,212) (57,212) Balance as of December 31, 2011 ...... 104,939 (3,507) 157,407 505,120 (378,359) 2,811,130 (737,422) (103,492) 2,254,384 191,170 2,445,554
(i) Share Capital and Share Premium – see note 23.
(ii) Retained Profits – includes profit for the year attributable to equity holders, of which $94 million (2010: $60 million; 2009: $46 million) are undistributable to equity holders.
(iii) Share based compensation – see note 24.
(i) Put option reserve – see note 25.
(v) Other reserves – see note 26.
(vi) Non-controlling interests – as at January 1, and December 31, 2009, non controlling interest was negative as the non-controlling shareholders of Colombia Móvil S.A. ESP have a binding obligation to cover their share of the losses of this entity.
(vii) Dividends – see note 29.
(viii) Directors shares – see note 30.
(ix) Change of scope of consolidation – see note 5.
(x) Restatement – see note 4.
The accompanying notes are an integral part of these consolidated financial statements Millicom International Cellular S.A. Notes to the consolidated financial statements as of December 31, 2011, 2010 and 2009
1. Corporate information
Millicom International Cellular S.A. (the “Company”), a Luxembourg Société Anonyme, and its subsidiaries, joint ventures and associates (the “Group” or “Millicom”) is a global group providing communications, information, entertainment, solutions and financial services in emerging markets. We operate various combinations of mobile and fixed telephony, cable and broadband businesses in 15 countries in Central America, South America and Africa. The Group was formed in December 1990 when Investment AB Kinnevik (“Kinnevik”), formerly named Industriförvaltnings AB Kinnevik, a company established in Sweden, and Millicom Incorporated (“Millicom Inc.”), a corporation established in the United States of America, contributed their respective interests in international mobile telephony joint ventures to form the Group.
Millicom operates its mobile businesses in El Salvador, Guatemala and Honduras in Central America; in Bolivia, Colombia and Paraguay in South America; in Chad, the Democratic Republic of Congo, Ghana, Mauritius, Rwanda, Senegal and Tanzania in Africa. Millicom’s operations in Laos were sold in March 2011, in Sierra Leone and Cambodia in November 2009; and in Sri Lanka in October 2009 (see notes 6, 7).
In 2008, Millicom acquired 100% of Amnet Telecommunications Holding Limited, a provider of broadband and cable television services in Costa Rica, Honduras and El Salvador, of fixed telephony in El Salvador and Honduras, and of corporate data services in the above countries as well as Guatemala and Nicaragua. In addition, in December 2008, Millicom was successful in the tender for the third national mobile license in Rwanda. Services in Rwanda were launched in early December 2009.
The Company’s shares are traded on the Stockholm stock exchange under the symbol MIC and over the counter in the US under the symbol MICC. The Company has its registered office at 15, Rue Léon Laval, L-3372, Leudelange, Grand Duchy of Luxembourg and is registered with the Luxembourg Register of Commerce under the number RCS B 40 630.
The Board of Directors (“Board”) approved these consolidated financial statements on March 1, 2012. The approval of the consolidated financial statements will be submitted for ratification by the shareholders at the Annual General Meeting on May 29, 2012.
2. Summary of consolidation and accounting policies 2.1 Basis of preparation
The consolidated financial statements of the Group are presented in US dollars and all values are rounded to the nearest thousand (US$ ’000) except when otherwise indicated. The consolidated financial statements have been prepared on a historical cost basis except for certain financial assets and liabilities that have been measured at fair value.
In accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, the consolidated financial statements for the year ended December 31, 2011 have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”).
As of December 31, 2011, International Financial Reporting Standards as adopted by the European Union are similar to those published by the International Accounting Standards Board (“IASB”), except for IAS 39 – Financial Instruments that has been partially adopted by the European Union and for new standards and interpretations not yet endorsed but effective in future periods. Since the provisions that have not been adopted by the European Union are not
F-111 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued) applicable to the Group, the consolidated financial statements comply with both International Financial Reporting Standards as issued by the IASB and as adopted by the European Union.
The preparation of financial statements in conformity with IFRS requires management to exercise its judgment in the process of applying the Group’s accounting policies. It also requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from these estimates. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3.
2.2 Consolidation
The consolidated financial statements of the Group are comprised of the financial statements of the Company and its subsidiaries and joint ventures as at December 31 each year. The financial statements of the subsidiaries and joint ventures are prepared for the same reporting year as the Company, using consistent accounting policies.
All intra-group balances, transactions, income and expenses, and profits and losses resulting from intra-group transactions are eliminated.
The acquisition method of accounting is used to account for acquisitions where there is a change in control. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement (see accounting policy for Goodwill). All acquisition related costs are expensed.
Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
Non-controlling interests
The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. Gains or losses on disposals to non-controlling interests are recorded in equity. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is also recorded in equity. Non-controlling interest is measured at the proportionate interest in the net assets of the subsidiary.
F-112 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
Joint ventures
Millicom determines the existence of joint control by reference to joint venture agreements, articles of association, structures and voting protocols of the Boards of Directors of those ventures.
Entities that are jointly controlled are consolidated in the financial statements using the proportionate method which includes the Group’s share of the assets, liabilities, income and expenses of the joint ventures.
The Group recognizes the portion of gains or losses on the sale of assets to joint ventures that are attributable to other parties in the joint venture. The Group does not recognize its share of profits or losses from purchase of assets by the Group from a joint venture until it resells the assets to a third party. However, if a loss on a transaction provides evidence of a reduction in the net realizable value of current assets or an impairment loss, the loss is recognized immediately.
Associates
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights.
Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.
The Group’s share of post-acquisition profits or losses of associates is recognized in the consolidated income statement, and its share of post-acquisition movements in reserves is recognized in reserves. Cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless the Group has incurred obligations or made payments on behalf of the associates.
Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Dilution gains and losses arising in investments in associates are recognized in the income statement.
2.3 Foreign currency translation
Functional and presentation currencies
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of each subsidiary, joint venture and associate reflects the economic substance of the underlying events and circumstances of these entities. The Company is located in Luxembourg and its subsidiaries, joint ventures and associates operate in different currencies. The Group’s consolidated financial statements are presented in U.S. dollars (the “presentation currency”). The functional currency of the Company is the U.S. dollar because of the significant influence of the U.S. dollar on its operations.
F-113 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
Transactions and balances
Transactions denominated in a currency other than the functional currency are translated into the functional currency using exchange rates prevailing on transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions, and on translation of monetary assets and liabilities denominated in currencies other than the functional currency at year-end exchange rates, are recognized in the consolidated income statement, except when deferred in equity as qualifying cash flow, or net investment hedges.
Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in the consolidated income statement as part of fair value gain or loss. Translation differences on non-monetary financial assets such as investments classified as available for sale are included in fair value reserve in equity.
Translation into presentation currency
The results and financial position of all Group entities (none of which operate in an economy with a hyperinflationary functional currency) with functional currency other than the US dollar presentation currency are translated into the presentation currency as follows: i) Assets and liabilities are translated at the closing rate at the date of the statement of financial position; ii) Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and iii) All resulting exchange differences are recognized as a separate component of equity (“Currency translation reserve”), in the caption “Other reserves”.
On consolidation, exchange differences arising from the translation of net investments in foreign operations, and of borrowing and other currency instruments designated as hedges of such investments, are taken to equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognized in the consolidated income statement as part of gain or loss on sale.
Goodwill and fair value adjustments arising on acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.
F-114 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
The following table presents relevant currency translation rates to the U.S. dollar as of December 31, 2011 and 2010 and average rates for the year ended December 31, 2011.
2011 2011 2010 Country Currency Average rate Year-end rate Year-end rate Bolivia ...... Boliviano 6.95 6.91 6.99 Chad and Senegal ...... CFAFranc 471.65 506.98 489.70 Colombia ...... Peso 1,858.95 1,942.70 1,918.75 Costa Rica ...... Costa Rican Colon 507.32 511.84 512.97 Ghana ...... Cedi 1.54 1.64 1.49 Guatemala ...... Quetzal 7.81 7.81 8.02 Honduras ...... Lempira 18.91 19.12 18.90 Luxembourg ...... Euro 0.72 0.77 0.75 Mauritius ...... Rupee 28.81 29.33 30.45 Nicaragua ...... Gold Cordoba 22.42 22.97 21.88 Paraguay ...... Guarani 4,226.12 4,478.00 4,645.00 Rwanda ...... Rwandese Franc 600.29 604.14 594.00 Sweden ...... Krona 6.45 6.88 6.72 Tanzania ...... Shilling 1,576.83 1,578.15 1,459.50 UAE (Dubai) ...... Dirham 3.67 3.67 3.67
The effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and end of the year. Millicom’s functional currency in both El Salvador and DRC is the US$.
2.4 Segment reporting
Operating segments are reported in a manner consistent with internal reporting to the Chief Operating Decision-Maker (“CODM”). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive committee that makes strategic decisions.
2.5 Property, plant and equipment
Items of property, plant and equipment are stated at historical cost, less accumulated depreciation and accumulated impairment. Historical cost includes expenditure that is directly attributable to acquisition of items. The carrying amount of replaced parts is derecognized. Repairs and maintenance are charged to the income statement in the financial period in which they are incurred.
Depreciation is calculated using the straight-line method over the shorter of the estimated useful life of the asset and the remaining life of the license associated with the assets, unless the renewal of the license is contractually possible.
Estimated useful lives are:
Buildings ...... 40years or lease period, if lower Networks (including civil works) ...... 5to15years Other ...... 2to7years
F-115 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. The assets’ residual value and useful life is reviewed, and adjusted if appropriate, at each statement of financial position date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
Construction in progress consists of the cost of assets, labor and other direct costs associated with property, plant and equipment being constructed by the Group. Once the assets become operational, the related costs are transferred from construction in progress to the appropriate asset category and start to be depreciated.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to the income statement in the financial period in which they are incurred.
A liability for the present value of the cost to remove an asset on both owned and leased sites is recognized when a present obligation for the removal is established. The corresponding cost of the obligation is included in the cost of the asset and depreciated over the useful life of the asset.
Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of that asset when it is probable that such costs will result in future economic benefits for the Group and the costs can be measured reliably.
2.6 Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is measured at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is charged to the income statement in the year in which expenditure is incurred.
Intangible assets with finite useful lives are amortized over their estimated useful economic lives using the straight-line method and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for intangible assets with finite useful lives are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the assets are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated income statement in the expense category consistent with the function of the intangible assets.
Goodwill
Goodwill represents the excess of cost of an acquisition, over the Group’s share in the fair value of identifiable assets less liabilities and contingent liabilities of the acquired subsidiary, joint venture or associate at the date of the transaction. If the fair value of identifiable assets, liabilities or contingent liabilities or the cost of the acquisition can only be determined
F-116 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued) provisionally, then Millicom initially accounts for goodwill using provisional values. Within twelve months of the acquisition date, Millicom then recognizes any adjustments to the provisional values once the fair value of the identifiable assets, liabilities and contingent liabilities and the cost of the acquisition have been finally determined. Adjustments to provisional fair values are made as if the adjusted fair values had been recognized from the acquisition date. Goodwill on acquisition of subsidiaries and joint ventures is included in “intangible assets, net”. Goodwill on acquisition of associates is included in “investments in associates”. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment losses on goodwill are not reversed.
For the purpose of impairment testing, goodwill acquired in a business combination is, from acquisition date, allocated to each of the Group’s cash generating units or groups of cash- generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated:
• Represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
• Is not larger than an operating segment.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed and the portion of the cash-generating unit retained.
Licenses
Licenses are shown at either historical cost or, if acquired in a business combination, at fair value at the date of acquisition. Licenses have a finite useful life and are carried at cost less accumulated amortization and any accumulated impairment losses. Amortization is calculated using the straight-line method to allocate the cost of the licenses over their estimated useful lives.
The terms of licenses, which have been awarded for various periods, are subject to periodic review for, amongst other things, rate setting, frequency allocation and technical standards. Licenses are initially measured at cost and are amortized from the date the network is available for use on a straight-line basis over the license period. Licenses held, subject to certain conditions, are usually renewable and generally non-exclusive. When estimating useful lives of licenses, renewal periods are not usually included.
F-117 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
Trademarks and customer bases
Trademarks and customer bases are recognized as intangible assets only when acquired or gained in a business combination. Their cost represents fair value at the date of acquisition. Trademarks and customer bases have finite useful lives and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of the trademarks and customer bases over their estimated useful lives. The estimated useful lives for trademarks and customer bases are based on specific characteristics of the market in which they exist. Trademarks and customer bases are included in “Intangible assets, net”.
Estimated useful lives are:
Trademarks ...... 1to10years Customer bases ...... 4to9years
2.7 Impairment of non-financial assets
At each reporting date the Group assesses whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. The Group determines the recoverable amount based on the higher of its fair value less cost to sell, and its value in use, for individual assets, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Where no comparable market information is available, the fair value less cost to sell is determined based on the estimated future cash flows discounted to their present value using a discount rate that reflects current market conditions for the time value of money and risks specific to the asset. In addition to evaluation of possible impairment to the assets carrying value, the foregoing analysis also evaluates the appropriateness of the expected useful lives of the assets. Impairment losses of continuing operations are recognized in the consolidated income statement in those expense categories consistent with the function of the impaired asset.
At each reporting date an assessment is made as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. Other than for goodwill, a previously recognized impairment loss is reversed if there has been a change in the estimate used to determine the asset’s recoverable amount since the last impairment loss was recognized. If so, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
2.8 Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified within non-current assets.
F-118 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
Loans and receivables are carried at amortized cost using the effective interest method. Gains and losses are recognized in the income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process.
2.9 Financial instruments at fair value through profit or loss
Financial instruments at fair value through profit or loss are financial instruments held for trading. Their fair value is determined by reference to quoted market prices on the statement of financial position date. Where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions, reference to the current market value of a substantially similar instrument, discounted cash flow analysis and option pricing models. A financial instrument is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.
2.10 Financial instruments that contain obligations to purchase own equity instruments
Contracts that contain obligations for the Company to purchase its own equity instruments for cash or other financial assets are initially recorded as financial liabilities based on the present value of the redemption amounts with a corresponding reserve in equity. Subsequently the carrying value of the liability is remeasured at the present value of the redemption amount with changes in carrying value recorded in other non-operating (expenses) income, net. If the contracts expire without delivery, the carrying amounts of the financial liabilities are reclassified to equity.
2.11 Non-current assets (or disposal groups) held for sale and related liabilities
Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value (less costs to sell if their carrying amount is expected to be recovered principally through a sale transaction rather than through continuing use). Liabilities of disposal groups are classified as “Liabilities directly associated with assets held for sale”.
2.12 Inventories
Inventories (which mainly consist of mobile telephone handsets and related accessories) are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
2.13 Trade receivables
Trade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment is recorded when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are indicators of impairment. The
F-119 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued) amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The provision is recognized in the consolidated income statement within “Cost of sales”.
2.14 Deposits
Time deposits
Cash deposits with banks with maturities of more than 3 months that generally earn interest at market rates are classified as time deposits.
Pledged deposits
Pledged deposits represent contracted cash deposits with banks that are held as security for debts at corporate or operational entity level. Millicom is unable to access these funds until either the relevant debt is repaid or alternative security is arranged with the lender.
2.15 Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short- term highly liquid investments with original maturities of three months or less.
2.16 Impairment of financial assets
The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. Impairment losses are recognized in the consolidated income statement.
2.17 Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.
Where any Group company purchases the Company’s share capital, the consideration paid including any directly attributable incremental costs is shown under “Treasury shares” and deducted from equity attributable to the Company’s equity holder until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.
2.18 Borrowings
Borrowings are initially recognized at fair value, net of directly attributable transaction costs. After initial recognition borrowings are subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on acquisition and any fees or costs that are an integral part of the effective interest rate. Any difference between the initial amount and the maturity amount is recognized in the consolidated income statement over the period of the borrowing.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date.
F-120 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued) 2.19 Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Where a finance lease results from a sale and leaseback transaction, any excess of sales proceeds over the carrying amount of the assets is deferred and amortized over the lease term.
Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets, or the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.
Operating lease payments are recognized as expenses in the consolidated income statement on a straight-line basis over the lease term.
2.20 Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, risks specific to the liability. Where discounting is used, increases in the provision due to the passage of time are recognized as interest expenses.
2.21 Trade payables
Trade payables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method where the effect of the passage of time is material.
2.22 Revenue recognition
Revenue comprises the fair value of consideration received or receivable for the sale of goods and services, net of value added tax, rebates and discounts and after eliminating intra-group sales.
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized.
F-121 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
These recurring revenues consist of monthly subscription fees, airtime usage fees, interconnection fees, roaming fees and fees from other telecommunications services such as data services, short message services and other value added services. Recurring revenues are recognized on an accrual basis, i.e. as the related services are rendered. Unbilled revenues for airtime usage and subscription fees resulting from services provided from the billing cycle date to the end of each month are estimated and recorded. Subscription products and services are deferred and amortized over the estimated life of the customer relationship. Related costs are also deferred, to the extent of the revenues deferred, and amortized over the estimated life of the customer relationship. The estimated life of the customer relationship is calculated based on historical disconnection percentage for the same type of customer. Where customers purchase a specified amount of airtime in advance, revenue is recognized as credit is used. Unutilized airtime is carried in the statement of financial position as deferred revenue within “other current liabilities”. Revenues from value added content services such as video messaging, ringtones, games etc., are recognised net of payments to the providers of these services if the providers are responsible for content and determining the price paid by the customer. For such services the Group is considered to be acting in substance as an agent. Where the Group is responsible for the content and determines the price paid by the customer then the revenue is recognised gross. Revenues from the sale of handsets and accessories on a stand-alone basis (without multiple deliverables) are recognized when the significant risks and rewards of ownership of handsets and accessories have been passed to the buyer. Revenue arrangements with multiple deliverables (“Bundled Offers” such as equipment and services sold together) are divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. The arrangement consideration is then allocated among the separate units of accounting based on their relative fair values or on the residual method. Revenue is then recognized separately for each unit of accounting.
2.23 Cost of sales The primary cost of sales incurred by the Group in relation to the provision of telecommunication services relate to interconnection costs, roaming costs, rental of leased lines, costs of handsets and other accessories sold, and royalties. Cost of sales is recorded on an accrual basis. Cost of sales also includes depreciation and any impairment of network equipment and trade receivables.
2.24 Customer acquisition costs Specific customer acquisition costs, including dealer commissions and handset subsidies, are charged to sales and marketing when the customer is activated.
2.25 Employee benefits Pension obligations Pension obligations can result from either a defined contribution plan or a defined benefit plan. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity No further payment obligations exist once the contributions have been
F-122 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued) paid. The contributions are recognized as employee benefit expenses when they are due. Prepaid contributions are recognized as assets to the extent that a cash refund or a reduction in future payments is available.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit pension plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the statement of financial position in respect of the defined benefit pension plan is the present value of the defined benefit obligation at the statement of financial position date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using an appropriate discount rate based on maturities of the related pension liability. The Group does not have any defined benefit pension plans.
Share based compensation
Share awards are granted to management and key employees.
The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employee becomes fully entitled to the award (the vesting date). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vested irrespective of whether or not the market conditions are satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expense is recognized as if the terms had not been modified. In addition, an expense is recognized for any modification that increases the total fair value of the share based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.
2.26 Taxation
Current tax
Current tax assets and liabilities for current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rate and tax laws used to compute the amount are those enacted or substantively enacted by the statement of financial position date.
Deferred tax
Deferred income tax is provided using the liability method and calculated from temporary differences at the statement of financial position date between the tax base of assets and liabilities and their carrying amount for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except where the deferred tax liability arises
F-123 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued) from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting, nor taxable, profit or loss.
Deferred income tax assets are recognized for all deductible temporary differences and carry- forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference and the carry-forward of unused tax credits and unused tax losses can be utilized, except where the deferred tax assets relate to deductible temporary differences from initial recognition of an asset or liability in a transaction that is not a business combination, and, at the time of the transaction, affects neither accounting, nor taxable, profit or loss.
The carrying amount of deferred income tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to utilize the deferred income tax asset. Unrecognized deferred income tax assets are reassessed at each statement of financial position date and are recognized to the extent it is probable that future taxable profit will enable the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rate expected to apply in the year when the assets are realized or liabilities settled, based on tax rates and tax laws that have been enacted or substantively enacted at the statement of financial position date. Income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated income statement. Deferred tax assets and deferred tax liabilities are offset where legally enforceable set off rights exist and the deferred taxes relate to the same taxable entity and the same taxation authority.
2.27 Discontinued operations
Revenues and expenses associated with discontinued operations are presented in a separate line in the consolidated income statement. Comparative figures in the consolidated income statement representing the discontinued operations are reclassified to the separate line. Discontinued operations are those with identifiable operations and cash flows (for both operating and management purposes) and represent a major line of business or geographic unit which has been disposed of or is available for sale.
2.28 Derivative financial instruments and hedging activities
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:
(a) hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge);
(b) hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge); or
(c) hedges of a net investment in a foreign operation (net investment hedge).
For transactions designated and qualifying for hedge accounting, at the inception of the transaction, the Group documents the relationship between hedging instruments and hedged
F-124 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued) items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
The fair values of derivative instruments used for hedging purposes are disclosed in note 35. Movements in the hedging reserve are recognized as other comprehensive income. The full fair value of a hedging derivative is classified as a non-current asset or liability when the period to maturity of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability when the remaining period to maturity of the hedged item is less than 12 months.
The Group does not have either fair value or net investment hedges.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to any ineffective portion is recognized immediately in the income statement within ‘other non operating (expenses) income, net’.
Amounts accumulated in equity are reclassified to the income statement in the periods when the hedged item affects profit or loss.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within ‘other non operating (expenses) income, net’.
2.29 Changes in accounting policies
The consolidated financial statements as of December 31, 2011 are prepared in accordance with consolidation and accounting policies consistent with those of the previous financial years.
There are no IFRS’s or IFRIC interpretations that are effective for the first time for the financial year beginning January 1, 2011 that have a material impact on the Group.
The following standards, amendments and interpretations issued are not effective for the financial year beginning January 1, 2011 and have not been early adopted.
• IFRS 9, ‘Financial Instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value, and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income
F-125 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
2. Summary of consolidation and accounting policies (continued)
statement, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2015.
• IFRS 10, ‘Consolidated Financial Statements’ build on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Group is yet to assess IFRS 10’s full impact and intends to adopt IFRS 10 no later than the accounting period beginning on or after January 1, 2013.
• IFRS 11, ‘Joint Arrangements’, sets out the core principle that a party to a joint arrangement determines the type of joint arrangement in which it is involved by assessing its rights and obligations and accounts for those rights and obligations in accordance with that type of joint arrangement. The standard removes the option of accounting for joint ventures using proportionate consolidation, and requires equity accounting to be applied to joint ventures. The standard is effective for annual periods beginning on or after January 1, 2013.
• IFRS 12, ‘Disclosure of interests in other entities’ includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The Group is yet to assess IFRS 12’s full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after January 1, 2013.
• IFRS 13. ‘Fair Value Measurement’ aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS’s. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. The Group is yet to assess IFRS 13’s full impact and intends to adopt IFRS 13 no later than the accounting period beginning on or after January 1, 2013.
• IAS 1, Presentation of Financial Statements – amendment to revise the way other comprehensive income is presented, which retains the ‘one or two statement’ approach at the option of the entity and only revises the way other comprehensive income is presented: requiring separate subtotals for those elements which may be 'recycled' (e.g. cash-flow hedging, foreign currency translation), and those elements that will not (e.g. fair value through OCI items under IFRS 9). The amendment is effective for annual periods beginning on or after January 1, 2012.
• IAS 27, Consolidated and Separate Financial Statements, reissued as IAS 27 Separate Financial Statements, as a result of issuance of IFRS 10, Consolidated Financial Statements. The standard is effective for annual periods beginning on or after January 1, 2013.
• IAS 28, Investments in Associates and Joint Ventures, reissued as IAS 28 Investments in Associates, as a result of issuance of IFRS 11, Joint Arrangements. The standard is effective for annual periods beginning on or after January 1, 2013.
There are no other IFRS’s or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.
F-126 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
3. Significant accounting judgments and estimates
Contingent liabilities
Contingent liabilities are potential liabilities that arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of Millicom. Provisions for liabilities are recorded when a loss is considered probable and can be reasonably estimated. The determination of whether or not a provision should be recorded for any potential liabilities is based on management’s judgment.
Estimates
Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Because of inherent uncertainties in this evaluation process, actual results may be different from originally estimated amounts. In addition, significant estimates are involved in the determination of impairments, provisions related to taxes and litigation risks. These estimates are subject to change as new information becomes available and may significantly affect future operating results.
Accounting for property, plant and equipment, and intangible assets involves the use of estimates for determining fair values at acquisition dates, particularly in the case of such assets acquired in a business combination. Furthermore, the expected useful lives of these assets must be estimated. The determination of fair values of assets and liabilities, as well as of useful lives of the assets is based on management judgment.
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies (see note 14).
For our critical accounting estimates reference is made to the relevant individual notes to these consolidated financial statements, more specifically note 5 – Acquisition of subsidiaries, joint ventures and non-controlling interests; note 7 – Discontinued operations and assets held for sale; note 14 – Taxes; note 16 – Intangible assets, note 17 – Property, plant and equipment, note 20 – Trade receivables, note 24 – Share-based compensation (relating to long-term incentive plans); note 28 – Other noncurrent and current provisions and liabilities (relating to the put option); note 32 – Commitments and contingencies; and note 35 – Financial instruments.
4. Restatement of previously issued financial statements
As previously reported in the Company’s press release furnished on Form 6-K filed with the United States Securities and Exchange Commission (“SEC”) on January 26, 2012, the board of directors of the Company, based on the recommendation of the audit committee and in consultation with management, concluded that, because of a misstatement in the Company’s previously issued financial statements for the year ended December 31, 2010, and for the quarters ending on September 30, 2010 to September 30, 2011, the Company should restate its December 31, 2010 financial statements in this Annual Report on Form 20-F for the fiscal year ended December 31, 2011. Accordingly, the Company has restated its financial statements for these periods.
F-127 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
4. Restatement of previously issued financial statements (continued)
The restated financial statements as of and for the year ended December 31, 2010 correct the accounting treatment for the Honduras transaction in July 2010 as follows:
Recognition of a liability and corresponding reserve for the put option provided to our partner who holds a non-controlling interest in our Honduran operation. Following reassessment of the accounting treatment of the put option provided to Millicom’s partner who holds a 33.3% non-controlling interest in our Honduran operation, Millicom determined that, as the put option could be exercised under certain change of control events which could be outside the control of Millicom, the option meets the criteria under IAS 32 for recognition as a liability and corresponding equity reserve. Therefore, Millicom has retroactively recorded a liability for the put option at July 1, 2010 of $737 million. As a result of the change in carrying value of the put option between July 1, 2010 and year end, the liability amounted to $769 million at December 31, 2010, representing the redemption value of the option.
Recognition of a loss on revaluation of the put option liability Recognition for the period between July 1, 2010 to December 31, 2010 of a non operating expense of $32 million, reflecting the change in value of the above mentioned put option liability.
Effects of restatement The following table sets forth the effects of the restatement on affected items within Millicom’s previously reported Consolidated Statements of Financial Position and Consolidated Income Statements. The adjustments necessary to correct the errors have no effect on reported assets or cash flows or guidance.
As of and for the Year (in thousands of U.S. dollars, except per share data) Ended December 31, 2010 Consolidated Income Statements Data: Other non-operating income (expenses), net (including loss from associates) ...... Aspreviously reported (31,519) Adjustment (31,956) As adjusted (63,475) Profit before taxes from continuing operations ...... Aspreviously reported 1,870,163 Adjustment (31,956) As adjusted 1,838,207 Net profit for the period ...... Aspreviously reported 1,652,233 Adjustment (31,956) As adjusted 1,620,277 Basic earnings per common share ...... Aspreviously reported $ 15.27 Adjustment ($ 0.30) As adjusted $ 14.97 Diluted earnings per common share ...... Aspreviously reported $ 15.24 Adjustment ($ 0.29) As adjusted $ 14.95
F-128 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
4. Restatement of previously issued financial statements (continued)
As of and for the Year (in thousands of U.S. dollars) Ended December 31, 2010 Consolidated Statements of Financial Position Data: Accumulated profits brought forward ...... Aspreviously reported 1,134,354 Adjustment – As adjusted 1,134,354 Put option reserve ...... Aspreviously reported – Adjustment (769,378) As adjusted (769,378) Total Equity ...... Aspreviously reported 3,159,011 Adjustment (769,378) As adjusted 2,389,633 Total Current Liabilities ...... Aspreviously reported 1,684,831 Adjustment 769,378 As adjusted 2,454,209
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests Year ended December 31, 2011
In 2011 Millicom acquired minor investments in businesses for consideration of $9 million. As at December 31, 2011, an agreement entered into on August 20, 2010 to increase Millicom’s ownership in Navega El Salvador from 55% to 100% remains subject to regulatory approval.
Year ended December 31, 2010
In 2010, Millicom gained control over Telefonica Cellular S.A. DE CV, its mobile phone operation in Honduras, and acquired control of Navega S.A. DE CV, its cable operation in Honduras.
Telefonica Cellular S.A. DE CV
On July 1, 2010 Millicom reached agreement with its local partner in Honduras whereby Millicom’s local partner granted Millicom an unconditional call option for the next five years for his 33% stake in Telefonica Cellular S.A. DE CV (“Celtel”) and as consideration, Millicom granted a put option for the same duration to the local partner (see notes 28 and 35). The put option can only be exercised in case of a change of control of Millicom International Cellular S.A. or Millicom’s subsidiary that holds the shares in Celtel (except if the change of control is in favor of Investment AB Kinnevik, the current largest shareholder of Millicom, or management of Millicom).
Prior to entering into the agreement, Millicom was dependent on the consent of its local partner for strategic decisions related to its Honduran operation, as the shareholders agreement required a vote of 75% of the shares to authorize and approve significant financial and operating policies of Celtel. The call option allows Millicom, unconditionally at any time during the five year period from July 1, 2010 to exercise its right to acquire the 33% stake (and voting rights) of our local partner at a price which Millicom believes represents the strategic value of the asset. The call
F-129 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) option therefore conferred to Millicom control over Celtel through its ability to influence and exercise the power to govern the financial and operating policies (develop the future business in Honduras).
Accordingly, Celtel has been fully consolidated into the Millicom Group financial statements from July 1, 2010. Previously, the Honduras operations were proportionately consolidated.
Millicom completed the allocation of the purchase price to the assets acquired, liabilities assumed and contingent liabilities during the year ended December 31, 2010. The recognized amounts of identified assets acquired and liabilities assumed as of July 1, 2010 were as follows:
Previously Fair value held interests (100%) (66.7%) US$ ’000 US$ ’000 Intangible assets, net(i) ...... 435,174 22,602 Other investments ...... 20,653 13,769 Property, plant and equipment, net ...... 339,082 226,055 Trade receivables ...... 13,876 9,251 Prepayments and accrued income ...... 6,681 4,454 Other current assets ...... 34,485 22,990 Cash and cash equivalents ...... 24,654 16,436 874,605 315,557 Other non-current liabilities(ii) ...... 264,590 100,492 Current debt and other financing ...... 74,943 49,962 Trade payables ...... 6,117 4,078 Accrued interests and other expenses ...... 12,756 8,504 Current income tax liabilities ...... 17,465 11,643 Other current liabilities ...... 51,890 35,871 427,761 210,550 Non-controlling interests ...... 147,121 Fair value of the net assets acquired and contingent liabilities ...... 299,723 Goodwill arising on change of control ...... 854,572 Previously held interests in Celtel ...... (105,007) Revaluation of the previously held interests in Celtel ...... 1,049,288
(i) Intangible assets not previously recognized are trademarks for an amount of $40 million, with estimated useful life of 10 years, customers’ list for an amount of $335 million, with estimated useful life of 8-9 years, and telecommunications license for an amount of $21 million, with estimated useful life of 11 years.
(ii) Deferred tax liabilities related to differences between the tax base and the fair value of the identifiable assets acquired amount to $114 million.
The goodwill, which is not expected to be tax deductible, is attributable to the profitability potential of Celtel and the synergies expected to arise. The fair value of the customers’ list was ascertained using the discounted excess earnings method, the fair value of the trademark was ascertained using the relief from royalty approach, and the fair value of the telecommunications license against comparable transactions.
F-130 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) The change of control contributed revenues of $100 million and net profit of $1,049 million (including the gain on revaluation of the previously held interest) for the period from acquisition to December 31, 2010. If the change of control had occurred on January 1, 2010, unaudited pro forma Group revenues from continuing operations for the year ended December 31, 2010 would have been $4,018 million, and the unaudited pro forma net profit from continuing operations for the same period, as restated, would have been $1,633 million. These amounts have been calculated using the Group accounting policies.
Millicom revalued at fair value its previously held 66.7% interest in Celtel recognizing a gain of $1,049 million, recorded under the caption “Revaluation of previously held interests”. The fair value of the previously held interests was determined based on discounted cash flows. The cash flow projections used (adjusted operating profit margins, income tax, working capital and capital expenditure) were estimated by management covering 6 years. Cash flows beyond this period were extrapolated using a perpetual growth rate of 2%. The valuation was determined using a discount rate of 14.3%.
Navega S.A. DE CV
As part of a regional shareholding alignment agreement with its local partner in Honduras, on August 20, 2010 Millicom reached agreement with its local partner in Honduras whereby Millicom acquired a further 6% of Navega S.A. DE CV (“Navega Honduras”) (formerly Metrored S.A.). As a result of this agreement Millicom has the right to control Navega Honduras, which has been fully consolidated into the Millicom Group financial statements from August 20, 2010. Previously, the results of Navega Honduras were proportionately consolidated. The agreement is expected to facilitate further integration of the cable business and to create synergies.
F-131 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) Millicom completed the allocation of the purchase price to the assets acquired, liabilities assumed and contingent liabilities during the year ended December 31, 2010 and recognized the following amounts:
Previously Fair value held interests 100% 60.72% US$ ’000 US$ ’000 Intangible assets, net ...... 19,563 11,879 Property, plant and equipment, net ...... 22,875 13,890 Other non-current assets ...... 180 109 Trade receivables ...... 1,988 1,207 Prepayments and accrued income ...... 40 25 Other current assets ...... 482 293 Cash and cash equivalents ...... 3,050 1,852 48,178 29,255 Other non-current liabilities ...... 3,178 1,930 Current debt and other financing ...... 1,152 699 Trade payables ...... 357 217 Accrued interests and other expenses ...... 1,135 689 Current income tax liabilities ...... 1,035 628 Other current liabilities ...... 2,211 1,343 9,068 5,506 Non controlling interests ...... 13,037 Fair value of the net assets acquired and contingent liabilities ...... 26,073 Goodwill arising on change of control ...... 13,866 Previously held interests in Navega Honduras ...... (23,748) Revaluation of the previously held interests in Navega Honduras ...... 10,726 Cost of change of control ...... 5,465
The goodwill, which is not expected to be tax deductible, is attributable to the profitability potential of Navega Honduras and the synergies expected to arise. The fair value of the customers’ list was ascertained using the discounted excess earnings method, and the fair value of the trademark was ascertained using the relief from royalty approach.
Navega Honduras contributed revenues of $1 million and net profit of $20 million (including gain on revaluation) for the period from acquisition to December 31, 2010. If the acquisition had occurred on January 1, 2010, unaudited pro forma Group revenues from continuing operations for the year ended December 31, 2010 would have been $3,924 million, and the unaudited pro forma net profit from continuing operations for the same period, as restated, would have been $1,612 million. These amounts have been calculated using the Group accounting policies.
Millicom revalued at fair value its previously held 60% interest in Navega Honduras recognizing a gain of $11 million, recorded under the caption “Revaluation of previously held interests”.
Year ended December 31, 2009
In 2009, Millicom’s joint venture in Guatemala acquired the remaining non-controlling interest in Navega.com S.A. and Millicom acquired the remaining non-controlling interest in its operation in Chad.
F-132 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) Navega.com S.A.
On March 13, 2009, Millicom’s joint venture in Guatemala completed the acquisition of the remaining 55% interest in Navega.com S.A. (“Navega Guatemala”). Millicom’s share of the acquisition cost of the remaining 55% interest in Navega Guatemala amounted to $49 million and Millicom’s share of the cash acquired amounted to $10 million; net cash used for this acquisition therefore amounted to $39 million.
Millicom completed the allocation of the purchase price to the assets acquired, liabilities assumed and contingent liabilities during the year ended December 31, 2009. Millicom’s share of the fair value of the identifiable assets and liabilities acquired was as follows:
Previously Fair value held interests US$ ’000 US$ ’000 Intangible assets, net(i) ...... 51,442 8,988 Property, plant and equipment, net ...... 34,205 18,995 Other non-current assets ...... 122 87 Trade receivables ...... 3,196 1,739 Prepayments and accrued income ...... 13 8 Current income tax assets ...... 16 7 Other current assets(ii) ...... 2,400 353 Cash and cash equivalents ...... 10,656 5,070 102,050 35,247 Other non-current liabilities(iii) ...... 3,437 – Current debt and other financing ...... 10,953 5,546 Trade payables ...... 7,241 4,611 Accrued interests and other expenses ...... 557 286 Current income tax liabilities ...... 2,872 1,899 Other current liabilities(ii) ...... 16,589 5,961 41,649 18,303 Fair value of the net assets acquired and contingent liabilities ...... 60,401 Goodwill arising on acquisition ...... 38,203 Previously held interests in Navega Guatemala and Metrored ...... (16,944) Revaluation of the previously held interests in Navega Guatemala and Metrored ...... (32,319) Acquisition cost ...... 49,341
(i) Intangible assets not previously recognized are trademarks for an amount of $2 million (Millicom’s share: $1 million), with estimated useful life of 8 years, and customers’ list for an amount of $62 million (Millicom’s share: $35 million), with estimated useful life of 9 years.
(ii) Contingent liabilities relating to tax and other contingencies on acquisition of $6 million (Millicom’s share: $3 million) were booked within “Other current liabilities”. The former shareholders placed $3 million in escrow to partly cover these contingencies. Therefore a corresponding financial asset of $3 million (Millicom’s share: $2 million) has been recorded within “Other current assets”.
(iii) Deferred tax liabilities, related to the differences between the tax base and the fair value of the identifiable assets acquired amount to $6 million (Millicom’s share: $3 million).
F-133 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
5. Acquisitions of subsidiaries, joint ventures and non-controlling interests (continued) The goodwill, which is not expected to be tax deductible, is attributable to the profitability potential of the acquired business and the synergies expected to arise from the Group’s acquisition of Navega. The fair value of the customer bases was ascertained using the discounted excess earnings method and the fair value of the trademark was ascertained using the relief from royalty approach.
The acquired business contributed revenues of $21 million and net profit of $12 million for the period from acquisition to December 31, 2009. If the acquisition had occurred on January 1, 2009, unaudited pro forma Group revenues from continuing operations for the year ended December 31, 2009 would have been $3,378 million, and the unaudited pro forma net profit from continuing operations for the same period would have been $507 million. These amounts have been calculated using the Group accounting policies.
In 2009 Millicom early adopted IFRS 3R and applied it to this acquisition (see note 2). As a result, Millicom revalued at fair value its previously held 45% interest in Navega (held by Millicom’s joint venture in Guatemala) and its previously held 49% interest in Metrored S.A. (“Metrored”), a subsidiary of Navega (held by Millicom’s joint venture in Honduras), recognizing a gain of $32 million, recorded under the caption “Revaluation of previously held interests”.
Millicom Tchad S.A.
On March 4, 2009, Millicom completed the acquisition of the remaining 12.5% non-controlling interests in its operation in Chad. The initial consideration amounted to $8 million and was paid in cash. As certain conditions were met, two additional payments of $1 million each were made.
In 2009 Millicom early adopted IAS 27R and applied it to this acquisition. As a result, the purchase of the non-controlling interest in Chad was treated as an equity transaction. The difference between the acquisition cost and the carrying value of the existing non-controlling interest at the date of the transaction resulted in a decrease in Millicom shareholders’ equity of $10 million.
Other minor investments
In 2009, Millicom acquired other minor investments for a cash consideration of $6 million.
6. Disposals of subsidiaries and joint ventures
Year ended December 31, 2011
Millicom Lao Co Ltd
On September 16, 2009 Millicom announced that it signed an agreement for the sale of its 74.1% holding in Millicom Lao Co. Ltd., its Laos operation, to VimpelCom for approximately $65 million in total cash proceeds, payable on completion. The transaction valued the entire Laos operation at an enterprise value of approximately $102 million.
On March 9, 2011 Millicom completed the transaction and received proceeds (net of transaction costs and taxes) from the sale of $53 million, realizing a gain on sale of $37 million. From that date the Laos operation is no longer included in the consolidated financial statements of the Group.
F-134 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
6. Disposals of subsidiaries and joint ventures (continued)
Amnet Honduras
As part of a regional shareholding alignment agreement with its local partner in Honduras, on March 21, 2011, Millicom reduced its shareholding in Amnet Honduras from 100% to 66.7%, realizing a gain on sale of $2.2 million, which is recorded in equity as gain on sale to non-controlling interests. The proceeds from the sale amount to $16.5 million, of which $1 million was received in March 2011, while $4 million will be received each year for the next three years (in March 2012, March 2013 and March 2014) and the remaining $3.5 million will be received in March 2015.
Year ended December 31, 2010
As part of the regional shareholding alignment agreement with its local partner in Guatemala, on August 20, 2010, Millicom disposed of 45% of its interest in Newcom Guatemala (“Amnet Guatemala”). From that date Amnet Guatemala has been accounted for as a joint venture and proportionately consolidated into the Millicom Group financial statements. Previously, the results of the Amnet Guatemala were fully consolidated. There was no significant impact on profit and loss from the disposal.
Year ended December 31, 2009
On October 16, November 25 and November 26, 2009 respectively, Millicom completed the sale of its operations in Sri Lanka, Sierra Leone and Cambodia, for total proceeds of respectively $155 million, $1 million and $353 million realizing a total net gain of $289 million. Total transaction costs amounted to $11 million. Total cash disposed amounted to $30 million.
7. Discontinued operations and assets held for sale
Discontinued operations
The results of discontinued operations for the years ended December 31, 2011, 2010 and 2009 are presented below:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Revenues ...... 6,134 29,625 218,874 Operating expenses(i) ...... (3,378) (17,086) (193,038) Operating profit ...... 2,756 12,539 25,836 Non-operating income (expenses), net ...... 509 271 (10,500) Profit before tax ...... 3,265 12,810 15,336 Tax charge ...... (305) (953) (3,854) Gain from disposal, net ...... 36,505 – 288,860 Net profit for the year ...... 39,465 11,857 300,342
(i) In 2009, an impairment of $11 million was booked to align the carrying value of Millicom’s operation in Sierra Leone to its estimated fair value less cost to sell.
F-135 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
7. Discontinued operations and assets held for sale (continued)
The cash (used) provided by discontinued operations for the years ended December 31, 2011, 2010 and 2009 is presented below:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Net cash provided by operating activities ...... – 11,105 29,906 Net cash used by investing activities ...... – (16,089) (62,795) Net cash (used) provided by financing activities ...... – 5,597 (8,270) Exchange (loss) gain on cash and cash equivalents ...... – 234 (158) Transfer of cash to assets held for sale ...... – (847) (19,099) Proceeds from the sale of discontinued operations ...... 53,102 – 477,171 Cash provided (used) by discontinued operations ...... 53,102 – 416,755
The following table gives details of non cash investing and financing activities of discontinued operations for the years ended December 31, 2011, 2010 and 2009:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Investing activities Acquisition of property, plant and equipment ...... – – (873) Financing activities Vendor financing and finance leases ...... – – 873
Asian businesses
In May 2009, Millicom decided to dispose of its businesses in Cambodia, Laos and Sri Lanka and, as a result, in accordance with IFRS 5, these operations were classified as discontinued operations. Millicom’s operations in Sri Lanka and Cambodia were sold respectively on October 16 and November 26, 2009 and its operation in Laos sold on March 9, 2011. Millicom’s businesses in Cambodia, Laos and Sri Lanka previously represented the entire operating segment “Asia”.
Assets held for sale
At December 31, 2011 Millicom had assets held for sale amounting to $66 million representing towers sold but yet to be transferred to associates in Ghana, Tanzania, the Democratic Republic of Congo and Colombia. The assets and directly associated liabilities (asset retirement obligations) of $10 million that are part of these sales but are not leased back by Millicom have been reclassified respectively as assets held for sale and liabilities directly associated with assets held for sale, as completion of their sale is highly probable. The part of the towers which are leased back are capitalized and classified under the caption “Property, plant & equipment, net” in the statement of financial position as at December 31, 2011.
F-136 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
7. Discontinued operations and assets held for sale (continued)
The major classes of assets and liabilities classified as held for sale as at December 31, 2011, and 2010 are as follows:
2011 2010 US$ ’000 US$ ’000 Assets Property, plant and equipment, net ...... 66,252 171,473 Trade receivables, net ...... – 6,044 Inventories ...... – 477 Other assets ...... – 4,402 Cash and cash equivalents ...... – 2,314 Assets held for sale ...... 66,252 184,710 Liabilities Non-current debt and other financing ...... – 13,322 Other non-current liabilities ...... 9,658 13,992 Current debt and other financing ...... – 5,662 Trade payables ...... – 4,278 Other current liabilities ...... – 23,513 Liabilities directly associated with assets held for sale ...... 9,658 60,767 Net assets directly associated with the disposal group ...... 56,594 123,943
Ghana
In January 2010, Millicom’s operation in Ghana signed a sale and lease-back agreement with Helios Towers Ghana, a direct subsidiary of Helios Towers Africa, for most of its tower assets. Under the agreement, Millicom Ghana sold the tower assets to Helios Towers Ghana for a total consideration of $30 million cash and a 40% stake in Helios Towers Ghana, and leased back a dedicated portion of each tower on which to locate its network equipment.
By December 31, 2011 approximately 97% of the towers had been transferred. The remaining towers are expected to be transferred in 2012. The carrying value of the portion of the remaining towers that will not be leased back has been classified as assets held for sale as at December 31, 2011 and amounted to $1 million (December 31, 2010: $6 million).
The gain on sale represents the difference between the proceeds received and the net book value of the towers sold, as adjusted to eliminate Millicom’s equity stake in Helios Towers Ghana. A portion of the gain, representing the portion of towers leased back is deferred and recognised over the term of the lease. The net gain realized for the year ended December 31, 2011 was $5 million (2010: $5 million).
The fair value of the towers was derived by using the estimated replacement cost of the towers adjusted by an amount for wear and tear taking into consideration the average age of the towers. The fair value of the assets sold was $70 million and the acquired 40% interest in Helios Towers Ghana is accounted for as an investment in associate (see note 18).
Millicom is leasing back a portion representing 40% of the towers sold for a period of 12 years (with options to renew for four further periods of five years each). The 40% portion of towers being leased back represents the dedicated part of each tower on which Millicom’s equipment is located and is derived from the average current technical capacity of the towers. This part of
F-137 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
7. Discontinued operations and assets held for sale (continued) each of the towers is being accounted for as a finance lease. Rights to use the land on which the towers are located are accounted for as operating leases, and costs of services for the towers are treated as operating expenses. Annual payments under the finance lease agreement depend on the timing of transfer of towers to Helios Towers Ghana, but amount to approximately $11 million per annum once all towers are transferred.
Tanzania In December 2010, Millicom’s operation in Tanzania signed a sale and lease-back agreement with Helios Towers Tanzania, a direct subsidiary of Helios Towers Africa, for most of its tower assets. Under the agreement, Millicom Tanzania has agreed to sell the tower assets to Helios Towers Tanzania for a total consideration of $81 million cash and a 40% stake in Helios Towers Tanzania, and will lease back a dedicated portion of each tower on which to locate its network equipment. By December 31, 2011, approximately 70% of the towers had been transferred. The remaining towers are expected to be transferred in 2012. The carrying value of the portion of the remaining towers that will not be leased back has been classified as assets held for sale as at December 31, 2011 and amounted to $22 million (December 31, 2010: $52 million). At December 31, 2011, liabilities directly related to these assets held for sale amounted to $3 million. (December 31, 2010: $6 million). The gain on sale represents the difference between the proceeds received and the net book value of the towers sold, as adjusted to eliminate Millicom’s equity stake in Helios Towers Tanzania. A portion of the gain, representing the portion of towers leased back is deferred and recognised over the term of the lease. The net gain realized for the year ended December 31, 2011 was $13 million (2010: nil). The fair value of the assets was derived by using the estimated replacement cost of the towers adjusted by an amount for wear and tear taking into consideration the average age of the towers. The fair value of the assets sold was $131 million and the acquired 40% interest in Helios Towers Tanzania is accounted for as an investment in associate (see note 18). Millicom will lease back 40% of the towers sold for a period of 12 years (with options to renew for four further periods of five years each). The 40% portion of towers to be leased back represents the dedicated part of each tower on which Millicom’s equipment is located and is derived from the average current technical capacity of the towers. This part of each of the towers is accounted for as a finance lease. Rights to use the land on which the towers are located will be accounted for as operating leases, and costs of services for the towers are treated as operating expenses. Annual payments under the finance lease agreement depend on the timing of transfer of towers to Helios Towers Tanzania, but amount to approximately $10 million per annum once all towers are transferred.
The Democratic Republic of Congo (“DRC”) In December 2010, Millicom’s operation in DRC signed a sale and lease-back agreement with Helios Towers DRC, a direct subsidiary of Helios Towers Africa, for most of its tower assets. Under the agreement, Millicom DRC has agreed to sell the towers to Helios Towers DRC for a total consideration of $41.5 million cash and a 40% stake in Helios Towers DRC, and will lease back a dedicated portion of most of the towers on which to locate its network equipment.
F-138 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
7. Discontinued operations and assets held for sale (continued)
By December 31, 2011, approximately 50% of the towers had been transferred. The remaining towers are expected to be transferred in 2012. The carrying value of the portion of the remaining towers that will not be leased back has been classified as assets held for sale as at December 31, 2011 and amounted to $29 million (December 31, 2010: $55 million). At December 31, 2011, liabilities directly related to these assets held for sale amounted to $2 million. (December 31, 2010: $5 million).
The gain on sale represents the difference between the proceeds received and the net book value of the towers sold, as adjusted to eliminate Millicom’s equity stake in Helios Towers DRC. A portion of the gain, representing the portion of towers leased back is deferred and recognised over the term of the lease. The net gain realized for the year ended December 31, 2011 was $3 million (2010: nil).
Millicom will lease back a portion representing 40% of most of the towers sold for a period of 12 years (with options to renew for four further periods of five years each). The 40% portion of towers to be leased back represents the dedicated part of each tower on which Millicom’s equipment is located and is derived from the average current technical capacity of the towers. This part of each of the towers is accounted for as a finance lease. Rights to use the land on which the towers are located are accounted for as operating leases, and costs of services for the towers are treated as operating expenses.
Annual payments under the finance lease agreement depend on the timing of transfer of towers to Helios Towers DRC, but amount to approximately $13 million per annum once all towers are transferred.
Colombia
In July 2011, Millicom’s operation in Colombia signed a sale and lease-back agreement with American Towers International Inc, for most of its tower assets.
Under the agreement, Colombia Móvil has agreed to sell those tower assets to a fully owned subsidiary of American Towers in Colombia (ATC Infraco S.A.S) for total consideration of $182 million cash and an option for Millicom to acquire in cash a 40% stake in the holding company that owns that subsidiary (ATC Colombia BV), and will lease back a dedicated portion of each tower on which to locate its network equipment.
By December, 2011, approximately 63% of the towers had been transferred. The remaining towers are expected to be transferred in 2012. The carrying value of the portion of the remaining towers that will not be leased back has been classified as assets held for sale as at December 31, 2011 and amounted to $14 million. At December 31, 2011, liabilities directly related to these assets held for sale amounted to $4 million.
The gain on sale represents the difference between the proceeds and the net book value of the towers sold, as adjusted to eliminate Millicom’s equity stake in ATC Colombia BV. A portion of the gain, representing the portion of towers leased back is deferred and recognised over the term of the lease. The net gain realized for the year ended December 31, 2011 was $12 million.
Millicom will lease back 50% of the towers sold for a period of 12 years (with options to renew for four further periods of five years each). The 50% portion of towers to be leased back represents the dedicated part of each tower on which Millicom’s equipment is located and is derived from the average current technical capacity of the towers. This part of each of the towers
F-139 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
7. Discontinued operations and assets held for sale (continued) is accounted for as a finance lease. Rights to use the land on which the towers are located are accounted for as operating leases, and costs of services for the towers are treated as operating expenses.
Annual payments under the finance lease agreement depend on the timing of transfer of towers to ATC Infraco S.A.S., but amount to approximately $19 million per annum once all towers are transferred.
The option to acquire a 40% interest in ATC Infraco (“ATC Infraco Option”) was exercised by Millicom in December 2011 for cash consideration of $7 million. The option price is set at a value that has been derived from the value of the tower assets that are transferred to ATC Infraco.
Millicom has provided Colombia Móvil’s other shareholders with an unconditional option to acquire an interest in ATC Infraco up to half of the interest held or to be held by Millicom. The option expires on July 18, 2013. At December 31, 2011 the fair value of the option granted by Millicom is not significant.
Through a Millicom subsidiary, Millicom also has an unconditional option to acquire a minority equity interest of up to 40% in ATC Sitios de Colombia S.A.S., an already established tower subsidiary of American Towers International Inc. The option to acquire an interest of up to 40% in ATC Sitios (“ATC Sitios Option”) may be exercised until December 21, 2012. The option price is the equivalent of the amount invested by American Tower in ATC Sitios as adjusted for any return on capital invested by American Tower. At December 31, 2011 the fair value of the option granted to Millicom is not significant.
Millicom has provided Colombia Móvil’s other shareholders with an unconditional option to acquire an interest in ATC Sitios up to half of the interest held or to be held by Millicom. The option expires on July 18, 2013. At December 31, 2011 the fair value of the option granted by Millicom is not significant.
F-140 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
8. Subsidiaries
The Group has the following significant subsidiaries, which are consolidated:
Holding Holding Name of the company Country December 31, 2011 December 31, 2010 % of ownership % of ownership interest interest Central America Telemovil El Salvador S.A...... ElSalvador 100.0 100.0 Cable El Salvador S.A. de C.V...... ElSalvador 100.0 100.0 Telefonica Celular S.A...... Honduras 66.7 66.7 Navega S.A. DE CV (formerly Metrored S.A) (see note 5)...... Honduras 66.7 66.7 Cable Costa Rica S.A...... Costa Rica 100.0 100.0 South America Telefonica Celular de Bolivia S.A...... Bolivia 100.0 100.0 Telefonica Celular del Paraguay S.A...... Paraguay 100.0 100.0 Colombia Movil S.A. E.S.P...... Colombia 50.0 + 1 share 50.0 + 1 share Africa Millicom Ghana Company Limited ...... Ghana 100.0 100.0 Sentel GSM S.A...... Senegal 100.0 100.0 MIC Tanzania Limited ...... Tanzania 100.0 100.0 Oasis S.P.R.L...... Democratic Republic of Congo 100.0 100.0 Millicom Tchad S.A. (see note 5) ...... Chad 100.0 100.0 Millicom Mauritius Limited ...... Mauritius 100.0 100.0 Millicom Rwanda Limited ...... Rwanda 87.5 87.5 Unallocated Millicom International Operations S.A. . . . Luxembourg 100.0 100.0 Millicom International Operations B.V. . . . Netherlands 100.0 100.0 MIC Latin America B.V...... Netherlands 100.0 100.0 Millicom Africa B.V...... Netherlands 100.0 100.0 Millicom Holding B.V...... Netherlands 100.0 100.0 Millicom Ireland Limited ...... Ireland 100.0 100.0
9. Interests in joint ventures
The Group has the following significant joint venture companies, which are proportionally consolidated:
Holding Holding Name of the company Country December 31, 2011 December 31, 2010 % of ownership % of ownership interest interest Central America Comunicaciones Celulares S.A...... Guatemala 55.0 55.0 Navega.com S.A. (see note 5) ...... Guatemala 55.0 55.0 Africa Emtel Limited ...... Mauritius 50.0 50.0
F-141 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
9. Interests in joint ventures (continued)
The share of assets and liabilities of the jointly controlled entities at December 31, 2011 and 2010, which are included in the consolidated financial statements, are as follows:
2011 2010 US$ ’000 US$ ’000 Current assets ...... 235,092 199,147 Non-current assets ...... 419,371 386,703 Total assets ...... 654,463 585,850 Current liabilities ...... 205,848 159,616 Non-current liabilities ...... 174,823 145,664 Total liabilities ...... 380,671 305,280
The share of revenues and operating expenses of the jointly controlled entities for the years ended December 31, 2011, 2010, and 2009, which are included in the consolidated income statements from continuing operations, are as follows:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Revenues ...... 650,300 799,305 947,600 Total operating expenses ...... (364,992) (413,461) (503,298) Operating profit ...... 285,308 385,844 444,302
10. Segment information
Management has determined the operating and reportable segments based on the reports that are used by the Chief Operating Decision Maker (“CODM”) to make strategic and operational decisions.
Management considers the Group from both a business and a geographic perspective. The Group operates in the business of communication, information, entertainment, mobile financial services and solutions, and provides these services through mobile telephony and cable (including broadband, television and fixed telephony). The Group’s risks and rates of return for its operations are affected predominantly by the fact that it operates in different geographical regions. The businesses are organized and managed according to the selected geographical regions, which represent the basis for evaluation of past performance and for making decisions about the future allocation of resources.
The Group has businesses in three regions: Central America, South America and Africa.
Product and service offerings have converged to business categories to be more customer-centric, and less focused on the medium in which the product and service offerings are provided (i.e. through mobile devices vs. cables). Accordingly, management and operation of the Central America cable business has been integrated with our mobile operations. As a result of these changes, execution of global strategies and reporting to the Chief Operating Decision-Maker are no longer separated between mobile operations and cable operations. Comparative segment information for Central America has been restated to include the Cable business, which was previously reported as a separate segment.
F-142 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
10. Segment information (continued)
The following tables present revenues, operating profit (loss) and other segment information for the years ended December 31, 2011, 2010 and 2009:
Total Discontinued Inter- Central South Unallocated continuing operations company December 31, America America Africa items operations (note 7) elimination Total 2011 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Revenues ...... 1,842,166 1,706,139 981,292 — 4,529,597 6,134 – 4,535,731 Operating profit (loss) ...... 649,159 504,822 216,865 (113,825) 1,257,021 2,756 – 1,259,777 Add back: Depreciation and amortization .... 303,272 230,936 203,948 824 738,980 1,539 – 740,519 Loss (gain) of disposal and impairment ..... 5,453 (9,913) (17,325) – (21,785) – – (21,785) Share based compensation . . . – – – 17,264 17,264 – – 17,264 Corporate costs . . . – – – 95,737 95,737 – – 95,737 Adjusted operating profit (loss)(i) .... 957,884 725,845 403,488 – 2,087,217 4,295 – 2,091,512 Additions to: Property, plant and equipment ...... (220,455) (294,628) (287,736) (434) (803,253) (20) – (803,273) Intangible assets . . . (1,576) (29,304) (8,952) (5,412) (45,244) – – (45,244) Capital expenditure .... (222,031) (323,932) (296,688) (5,846) (848,497) (20) – (848,517) Taxes paid ...... (146,245) (77,355) (13,528) (30,943) (268,071) Changes in working capital ...... (66,743) 14,613 92,061 (25,392) 14,539 Other movements ..... 18,239 85,747 77,857 36,721 218,564 Operating free cash flow(ii) ...... 541,104 424,918 263,190 (25,460) 1,203,752 Total Assets(iii) .....4,073,905 2,008,584 1,629,896 830,071 8,542,456 – (1,260,510) 7,281,946 Total Liabilities ....1,673,356 1,388,516 1,704,743 926,596 5,693,211 – (856,819) 4,836,392
(i) Adjusted operating profit is used by the management to monitor the segmental performance and for capital management (see note 34).
(ii) Operating free cash flow by segment includes vendor financing of capital equipment as a cash transaction.
(iii) Segment assets include goodwill and other intangibles.
F-143 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
10. Segment information (continued)
Total Discontinued Inter- December 31, Central South Unallocated continuing operations company 2010 (As America(v) America Africa items operations (note 7) elimination Total Restated)(iv) US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Revenues ...... 1,641,441 1,373,877 904,931 – 3,920,249 29,625 – 3,949,874 Operating profit (loss) ...... 638,598 361,969 147,737 (106,574) 1,041,730 12,539 – 1,054,269 Add back: Depreciation and amortization .... 250,144 223,186 202,733 923 676,986 – – 676,986 Loss (gain) of disposal and impairment ..... 4,099 4,590 7,568 – 16,257 – – 16,257 Share based compensation . . . – – – 30,718 30,718 – – 30,718 Corporate costs . . . – – – 74,933 74,933 – – 74,933 Adjusted operating profit (loss)(i) .... 892,841 589,745 358,038 – 1,840,624 12,539 – 1,853,163 Additions to: Property, plant and equipment ..... (187,157) (216,408) (273,689) (17) (677,271) (16,223) – (693,494) Intangible assets . . (20,948) (28,091) (3,924) (473) (53,436) – – (53,436) Capital expenditure .... (208,105) (244,499) (277,613) (490) (730,707) (16,223) – (746,930) Taxes paid ...... (139,139) (62,240) (9,291) (28,053) (238,723) Changes in working capital ...... 34,024 (31,333) (27,776) 25,970 885 Other movements ..... 6,978 60,061 101,603 (24,456) 144,186 Operating free cash flow(ii) ..... 586,599 311,734 144,961 (27,029) 1,016,265 Total Assets(iii) .... 3,617,802 1,503,621 1,600,307 650,677 7,372,407 71,878 (449,168) 6,995,117 Total Liabilities ... 2,319,733 1,257,708 1,630,201 803,332 6,010,974 47,518 (1,453,008) 4,605,484
(i) Adjusted operating profit is used by the management to monitor the segmental performance and for capital management (see note 34).
(ii) Operating free cash flow by segment includes vendor financing of capital equipment as a cash transaction.
(iii) Segment assets include goodwill and other intangibles.
(iv) Restatement – see note 4.
(v) Includes cable which in 2010 was reported as a separate segment which has now been integrated with mobile operations.
F-144 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
10. Segment information (continued)
Total Discontinued Inter- Central South Unallocated continuing operations company December 31, America America Africa items operations (note 7) elimination Total 2009 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Revenues ...... 1,514,663 1,075,914 782,150 – 3,372,727 218,874 – 3,591,601 Operating profit (loss) ...... 615,636 227,904 84,582 (77,099) 851,023 314,696 – 1,165,719 Add back: Depreciation and amortization ..... 205,052 208,469 196,832 1,082 611,435 34,842 – 646,277 Loss (gain) of disposal and impairment ...... 1,361 2,222 3,401 262 7,246 (277,665) – (270,419) Share based compensation .... – – – 10,175 10,175 – – 10,175 Corporate costs .... – – – 65,580 65,580 – – 65,580 Adjusted operating profit (loss)(i) ..... 822,049 438,595 284,815 – 1,545,459 71,873 – 1,617,332 Additions to: Property, plant and equipment ...... (152,222) (143,556) (395,352) (246) (691,376) (79,072) – (770,448) Intangible assets .... (23,085) (19,489) (2,892) (646) (46,112) – – (46,112) Capital expenditure (175,307) (163,045) (398,244) (892) (737,488) (79,072) – (816,560) Taxes paid ...... (115,414) (54,423) (6,654) (19,359) (195,850) Changes in working capital ...... (53,407) 39,978 55,631 239 42,441 Other movements . . 1,763 1,927 18 – 3,708 Operating free cash flow(ii) ...... 479,684 263,032 (64,434) (20,012) 658,270 Total Assets(iii) ...... 2,132,331 1,370,202 1,586,488 732,667 5,821,688 411,939 (242,609) 5,991,018 Total Liabilities ..... 1,257,957 1,141,956 1,594,662 470,781 4,465,356 242,625 (1,027,093) 3,680,888
(i) Adjusted operating profit is the measure used by the management to monitor the segmental performance and for capital management (see note 34).
(ii) Operating free cash flow by segment includes vendor financing of capital equipment as a cash transaction.
(iii) Segment assets include goodwill and other intangibles.
Revenues from continuing operations for the years ended December 31, 2011, 2010 and 2009 analyzed by country are as follows:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Colombia ...... 756,211 612,111 444,899 Honduras ...... 673,022 532,068 436,435 Guatemala ...... 646,679 570,827 517,555 Paraguay ...... 593,382 462,537 387,964 El Salvador ...... 413,712 453,503 493,298 Other ...... 1,446,591 1,289,203 1,092,576 Total ...... 4,529,597 3,920,249 3,372,727
F-145 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
10. Segment information (continued)
Non-current assets (intangible assets and property, plant and equipment) as at December 31, 2011 and 2010 analyzed by country are as follows:
2011 2010 US$ ’000 US$ ’000 Colombia ...... 596,498 604,723 Honduras ...... 1,669,030 1,762,865 Guatemala ...... 392,349 348,682 Paraguay ...... 255,577 223,840 El Salvador ...... 437,879 482,623 Other ...... 1,684,137 1,627,779 Total ...... 5,035,470 5,050,512
11. Analysis of operating profit
The Group’s operating income and expenses from continuing operations analyzed by nature of expense is as follows:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Revenues ...... 4,529,597 3,920,249 3,372,727 Cost of rendering telecommunication services ...... (1,006,951) (809,669) (716,269) Depreciation and amortization (notes 10, 16 and 17) ...... (738,980) (676,986) (611,435) Dealer commissions ...... (398,467) (354,608) (300,487) Employee related costs (note 12) ...... (299,151) (294,045) (249,757) Sites and network maintenance ...... (208,340) (175,971) (151,816) Advertising and promotion ...... (126,522) (119,675) (122,986) Phone subsidies ...... (138,578) (124,448) (108,714) External services ...... (154,621) (110,344) (81,537) Operating lease expense (note 32) ...... (96,376) (82,929) (72,749) Billing and payments ...... (33,373) (27,831) (21,005) Gain (loss) on disposal and impairment of assets, net (note 10 and17)...... 21,785 (16,257) (7,246) Other income ...... 43,700 3,192 – Other expenses ...... (136,702) (88,948) (77,703) Operating profit ...... 1,257,021 1,041,730 851,023
The following table summarizes the aggregate amounts paid to Millicom’s auditors for the years ended December 31, 2011, 2010 and 2009.
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Audit Fees ...... 3,623 4,237 4,179 Audit Related Fees ...... 152 604 115 Tax Fees ...... 97 – 61 All Other Fees ...... 58 55 71 Total ...... 3,930 4,896 4,426
Audit related services consist principally of consultations related to financial accounting and reporting standards, including making recommendations to management regarding internal
F-146 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
11. Analysis of operating profit (continued) controls and the issuance of certifications of loan covenant compliance required by Millicom’s debt agreements. Tax services consist principally of tax planning services and tax compliance services. All other fees are for services not included in the other categories. 100% of the audit related, tax and other fees for 2011 and 2010 were approved by the audit committee.
12. Employee related costs
Employee related costs are comprised of the following:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Wages and salaries ...... (209,180) (196,318) (183,220) Social security ...... (23,613) (21,094) (20,105) Share based compensation (see note 24) ...... (17,264) (30,718) (10,175) Other employee related costs(i) ...... (49,094) (45,915) (36,257) Total ...... (299,151) (294,045) (249,757)
(i) Includes pension costs and other benefits. There are no defined benefit pension plans.
The average number of permanent employees during the years ended December 31, 2011, 2010 and 2009 was as follows:
2011 2010 2009 Continuing operations ...... 6,526 6,109 5,937 Discontinued operations ...... 128 237 1,852 Total average number of permanent employees ...... 6,654 6,346 7,789
13. Other non-operating (expenses) income, net
The Group’s other non-operating (expenses) income, net is comprised of the following:
2010 2011 (As restated)(i) 2009 US$ ’000 US$ ’000 US$ ’000 Change in carrying value of put option(i) ...... 24,233 (31,956) – Change in fair value of derivatives ...... (2,472) (14,597) – Other exchange (losses), net ...... (26,051) (15,105) (32,181) Other non operating (expenses) income, net ...... (4,290) (61,658) (32,181)
(i) Restatement – see note 4
14. Taxes
Group taxes mainly comprise income taxes of subsidiaries and joint ventures. As a Luxembourg commercial company, the Company is subject to all taxes applicable to a Luxembourg Société Anonyme. Due to losses incurred and brought forward, no taxes based on Luxembourg-only income have been computed for 2011, 2010 and 2009.
The effective tax rate on continuing operations is (2%) (2010: 12%, 2009: 27%). Currently Millicom operations are in jurisdictions with income tax rates of 10% to 40% (2010 and 2009: 10% to 40%).
F-147 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
14. Taxes (continued)
The reconciliation between the weighted average statutory tax rate and the effective average tax rate is as follows:
2011 2010 2009 %%% Weighted average statutory tax rate(i) ...... 24 23 23 Recognition of previously unrecorded tax losses ...... (29) – – Unrecognized current year tax losses(ii) ...... 1 7 9 Non taxable income and non deductible expenses, net ...... 1 – (1) Taxes based on revenue ...... (6) (7) (8) Income taxes at other than statutory tax rates ...... 4 2 3 Withholding taxes on transfers between operating and non operating entities ...... 3 3 3 Non-taxable gain arising from revaluation of previously held interests ...... – (16) (2) Effective tax rate ...... (2) 12 27
(i) The weighted average statutory tax rate has been determined by dividing the aggregate statutory tax charge of each subsidiary and joint venture, which was obtained by applying the statutory tax rate to the profit or loss before tax, by the aggregate profit before tax excluding the impact of the revaluation of Honduras in 2010 (see note 5).
(ii) Unrecognized current year tax losses mainly consist of tax losses at the Company level and tax losses recorded in the Group’s operations in the Democratic Republic of Congo and Rwanda (2010: DRC, Rwanda and Colombia; 2009: DRC and Colombia).
The credit (charge) for income taxes from continuing operations is shown in the following table and recognizes that revenue and expense items may affect the financial statements and tax returns in different periods (temporary differences):
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Current income tax credit (charge) ...... (278,502) (223,077) (201,230) Net deferred income tax benefit (expense) ...... 296,849 (4,019) 13,232 Credit / (charge) for taxes ...... 18,347 (227,096) (187,998)
F-148 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
14. Taxes (continued)
The tax effects of significant items comprising the Group’s net deferred income tax asset and liability as of December 31, 2011 and 2010 are as follows: Consolidated balance Consolidated income sheets statements 2011 2010 2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Loss carry-forwards ...... 182,562 – 182,562 (5,877) (1,945) Provision for doubtful debtors ...... 9,124 4,206 4,918 602 408 Temporary differences between book and tax basis of intangible assets and property, plant and equipment ...... 4,993 (45,456) 50,449 (2,398) (2,411) Deferred tax liabilities recognized as part of the acquisition of Celtel (see note 5) ...... (94,390) (105,392) 11,002 8,460 – Deferred tax liabilities recognized as part of the acquisition of Amnet (see note 5) ...... (19,413) (25,805) 6,392 6,237 9,485 Deferred tax liabilities recognized as part of the acquisition of Navega (see note 5) ..... (2,358) (3,126) 768 936 540 Other temporary and translation differences ...... 37,382 3,613 40,758 (11,979) 7,155 Deferred tax benefit (expense) ...... 296,849 (4,019) 13,232 Deferred tax assets (liabilities), net ...... 117,900 (171,960) Reflected in the statements of financial position as: Deferred tax assets ...... 316,966 23,959 Deferred tax liabilities ...... (199,066) (195,919)
Deferred income tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
No deferred tax liability was recognized in respect of $3,352 million (2010: $3,659 million) of unremitted earnings of subsidiaries and joint ventures, because the Group was in a position to control the timing of the reversal of the temporary differences and it was unlikely that such differences would reverse in a foreseeable future. Furthermore, it was not practicable to estimate the amount of unrecognized deferred tax liabilities in respect of these unremitted earnings.
During 2011, a tax credit of $308 million was recognized in our Colombian operation relating to expected utilization of tax loss carry-forwards and other temporary differences related mainly to property, plant and equipment and intangible assets. The expected utilisation of tax loss carryforwards was based on an assessment by management that sufficient taxable profit will be available to allow the benefit of the deferred tax asset to be utilised.
Unrecognized net operating losses and other tax loss carry-forwards relating to continuing operations amounted to $169 million as at December 31, 2011 (2010: $775 million, 2009: $885 million) with expiry periods of between 1 and 5 years. In addition the Company has unrecognized net operating losses of $1,742 million (2010: $1,833 million) which do not expire.
F-149 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
15. Earnings per share
Basic earnings per share are calculated by dividing net profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share are calculated by dividing the net profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of dilutive potential shares.
The following reflects the net profit and share data used in the basic and diluted earnings per share computations:
2010 2011 (As restated)(i) 2009 US$ ’000 US$ ’000 US$ ’000 Basic Net profit attributable to equity holders from continuing operations ...... 885,815 1,611,491 551,390 Net profit attributable to equity holders from discontinued operations ...... 38,700 8,786 298,858 Net profit attributable to equity holders to determine the basic earnings per share ...... 924,515 1,620,277 850,788 Diluted Net profit attributable to equity holders from continuing operations ...... 885,815 1,611,491 551,390 Net profit attributable to equity holders from continuing operations used to determine the diluted earnings per share ...... 885,815 1,611,491 551,390 Net profit attributable to equity holders from discontinued operations ...... 38,700 8,786 298,858 Net profit attributable to equity holders to determine the diluted earnings per share ...... 924,515 1,620,277 850,788
2011 2010 2009 ’000 ’000 ’000 Weighted average number of ordinary shares (excluding treasury shares) for basic earnings per share ...... 104,196 108,219 108,527 Effect of dilution: Potential incremental shares as a result of share options ...... 105 177 223 Weighted average number of ordinary shares (excluding treasury shares) adjusted for the effect of dilution ...... 104,301 108,396 108,750
(i) Restatement – see note 4
To calculate earnings per share amounts for the discontinued operations, the weighted average number of shares for both basic and diluted amounts is as per the table above.
F-150 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
16. Intangible assets
The movements in intangible assets in 2011 were as follows:
Goodwill Licenses Other(ii) Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 Opening balance, net ...... 1,427,825 238,196 616,824 2,282,845 Change in the composition of the Group (see note 5) ...... – – 4,603 4,603 Additions (see note 10) ...... – 12,609 32,635 45,244 Amortization charge(i) ...... – (34,634) (105,882) (140,516) Transfers ...... – 3,342 (3,342) – Other movements ...... – (614) (498) (1,112) Exchange rate movements ...... (12,966) (5,719) (2,026) (20,711) Closing balance, net ...... 1,414,859 213,180 542,314 2,170,353 As at December 31, 2011 Cost or valuation ...... 1,414,859 408,872 865,465 2,689,196 Accumulated amortization ...... – (195,692) (323,151) (518,843) Net ...... 1,414,859 213,180 542,314 2,170,353
(i) The amortization charge for Licenses and Other is recorded under the caption “General and administrative expenses”.
(ii) The caption “Other” includes mainly those intangible assets identified in business combination (i.e. customers’ lists and trademarks).
The movements in intangible assets in 2010 were as follows:
Goodwill Licenses Other(ii) Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 Opening balance, net ...... 547,986 218,510 278,341 1,044,837 Change in the composition of the Group (see note 5) ...... 869,559 30,519 383,837 1,283,915 Additions (see note 10) ...... – 26,190 27,246 53,436 Amortization charge(i) ...... – (39,353) (78,801) (118,154) Transfers ...... – 1,751 (1,751) – Other movements ...... – (80) (2,167) (2,247) Exchange rate movements ...... 10,280 659 10,119 21,058 Closing balance, net ...... 1,427,825 238,196 616,824 2,282,845 As at December 31, 2010 Cost or valuation ...... 1,427,825 401,306 839,112 2,668,243 Accumulated amortization ...... – (163,110) (222,288) (385,398) Net ...... 1,427,825 238,196 616,824 2,282,845
(i) The amortization charge for Licenses and Other is recorded under the caption “General and administrative expenses”.
(ii) The caption “Other” includes mainly those intangible assets identified in business combination (i.e. customers’ lists and trademarks).
F-151 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
16. Intangible assets (continued)
The following table provides details of cash used for additions to intangible assets:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Additions ...... 45,244 53,436 46,112 Subtotal ...... 45,244 53,436 46,112 Change in suppliers advances ...... (165) 160 – Change in capex accruals and payables ...... 11,394 (27,358) (108) Cash used from continuing operations for additions from intangible assets ...... 56,473 26,238 46,004
Impairment test of goodwill
As at December 31, 2011, management tested all goodwill for impairment. The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill is allocated.
The recoverable amount of a cash-generating unit (“CGU”) or group of CGUs is determined based on discounted cash flows. The cash flow projections used (adjusted operating profit margins, income tax, working capital, capital expenditure and license renewal cost) are extracted from financial budgets approved by management and the Board covering a period of three years apart from our new business in Rwanda where six years has been used (2010: eight years). The planning horizon reflects industry practice in the countries where the Group operates. Cash flows beyond this period are extrapolated using a perpetual growth rate of 2% (2010: 2%). No impairment losses were recorded on goodwill for the years ended December 31, 2011, 2010 and 2009.
As part of the impairment tests, sensitivity analysis was performed on the key assumptions from which it was determined that sufficient margin exists from realistic changes to the assumptions that would have resulted in impairment.
The recoverable amounts have been determined for the cash generating units based on the following discount rates for the years ended December 31, 2011 and 2010:
Discount rate after tax 2011 2010 Central America ...... 8.2% – 12.7% 9.9% – 14.3% South America ...... 8.0% – 11.2% 9.5% – 15.9% Africa ...... 8.9% – 14.6% 8.8% – 14.6%
F-152 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
16. Intangible assets (continued)
The allocation of goodwill to cash generating units, net of exchange rate movements, is shown below:
2011 2010 Millicom’s operations in: US$ ’000 US$ ’000 Honduras (see note 5) ...... 925,834 936,895 El Salvador ...... 184,956 184,956 Costa Rica ...... 137,945 137,638 Colombia ...... 52,283 52,283 Guatemala ...... 35,574 34,339 Senegal ...... 34,008 35,209 Other ...... 44,259 46,505 Total Goodwill ...... 1,414,859 1,427,825
17. Property, plant and equipment
Movements in tangible assets in 2011 were as follows:
Network Land and Construction equipment(iv) buildings in progress Other(i) Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Opening balance, net ...... 2,395,597 53,725 206,808 111,537 2,767,667 Change in the composition of the Group (note 5)(iii) ...... 2,175 – 3,102 209 5,486 Additions (including sale and leaseback) ...... 127,279 8,845 720,659 21,841 878,624 Impairments and net disposals .... (99,038) (369) (6,661) (2,525) (108,593) Depreciation charge(ii) ...... (549,938) (3,317) – (45,209) (598,464) Asset retirement obligations ...... 4,776 100 – – 4,876 Transfers ...... 629,985 11,749 (685,219) 43,485 – Transfer to assets held for sale (see note 7) ...... (56,142) – – – (56,142) Exchange rate movements ...... (26,917) (1,310) 1,694 (1,804) (28,337) Closing balance at December 31, 2011 ...... 2,427,777 69,423 240,383 127,534 2,865,117 Cost or valuation ...... 4,557,220 84,879 240,383 344,537 5,227,019 Accumulated depreciation ...... (2,129,443) (15,456) – (217,003) (2,361,902) Net ...... 2,427,777 69,423 240,383 127,534 2,865,117
(i) The caption “Other” mainly includes office equipment and motor vehicles.
(ii) The depreciation charge for network equipment is recorded under the caption “Cost of sales” and the depreciation charge for Land and Buildings and Other is recorded under the caption “General and administrative expenses”.
(iii) The change in the composition of the Group corresponded to other minor investments.
(iv) The net carrying amount of network equipment under finance leases at December 31, 2011, mainly comprising towers, was $133 million.
F-153 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
17. Property, plant and equipment (continued)
Movements in tangible assets in 2010 were as follows:
Network Land and Construction equipment(iv) buildings in progress Other(i) Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 Opening balance, net ...... 2,352,954 81,215 152,234 124,238 2,710,641 Change in the composition of the Group (note 5)(iii) ...... 118,923 2,165 3,431 5,330 129,849 Additions ...... 54,906 417 600,625 21,323 677,271 Impairments and net disposals .... (48,038) (263) (2,034) (2,560) (52,895) Depreciation charge(ii)(v) ...... (508,339) (3,062) – (47,431) (558,832) Asset retirement obligations ...... (17,176) 493 – – (16,683) Transfers ...... 560,413 (26,870) (545,093) 11,550 – Transfer to assets held for sale (see note 7) ...... (106,174) – – – (106,174) Exchange rate movements ...... (11,872) (370) (2,355) (913) (15,510) Closing Balance at December 31, 2010 ...... 2,395,597 53,725 206,808 111,537 2,767,667 Cost or valuation ...... 4,165,165 65,868 206,808 303,781 4,741,622 Accumulated depreciation ...... (1,769,568) (12,143) – (192,244) (1,973,955) Net ...... 2,395,597 53,725 206,808 111,537 2,767,667
(i) The caption “Other” mainly includes office equipment and motor vehicles.
(ii) The depreciation charge for network equipment is recorded under the caption “Cost of sales” and the depreciation charge for Land and Buildings and Other is recorded under the caption “General and administrative expenses”.
(iii) The change in the composition of the Group corresponded to the acquisition of Honduras, Navega and other minor investments.
(iv) The net carrying amount of network equipment under finance leases at December 31, 2010, mainly comprising towers, was $41 million.
(v) From January 1, 2010 the estimated useful life of network towers and civil works was changed from 10 to 15 years.
Borrowing costs capitalized for the year ended December 31, 2011 were not significant (2010: not significant).
The following table provides details of cash used for the purchase of property, plant and equipment:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Additions ...... 803,273 693,494 770,448 Additions from discontinued operations ...... (20) (16,223) (79,072) Subtotal ...... 803,253 677,271 691,376 Change in suppliers advances ...... (2,639) (12,072) (77,539) Change in capex accruals and payables ...... (63,004) 22,480 162,421 Vendor financing and finance leases (see note 31) ...... (37,929) (90,779) (45,399) Capitalized interests ...... – – (4,294) Cash used from continuing operations for purchase of property, plant and equipment ...... 699,681 596,900 726,565
F-154 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
18. Investments in associates
As at December 31, 2011 Millicom’s investment in associates amounted to $63 million representing 40% interests in Helios Towers Tanzania, Helios Towers DRC and ATC Colombia B.V. acquired during the year, and Helios Towers Ghana (see note 7) (2010: including $17 million representing a 40% interest in Helios Towers Ghana).
19. Non-current pledged deposits
As at December 31, 2011, non-current pledged deposits amounted to $49 million (2010: $50 million) and mainly related to security over financing of Millicom’s operation in Chad (see note 27).
20. Trade receivables, net
2011 2010 US$ ’000 US$ ’000 Gross trade receivables ...... 348,870 304,999 Less: provisions for impairment of receivables ...... (71,926) (51,741) Trade receivables, net ...... 276,944 253,258
The nominal value less impairment of trade receivables is assumed to approximate their fair values (see note 35).
As at December 31, 2011 and 2010, the ageing analysis of trade receivables is as follows:
Neither past due nor Past due (net of impairments) Total impaired <30 days 30–90 days >90 days Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 2011 Telecom operators ...... 73,381 30,670 20,914 792 125,757 Own customers ...... 70,568 14,558 13,298 2,996 101,420 Others ...... 34,126 9,337 6,071 233 49,767 Total ...... 178,075 54,565 40,283 4,021 276,944
Neither past due nor Past due (net of impairments) Total impaired <30 days 30–90 days >90 days Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 2010 Telecom operators ...... 68,929 30,244 38,340 28 137,541 Own customers ...... 50,339 16,088 6,510 337 73,274 Others ...... 33,508 4,997 3,938 – 42,443 Total 152,776 51,329 48,788 365 253,258
F-155 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
21. Other current assets Other current assets are comprised as follows: 2011 2010 US$ ’000 US$ ’000 Value added tax receivables ...... 11,402 9,319 Pledged deposits ...... 297 7,261 Escrow accounts (see note 28) ...... 3,972 11,730 Related party receivables ...... 76,677 – Other ...... 54,267 47,001 Total other current assets 146,615 75,311
22. Cash and cash equivalents Cash and cash equivalents are comprised as follows: 2011 2010 US$ ’000 US$ ’000 Cash and cash equivalents in U.S. dollars ...... 509,882 571,158 Cash and cash equivalents in other currencies ...... 351,744 452,329 Restricted cash ...... 19,653 – Total cash and cash equivalents ...... 881,279 1,023,487
Cash balances are diversified among leading international banks and in domestic banks within the countries where we operate.
23. Share capital Share capital and share premium The authorized share capital of the Company totals 133,333,200 registered shares (2010: 133,333,200). As at December 31, 2011, the total subscribed and fully paid-in share capital and premium was $663 million (2010: $682 million) consisting of 104,939,217 (2010: 109,053,120) registered common shares at a par value of $1.50 (2010: $1.50) each. The following table summarizes movements in issued share capital for the years ended December 31, 2011 and 2010: 2011 2010 Number of Number of shares shares Issued share capital as of January 1 ...... 109,053,120 108,648,325 Exercise of share options(i) ...... 39,622 145,305 Shares to employees and directors(i) ...... 46,475 259,490 Total issuance of shares during the year ...... 86,097 404,795 Cancellation of shares during the year ...... (4,200,000) – Issued share capital as of December 31 ...... 104,939,217 109,053,120
(i) In addition, 6,179 of share options and 186,681 of restricted shares were issued from treasury shares during 2011 The Company re-purchased 4,646,241 shares for $498 million under a share buy-back program in 2011 (2010: 3,253,507 shares for $300 million). The Company reduced its issued share capital by $6 million in 2011, by way of cancellation of 4.2 million shares having a par value of $1.50 each, previously held as treasury shares.
F-156 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
24. Share based compensation
Share options
Until May 30, 2006, share options were granted to directors, senior executives, officers and selected employees. The exercise price of the granted options was equal to or higher than the market price of the shares on the date of grant. The options were conditional on the employee or director completing one to five years service (the vesting period). The options were exercisable starting from one year to five years from the grant date. The options have a contractual option term of six years from the grant date for employees and of twenty years for directors (amended in 2005). Share options grants for Directors prior to 2005 had an indefinite life. Shares issued when share options are exercised have the same rights as common shares.
The following table summarizes information about share options outstanding and exercisable at December 31, 2011. The market price of the Company’s shares as at December 31, 2011 was the SEK equivalent of $100.20 (2010: $95.60).
Options outstanding Options exercisable Weighted Number Weighted Number average outstanding at average exercisable at Range of exercise price $ exercise price December 31, 2011 exercise price December 31, 2011 20.56 ...... 20.56 35,000 20.56 35,000 25.05 – 29.75 ...... 26.93 33,332 26.93 33,332 31.88 – 35.91 ...... 35.16 66,664 35.16 66,664 20.56 – 35.91 ...... 29.34 134,996 29.34 134,996
Share options outstanding at the end of the year have the following expiry dates, exercise prices and terms:
Number of options outstanding as at Date issued December 31, 2011 Exercise price $ Terms May 1996, May 1997, May 1998, May 2000 and May Exercisable immediately. Options 2004 ...... 99,996 25.05 – 35.91 have an indefinite life. May 2005 ...... 35,000 20.56 Exercisable immediately. Options have a twenty year life.
The following table summarizes the Company’s share options as of December 31, 2011, 2010 and 2009, and changes during the years then ended:
2011 2010 2009 Average exercise Average exercise Average exercise price in $ per Number of price in $ per Number of price in $ per Number of share options share options share options Outstanding at beginning of year ...... 29.06 183,797 26.21 329,788 24.23 494,120 Expired/forfeited . . 20.56 (3,000) 25.05 (686) 18.73 (25,108) Exercised ...... 28.80 (45,801) 22.58 (145,305) 20.53 (139,224) Outstanding at end of year ...... 29.34 134,996 29.06 183,797 26.21 329,788 Exercisable at end of year ...... 29.34 134,996 29.06 183,797 28.20 243,946
F-157 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
24. Share based compensation (continued)
In May 2006 at the Annual General Meeting, it was agreed to accelerate the vesting period for share options held by the directors from three years to one year to correspond to the directors’ one-year term in office. It was also agreed to change the term of the share options so that they no longer expire when a director is no longer a member of the Board. In addition, the directors entered into an agreement with Millicom, whereby if Millicom is subject to a change of control the directors’ share options will vest immediately and the restricted shares will become unrestricted upon the change of control.
Restricted share grants
Starting on May 30, 2006, the grant of options was replaced by the grant of restricted shares whereby these shares cannot be sold or transferred for 12 months. No grants of restricted shares were made in 2011.
Grants to directors in 2010 were as follows:
Number of Share price at 2010 shares date of grant Expense (US$ ’000) Directors ...... 5,277 $81.91 432
Compensation expense for the total number of shares awarded in 2010 to Directors was measured on the grant dates using Millicom’s closing share price as quoted on the NASDAQ National Market on those dates.
Long-term incentive plans
2008
Long term incentive awards for 2008 (“2008 LTIPs”) were approved by Millicom’s Board of Directors on December 4, 2007. The awards consisted of a performance shares plan and a matching share award plan. Shares granted under the performance share plan vested at the end of a three year period, on meeting a performance condition related to Millicom’s “earnings per share” (“EPS”). The achievement of a certain level of this condition, measured at the end of the three year period, resulted in the vesting of a specific percentage of shares to each employee in the plan.
The matching share award plan requires employees to invest in shares of the Company in order to be eligible for matching shares. Shares awarded under this plan vested at the end of a three year period, on meeting market conditions that are based on the “total shareholder return” (“TSR”) of Millicom’s shares compared to the TSR of a peer group of companies during the three- year period of the plan. A fair value per share was determined and applied to the total potential number of matching shares and was expensed over the vesting period.
In 2011, 148,585 shares were issued under the 2008 performance shares plan and 28,795 shares issued under the matching share award plan. There are no more shares to be issued under the 2008 LTIPs.
The total charge for the 2008 LTIPs of $25 million was recorded over the service period including $20 million in 2010 when conditions connected to the plans previously not expected to be met, were fulfilled (2008 to 2010).
F-158 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
24. Share based compensation (continued)
2009 Long term incentive awards for 2009 (“2009 LTIPs”) were approved by Millicom’s Board of Directors on June 16, 2009. The 2009 LTIPs consist of a deferred share awards plan and a performance shares plan. Shares granted under the deferred plan are based on past performance and vested 16.5% on each of January 1, 2010 and January 1, 2011 and 67% on January 1, 2012. Shares granted under the performance plan vest at the end of a three year period, 50% subject to a market condition that is based on the TSR of Millicom compared to the TSR a peer group of companies during the three-year period of the plan, and 50% subject to a performance condition, based on EPS. A fair value per share subject to the market condition was determined and applied to the total potential number of performance shares, to be expensed over the vesting period. In 2011, 3,804 shares were issued under the 2009 performance shares plan and 26,023 shares issued under the deferred share plan. The total charge for the 2009 LTIPs of $11 million was recorded over the service period (2009 to 2011).
2010 Long term incentive awards for 2010 (“2010 LTIPs”) were approved by Millicom’s Board of Directors on November 27, 2009. The 2010 LTIPs consist of a deferred share awards plan and a performance shares plan, the mechanisms of which are the same as the 2009 LTIPs. In 2011, 706 shares were issued under the 2010 performance shares plan and 25,243 shares issued under the deferred share plan. The total charge for the 2010 LTIPs was estimated as of December 31, 2011 at $15 million, and is being recorded over the service period (2010 to 2012).
2011 Long term incentive awards for 2011 (“2011 LTIPs”) were approved by Millicom’s Board of Directors on February 1, 2011. The 2011 LTIPs consist of a deferred share awards plan and a performance shares plan, the mechanisms of which are the same as the 2009 LTIPs. Shares granted under the deferred share awards plan are based on past performance and vest 16.5% on each of January 1, 2012 and January 1, 2013 and 67% on January 1, 2014. Shares granted under the performance plan vest at the end of the three year period, subject to performance conditions, 50% based on Return on Capital Investment (ROIC) and 50% based on EPS. Prior to September 2011, the vesting conditions were 50% based on EPS and 50% on a market condition that was based on the ranking of the TSR of Millicom compared to the FTSE Global Telecoms Index adjusted to add three peer companies (“Adjusted Global Telecoms Index”). As this index was discontinued during 2011, the Compensation Committee approved the replacement of this condition with the ROIC condition. As a result the total estimated charge of the 2011 LTIPs increased from $19 million to $ 20 million. In 2011, no shares were issued under either the deferred share awards plan or the performance shares plan.
F-159 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
24. Share based compensation (continued)
The total charge for the 2011 LTIPs was estimated as of December 31, 2011 at $20 million, and is being recorded over the service period (2011 to 2013).
The number of share awards expected to vest under the long term incentive plans is as follows:
Deferred Deferred Deferred Performance share awards Performance share awards Performance share awards shares 2011 2011 shares 2010 2010 shares 2009 2009 Plan share awards ...... 105,643 145,687 81,862 153,960 124,254 172,352 Share awards granted(i) ...... 2,935 3,800 6,771 12,043 9,875 10,677 Revision for actual and expected forfeitures ...... (12,947) (19,130) (17,425) (26,612) (21,127) (36,501) Revision for expectations in respect of performance conditions ...... – – – – – – Shares issued ...... – – (706) (25,243) (4,416) (53,337) Share awards expected to vest ...... 95,631 130,357 70,502 114,148 108,586 93,191
(i) Additional shares granted including consideration for the impact of the special dividends paid in 2011 and 2010 (see note 29)
Total share based compensation expense
Total share-based compensation for years ended December 31, 2011, 2010 and 2009 was as follows:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Share options ...... – 7 (46) Restricted share grants ...... – 432 368 2006 LTIPs ...... – – (530) 2007 LTIPs ...... – 97 5,142 2008 LTIPs ...... – 20,467 167 2009 LTIPs ...... 3,330 3,461 5,074 2010 LTIPs ...... 5,289 6,254 – 2011 LTIPs ...... 8,645 – – Total share-based compensation expense ...... 17,264 30,718 10,175
F-160 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
25. Put option reserve
On July 1, 2010, in exchange for an unconditional 5 year call option, the Company granted to its non-controlling interest in our operation in Honduras a 5 year conditional put option over his 33.3% shareholding. A put option reserve in the amount of $737 million was recognised representing the present value of the redemption price of the put option at that date.
26. Other reserves
Equity-settled Currency Legal transaction Hedge translation reserve reserve reserve reserve Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 As at January 1, 2009 ...... 15,365 30,726 – (93,265) (47,174) Transfer from retained profits ...... 880 – – – 880 Shares issued via the exercise of share options ...... – (888) – – (888) Share based compensation ...... – 9,807 – – 9,807 Issuance of shares – 2006, 2007 and 2009 LTIPs ...... – (13,891) – – (13,891) Currency translation movement ...... – – – (13,664) (13,664) As at December 31, 2009 ...... 16,245 25,754 – (106,929) (64,930) Transfer from retained profits ...... 53 – – – 53 Shares issued via the exercise of share options ...... – (816) – – (816) Share based compensation ...... – 30,286 – – 30,286 Issuance of shares – 2007, 2008, 2009 and 2010 LTIPs ...... – (16,488) – – (16,488) Cash flow hedge reserve movement .... – – (1,700) – (1,700) Currency translation movement ...... – – – (1,090) (1,090) As at December 31, 2010 ...... 16,298 38,736 (1,700) (108,019) (54,685) Transfer from retained profits ...... 61 – – – 61 Shares issued via the exercise of share options ...... – (81) – – (81) Share based compensation ...... – 17,264 – – 17,264 Issuance of shares – 2008, 2009, 2010 and 2011 LTIPs ...... – (23,230) – – (23,230) Cash flow hedge reserve movement .... – – (3,015) – (3,015) Currency translation movement ...... – – – (39,806) (39,806) As at December 31, 2011 ...... 16,359 32,689 (4,715) (147,825) (103,492)
Legal reserve
On an annual basis, if the Company reports a net profit for the year on a non-consolidated basis, Luxembourg law requires appropriation of an amount equal to at least 5% of the annual net profit to a legal reserve until such reserve equals 10% of the issued share capital. This reserve is not available for dividend distribution.
At the Company’s Annual General Meeting in May 2011, the shareholders voted to transfer $61 thousand from retained profits to the legal reserve (May 2010: $53 thousand).
F-161 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
26. Other reserves (continued)
Equity-settled transaction reserve
The cost of share options and LTIPs is recognized as an increase in the equity-settled transaction reserve over the period in which the performance and/or service conditions are rendered. When the options are subsequently exercised their cost is transferred from the equity-settled transaction reserve to the share premium. The reserve will be transferred to the share capital and share premium when the shares under the different LTIPs vest and are issued.
Currency translation reserve
For the purposes of consolidating joint ventures, associates and subsidiaries with functional currencies other than U.S. dollars, their statements of financial position are translated to U.S. dollars using the closing exchange rate. Income statements accounts are translated to U.S. dollars at the average exchange rates during the year. The currency translation reserve includes foreign exchange gains and losses arising from the translation of financial statements.
27. Borrowings
Borrowings due after more than one year:
2011 2010 US$ ’000 US$ ’000 Debt and financing: 8% Senior Notes ...... 436,679 435,279 Bank financing ...... 1,411,340 1,477,680 Non-controlling shareholders ...... 264,427 308,162 Vendor financing ...... 42,911 49,211 Finance leases ...... 137,764 41,235 Total non-current other debt and financing ...... 2,293,121 2,311,567 Less: portion payable within one year ...... (476,269) (514,995) Total other debt and financing due after more than one year ...... 1,816,852 1,796,572
Borrowings due within one year:
2011 2010 US$ ’000 US$ ’000 Debt and financing: Bank financing ...... 121,134 36,876 Vendor financing ...... 6,462 3,593 Finance leases ...... 17,561 – Total current other debt and financing ...... 145,157 40,469 Portion of non-current debt payable within one year ...... 476,269 514,995 Total other debt and financing due within one year ...... 621,426 555,464
F-162 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued)
The following table provides details of net debt change for the years 2011, 2010 and 2009:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Net debt at the beginning of the year ...... 1,268,219 722,935 1,483,831 Cash items Proceeds from issuance of debt and other financing ...... 703,073 1,147,585 627,872 Repayment of debt and other financing ...... (791,940) (1,396,997) (506,588) Net (increase) decrease in cash and cash equivalents ...... 142,208 487,675 (836,967) (Purchase) disposal of time deposits ...... 2,837 46,953 (50,061) (Purchase) disposal of pledged deposits ...... 8,683 2,462 (45,652) Non-cash items Vendor financing and finance leases (see note 31) ...... 37,929 90,779 45,399 Interest accretion ...... 47,507 31,825 20,908 Debt acquired in acquisition of subsidiaries ...... – – 25,962 Other ...... 108,483 77,249 (95,637) Exchange movement on debt and other financing ...... (19,937) 57,753 53,868 Net debt at the end of the year ...... 1,507,062 1,268,219 722,935
Net debt includes interest bearing loans and borrowings, less cash and cash equivalents and pledged and time deposits related to bank borrowings.
10% Senior Notes
On September 9, 2010, Millicom announced early and fully redemption of its 10% Senior Notes. The 10% Senior Notes were repurchased on November 30, 2010 for $490 million representing $459 million of principal, $23 million of interest to December 1, 2010 and $8 million early redemption penalty.
These notes were initially issued in aggregate principal amount of $550 million on November 24, 2003, due on December 1, 2013, of which $90 million were repurchased in 2007. The 10% Senior Notes were bearing interest at 10% per annum, payable semi-annually in arrears on June 1 and December 1.
F-163 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued)
Other Debt and Financing
Millicom’s share of total other debt and financing analyzed by operation is as follows:
2011 2010 US$ ’000 US$ ’000 Colombia(i) ...... 543,412 522,994 El Salvador(ii) ...... 436,679 435,279 Honduras(iii) ...... 258,383 207,277 Tanzania(iv) ...... 197,270 207,086 Guatemala(v) ...... 221,364 163,631 Ghana(vi) ...... 118,426 158,183 Cable Central America(vii) ...... 131,834 133,816 Chad(viii) ...... 107,767 107,227 Paraguay(ix) ...... 98,222 105,700 Bolivia(x) ...... 70,831 99,085 DRC(xi) ...... 96,343 94,151 Other ...... 157,747 117,607 Total other debt and financing ...... 2,438,278 2,352,036 Of which: Due after more than 1 year ...... 1,816,852 1,796,572 Due within 1 year ...... 621,426 555,464
Significant individual financing facilities are described below:
(i) Colombia
In March 2008, Colombia Móvil S.A. E.S.P (“Colombia Móvil”), Millicom’s operation in Colombia, entered into a COP391 billion, 5 year facility with a club of Colombian banks. This facility bears interest at Deposits to Fixed Terms (“DTF”) plus 4.5% and is 50% guaranteed by the Company. As at December 31, 2011, $93 million (2010: $176 million) was outstanding on this facility.
Colombia Móvil S.A. E.S.P. also had local currency loans from its non-controlling shareholders outstanding as at December 31, 2011 of $264 million (2010: $308 million). These loans bear interest at DTF plus 4.15% and mature between 2014 and 2015.
In addition, as at December 31, 2011 Colombia Móvil S.A. E.S.P. had $116 million (2010: $39 million) of other debt and financing, in US$ and local currency as well as finance lease payables of $52 million relating to lease of tower space from ATC Sitios Infraco S.A.S.
(ii) El Salvador
On September 23, 2010, Telemóvil Finance Co. Ltd., a fully owned subsidiary of Millicom in the Cayman Islands issued $450 million aggregate principal amount of 8% Senior Unsecured Guaranteed Notes (the “8% Senior Notes”) due on October 1, 2017. The 8% Senior Notes were issued for $444 million representing 98.68% of the aggregate principal amount. Distribution and other transaction fees of $9 million reduced the total proceeds from issuance to $435 million. The 8% Senior Notes have an 8% per annum coupon with an 8.25% yield and are payable semi- annually in arrears on April 1 and October 1. The effective interest rate is 8.76%.
F-164 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued)
The 8% Senior Notes are general unsecured obligations of Telemóvil Finance Co. Ltd and rank equal in right of payment with all future unsecured and unsubordinated obligations of Millicom. The 8% Senior Notes are guaranteed by Telemóvil El Salvador, S.A., a Millicom subsidiary.
Telemóvil Finance Co. Ltd has options to partially or fully redeem the 8% Senior Notes as follows:
(i) Full or partial redemption at any time prior to October 1, 2014 for 100% of the principal to be redeemed, or the present value of the remaining scheduled payments of principal to be redeemed and interest, whichever is higher.
(ii) Full or partial redemption at any time on or after October 1, 2014 for the following percentage of principal to be redeemed, plus accrued and unpaid interest and all other amounts dues, if any:
October 1, 2014 104% October 1, 2015 102% October 1, 2016 100%
(iii) Redemption of up to 35% of the original principal of the 8% Senior Notes if, prior to October 1, 2013, Telemóvil El Salvador receives proceeds from issuance of shares, at a repurchase price of 108% of the principal amount to be redeemed plus accrued and unpaid interest and all other amounts due, if any, on the redeemed notes.
If either Millicom, Telemóvil Finance Co. Ltd or Telemóvil El Salvador, S.A. experience a Change of Control Triggering Event, defined as a rating decline resulting from a change in control, each holder will have the right to require repurchase of its notes at 101% of their principal amount plus accrued and unpaid interest and all other amounts due, if any.
In September 2006, Telemóvil El Salvador S.A., Millicom’s operation in El Salvador, entered into a $200 million 5 year loan. The loan was syndicated amongst a group of local and international banks and was arranged by ABN AMRO, Citigroup and Standard Bank. The loan bears interest at $ LIBOR plus 1.75%. This loan was fully repaid in 2010.
In December 2008, Telemóvil El Salvador S.A., entered into a $12 million 2 year loan with Banco Agrícola Comercial S.A. The loan bears interest at $ LIBOR plus 6%. This loan was fully repaid in 2010.
In December 2009, El Salvador entered into a 2 year loan with Scotiabank, bearing interest at $ LIBOR plus 5.0%. This loan was fully repaid in 2010.
(iii) Honduras
Telefonica Celular S.A., Millicom’s operation in Honduras, has facilities with several local and international banks maturing between 2012 and 2016. These facilities are in dollars and in Lempiras and are unsecured. Interest rates are either fixed or variable, ranging as of December 31, 2011 between 4% and 11% (2010: between 6.25% and 16.5%). As at December 31, 2011, the amount of outstanding debt under these facilities was $258 million.
(iv) Tanzania
In December 2008, Millicom Tanzania Limited, Millicom’s operation in Tanzania entered into facilities totaling $228 million comprising of a five year local currency syndicated tranche for
F-165 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued)
TZS95 billion at the 180 days treasury Bill rate plus 3%, a seven year $116 million EKN guaranteed financing with 45% of the facility fixed at 4.1% and 55% of the facility at $ LIBOR plus 0.665% and a seven year $40 million tranche with Proparco at $ LIBOR plus 2.5%. All tranches are 100% guaranteed by the Company. As at December 31, 2011, the amount outstanding under these facilities was $155 million (2010: $200 million).
In March 2007, Millicom Tanzania Limited entered into a 5 year Citi-Opic facility, bearing interest at a rate of $ LIBOR plus 2.5%, composed of a $17.4 million $ Tranche and a Tranche in local currency up to the equivalent of $5 million. The outstanding US$ amount under these facilities as at December 31, 2011 amounted to $2 million (2010: $7 million).
In December 2010, the operation signed a sale and lease-back agreement with Helios Towers Tanzania, a direct subsidiary of Helios Towers Africa, for most of its cell sites, to be transferred to Helios Towers in 2011 and 2012. As at December 31, 2011, $40 million was outstanding on the finance lease as part of the lease back agreement.
(v) Guatemala
In 2011 Comcel and its sister companies Asesoria en Telecomunicaciones S.A. (Asertel), Distribuidora Central de Comunicaciones, S.A. (COCENSA), Distribuidora Internacional de Comunicaciones, S.A. (INTERNACOM) and Distribuidora de Comunicaciones de Occidente, S.A. (COOCSA) entered into a $215 million syndicated loan with Citibank, Scotiabank, Banco General, RBC and HSBC which was fully disbursed in 2011, Millicom’s share of the facility at December 31, 2011 amounted to $118 million.
As at December 31, 2011, Comcel had financing of $27 million (Millicom’s share of outstanding debt) with Citibank bearing a fixed rate of 4.40% (2010: $28 million), and $70 million with Bancolombia and Blue Tower maturing between 2012 and 2017 bearing a floating interest rate between 5.00% and 5.06% (2010: $71 million) and other financing with local banks of the equivalent of $6 million (2010: nil).
Comcel also had another 5 year facility with IFC for $100 million, bearing interest at $ LIBOR plus 4.50%. This loan was fully repaid during 2011 (2010: $64 million).
(vi) Ghana
In December 2007 Millicom (Ghana) Limited, Millicom’s operation in Ghana, entered into a $60 million local 5 year Facility. The loan bears interest at $ LIBOR plus 2%. In parallel a $80 million offshore 7 year DFI (Development Finance Institution) financing which bears interest at $ LIBOR plus 2.25% was arranged. As at December 31, 2011, $72 million (2010: $102 million) was outstanding under these facilities.
In December 2009 the operation entered into a 3.5 year $22 million Ericsson arranged financing with EKN and Nordea priced at $ LIBOR + 0.85% fully guaranteed by the Company. As at December 31, 2011, $19 million was outstanding under this facility (2010: $15 million).
In January 2010, the operation signed a sale and lease-back agreement with Helios Towers Ghana, a direct subsidiary of Helios Towers Africa, for most of its cell sites, to be transferred to Helios Towers in 2010 and 2011. As at December 31, 2011, $27 million was outstanding on the finance lease as part of the lease back agreement (2010: $41 million).
F-166 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued)
(vii) Cable Central America
In September 2009, Millicom Cable N.V., a subsidiary of the Company, refinanced with a 2 year, $250 million senior term loan facility fully guaranteed by the Company with Standard Bank, RBS, Nordea, DnB Nor, and Morgan Stanley. This loan agreement is allocated to the 3 main Amnet operating entities in Costa Rica, El Salvador, and Honduras. The loan bore interest for the first six months at $ LIBOR plus 4.5%, for months seven to twelve at $ LIBOR plus 4.75% and thereafter the margin increases by an incremental 25 basis points per quarter.
During the course of 2010 Millicom’s cable businesses in Honduras and Costa Rica obtained financing under a $105 million 7 year club deal fixed rate facility with HSBC, Bancocolombia and Citibank bearing interest at 6.7% in Costa Rica and a $30 million 7 year bilateral fixed rate financing from Banco Industrial bearing interest at 7% in Honduras. As at December 31, 2011, $99 million was outstanding under the facility in Costa Rica (2010: $104 million) and $33 million for the facility in Honduras (2010: $29 million).
(viii) Chad
In May and August 2007, Millicom’s operation in Chad signed respectively a $31 million 5 year Facility with China Development Bank bearing interest at $ LIBOR +2% and a Euro15 million 5 year Facility with Proparco bearing interest at Euribor +2%. As at December 31, 2011 $3 and $4 million respectively (2010: $13 and $8 million respectively) were outstanding under these facilities, both guaranteed by the Company.
In May 2009, Millicom Chad entered into a XAF6 billion 5 year Facility co-arranged by Societe Generale Cameroun and Financial Bank priced at a fixed interest rate of 7%, fully guaranteed by the Company. At the same date, Millicom Chad signed a XAF21 billion 5 year Subordinated Facility with Societe Generale Tchad with interest at TIAO +1.85% and guaranteed by Nordea. This guarantee is secured by a pledged deposit of $44 million by the Company (see note 19). As at December 31, 2011 $12 and $41 million respectively were outstanding under these facilities (2010: $12 million and $43 million respectively).
In December 2009 the operation signed a XAF9.25 billion 5 year fixed rate financing with the IFC bearing interest at 8%. This facility is guaranteed by Millicom. As at December 31, 2011 the amount outstanding under this facility was $17 million (2010: $18 million).
In January 2010 the operation entered into a 3 year deferred payment agreement with Huawei for $50 million, guaranteed by Millicom and bearing interest at LIBOR +3.75%. As at December 31, 2011 the amount outstanding under this agreement was $15 million (2010: $13 million).
In July 2010, Millicom Chad signed a XAF 8 billion 5 year Facility co-arranged by Proparco and BICEC (Banque Internationale du Cameron pour l’Epargne et Le Credit) at a fixed interest rate of 8%, guaranteed by Millicom. As at December 31, 2011 the amount outstanding under this facility was $15 million (2010: nil).
(ix) Paraguay
In July 2008, Telefonica Cellular Del Paraguay S.A. (Telecel), Millicom’s operation in Paraguay entered into a $107 million, 8 year loan with the European Investment Bank (“EIB”). The loan bears interest at rates between $ LIBOR plus 0.234% and $ LIBOR plus 0.667%. The outstanding
F-167 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued) amount as at December 31, 2011 was $95 million (2010: $100 million). The EIB loan is guaranteed for commercial risks by a group of banks. The commission guarantee fee is 1.25% per annum.
In addition as at December 31, 2011, Telecel had $3 million (2010: $6 million) of other debt and financing outstanding.
(x) Bolivia
In December 2007, Telefonica Celular de Bolivia SA (“Telecel Bolivia”), Millicom’s operation in Bolivia, signed a financing agreement for $40 million with the Nederlandse Financieringsmaatschappij Voor Ontwikkelingslanden, N.V. (FMO), also known as the Netherlands Development Finance Company. The A tranche of $20 million was provided directly by the FMO, is repayable over 7 years and bears interest at $ LIBOR plus 2.25%. The B tranche of $20 million is provided equally by Nordea and Standard Bank, is repayable over 5 years and bears interest at $ LIBOR plus 2%. Both tranches are guaranteed by the Company. As of December 31, 2011, $16 million of this financing agreement was outstanding (2010: $25 million).
In March 2008, Telecel Bolivia signed a 4 year and 9 months financing agreement for $30 million with International Finance Corporation. The loan bears interest at $ LIBOR plus 2% and is fully guaranteed by the Company. As of December 31, 2011, $8 million of this financing agreement was outstanding (2010: $17 million).
In addition to the above, Telecel Bolivia had $46 million of other debt and financing outstanding as at December 31, 2011 (2010: $44 million). This additional debt comprises 7 bilateral loans in local currency bearing a fixed rate ranging from 4.5% to 6.5% and maturing between December 2012 and December 2016.
During 2011 supplier financing from Huawei (at interest rates of $ LIBOR plus 2%) and FPLT amounting to $13 million was repaid.
(xi) Democratic Republic of Congo
In September 2006, Oasis S.P.R.L. (“Oasis”), Millicom’s operation in the Democratic Republic of Congo, entered into a $106 million, 7 year loan from the China Development Bank to finance equipment purchases from Huawei. The loan bears interest at $ LIBOR plus 2% and is repayable over 17 equal quarterly installments commencing in 2009. This financing is 100% guaranteed by the Company. As of December 31, 2011, $35 million was outstanding under this facility (2010: $55 million).
In September 2009, Oasis entered into a 7 year $80 million financing with the IFC guaranteed by Millicom and bearing interest at LIBOR +5%. As at December 31, 2011 the outstanding amount under this facility was $28 million (2010: $17 million).
In addition at December 31, 2011, Oasis had other debt and financing of $33 million (2010: $22 million), mainly consisting of $17 million of finance leases related to towers and $16 million of vendor financing from Huawei, bearing interest at Libor + 3% and guaranteed by Millicom.
F-168 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued)
Fair value of financial liabilities
Borrowings are recorded at amortized cost. The fair value of borrowings as at December 31, 2011 and 2010 is as follows:
2011 2010 US$ ’000 US$ ’000 Other debt and financing ...... 2,262,974 2,246,644 Fair value of total debt ...... 2,262,974 2,246,644
When the quoted price of the borrowings in an active market is not available, the fair value of the borrowings is calculated by discounting the expected future cash flows at market interest rates.
The nominal value of the other financial liabilities is assumed to approximate their fair values (see note 35).
Guarantees
In the normal course of business, Millicom has issued guarantees to secure some of the obligations of some of its operations under bank and supplier financing agreements. The tables below describe the outstanding amount under the guarantees and the remaining terms of the guarantees as of December 31, 2011 and 2010. Amounts covered by bank guarantees are recorded in the consolidated statements of financial position under the caption “Other debt and financing” and amounts covered by supplier guarantees are recorded under the caption “Trade payables” or “Other debt and financing” depending on the underlying terms and conditions.
As of December 31, 2011
Bank and other financing guarantees(i) Outstanding Maximum Terms exposure exposure US$ ’000 US$ ’000 0–1 year ...... 29,522 105,088 1–3 years ...... 230,855 383,124 3–5 years ...... 271,995 354,565 More than 5 years ...... 186,065 225,210 Total ...... 718,437 1,067,987
As of December 31, 2010
Bank and other financing guarantees(i) Outstanding Maximum Terms exposure exposure US$ ’000 US$ ’000 0–1 year ...... – 6,200 1–3 years ...... 360,084 472,231 3–5 years ...... 220,079 293,424 More than 5 years ...... 182,165 265,710 Total(ii) ...... 762,328 1,037,565
F-169 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
27. Borrowings (continued)
(i) The guarantee ensures payment by the guarantor of outstanding amounts of the underlying loans in the case of non-payment by the obligor.
(ii) Including discontinued operations.
Pledged assets
The Group’s share of total debt and financing secured by either pledged assets, pledged deposits issued to cover letters of credit or guarantees issued by the Company as at December 31, 2011 is $1,384 million (2010: $1,380 million). The assets pledged by the Group for these debts and financings at the same date amount to $383 million (2010: $411 million) of which $335 million (2010: $360 million) were pledged over property, plant and equipment.
28. Other non-current and current provisions and liabilities
Provisions and other non-current liabilities are comprised as follows:
2011 2010 US$ ’000 US$ ’000 Non-current legal provisions (note 32) ...... 5,658 6,416 Long-term portion of asset retirement obligations ...... 51,223 61,473 Long-term portion of deferred income on tower deals ...... 50,914 7,864 Other ...... 5,818 4,014 Total ...... 113,613 79,767
Provisions and other current liabilities are comprised as follows:
2010 (As 2011 Restated) US$ ’000 US$ ’000 Put option(i) ...... 745,145 769,378 Deferred revenues ...... 133,326 111,169 Customer deposits ...... 22,171 12,242 Current legal provisions (note 32) ...... 1,738 2,314 Other tax payables ...... 69,799 87,541 Current provisions(ii) ...... 15,147 21,067 Derivative financial instruments ...... 14,884 – Customer and distributor cash balances (Tigo cash) ...... 19,152 2,044 Other ...... 27,118 6,080 Total ...... 1,048,480 1,011,835
(i) Restatement – see note 4
(ii) Includes tax and other contingencies for $4 million (2010: $12 million) that were assumed as part of the Amnet and Navega acquisitions. The former shareholders of Amnet and Navega placed in escrow $35 million and $3 million respectively to cover these contingencies. Therefore a corresponding financial asset of $4 million (2010: $12 million) has been recorded within “Other current assets”.
F-170 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
28. Other non-current and current provisions and liabilities (continued)
Put option
On July 1 2010, Millicom reached an agreement with its local partner in Honduras whereby Millicom’s local partner granted Millicom an unconditional call option for a duration of five years for his 33% stake in Celtel, the Honduran operation (see notes 5 and 35). At the same time, and as consideration for the call option, Millicom granted a put option for the same duration to its local partner. The put option can only be exercised in cases of a change of control of Millicom International Cellular S.A. or Millicom’s subsidiary that holds the shares in Celtel (except if the change of control is in favor of Investment AB Kinnevik, the current largest shareholder of Millicom, or management of Millicom).
A change of control event may occur at Millicom level which is beyond the control of Millicom. Such an event would trigger the ability of our local partner to exercise his put option at his discretion. Therefore, the put option is a financial liability as defined in IAS 32 and Millicom has recorded a current liability for the present value of the redemption price of the put option of $745 million at December 31, 2011 (2010: $769 million).
The redemption price of the put option is based on a multiple of the EBITDA of Celtel. The multiple is based on a change of control transaction multiple of Millicom. Management estimated the change of control transaction multiple of Millicom from a trading multiple of Millicom and adding a control premium (based upon comparable transactions from the industry).
29. Dividends
On December 2, 2011 an extraordinary dividend of $3.00 per share from Millicom’s retained profits as at December 31, 2010 was approved at an Extraordinary General Meeting and distributed in December 2011.
On May 31, 2011 a dividend distribution of $1.80 per share from Millicom’s retained profits as at December 31, 2010 was approved by the shareholders at the Annual General Meeting and distributed in June 2011.
On May 25, 2010 an ordinary dividend of $1.40 per share and a special dividend of $4.60 per share from Millicom’s retained profits as at December 31, 2009 were approved by the shareholders and distributed in June 2010.
30. Directors’ and officers’ remuneration
Directors
The remuneration of the members of the Board of Directors of the Company comprises an annual fee. Between May 2006 and May 2010 the Directors remuneration also included share based compensation (restricted shares) and until May 2006 Directors were issued share options. Director remuneration is proposed by the Nominations Committee and approved by the shareholders at the Annual General Meeting of Shareholders (the “AGM”).
F-171 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
30. Directors’ and officers’ remuneration (continued)
The remuneration charge for the Board for the years ended December 31, 2011, 2010 and 2009 was as follows: Other members of the Chairman board Total No. of shares US$ ’000 No. of shares US$ ’000 US$ ’000 2011 Fees ...... 203 697 900 Total ...... 203 697 900 2010 Fees ...... 77 444 521 Share based compensation:(i) Restricted shares(ii) ...... 1,007 82 4,270 350 432 Total ...... 159 794 953 2009 Fees ...... 106 584 690 Share based compensation:(i) Restricted shares(ii) ...... 1,441 81 5,111 287 368 Total ...... 187 871 1,058
(i) See note 24. (ii) Restricted shares cannot be sold for one year from date of issue. The number of shares and share options beneficially owned by the Directors as at December 31, 2011 and 2010 was as follows: Other members of Chairman the Board Total 2011 Shares ...... 2,318 19,560 21,878 Share options ...... – 10,000 10,000 2010 Shares ...... 2,318 73,158 75,476 Share options ...... – 35,000 35,000
Officers The remuneration of the Officers of the Company (“Officers”) comprises an annual base salary, an annual bonus, share based compensation, social security contributions, pension contributions and other benefits. The bonus and share based compensation plans are based on actual performance (including individual and Group performance). Up until May 2006, the Officers were issued share options. Subsequent to May 2006, the Officers were issued restricted shares. Share based compensation is granted once a year by the Compensation Committee of the Board. Since 2006, the annual base salary and other benefits of the Chief Executive Officer (“CEO”) are proposed by the Compensation Committee and approved by the Board and the annual base salary and other benefits of the Chief Financial Officer (“CFO”) and Chief Operating Officers (“COOs”) are set by the CEO and approved by the Board. On March 2, 2009, Millicom announced that the Board appointed Mikael Grahne, who has been the COO of Millicom since February 2002, to succeed Marc Beuls as President and CEO.
F-172 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
30. Directors’ and officers’ remuneration (continued)
The remuneration charge for the Officers for the years ended December 31, 2011, 2010 and 2009 was as follows:
Current Former Current Chief Chief Chief Executive Executive Financial Officer Officer Officer US$ ’000 US$ ’000 US$ ’000 2011 Base salary ...... 1,323 – 676 Bonus ...... 1,915 – 798 Pension ...... 406 – 105 Other benefits ...... 158 71 Total ...... 3,802 – 1,650 Share based compensation:(i) ...... Shares issued/charge under long term incentive plans(ii) ...... 2,862 – 1,267 2010 Base salary ...... 1,261 – 614 Bonus ...... 1,823 – 624 Pension ...... 385 – 112 Other benefits ...... 178 74 Total ...... 3,647 – 1,424 Share based compensation:(i) Shares issued/charge under long term incentive plans(ii) ...... 2,874 – 1,243 Charge for share options ...... 5 – – 2009 Base salary ...... 1,380 2,349 625 Bonus ...... 1,988 1,388 503 Other benefits ...... 142 – – Total ...... 3,510 3,737 1,128 Share based compensation:(i) Shares issued/charge under long term incentive plans(ii) ...... 1,598 (2,829)(iii) 129 Charge for share options ...... 16 10 –
(i) See note 24.
(ii) Share awards of 34,937 and 14,814 were granted in 2011 under the 2011 LTIPs to the CEO and CFO. Share awards of 41,628 and 19,891 were granted in 2010 under the 2010 LTIPs to the CEO and CFO. Share awards of 35,011 and 13,323 were granted under the 2009 LTIPs to the CEO and CFO.
(iii) Reversal for non-vested shares of the former CEO, Marc Beuls.
F-173 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
30. Directors’ and officers’ remuneration (continued)
The number of shares and unvested share awards beneficially owned by senior management as at December 31, 2011 and 2010 was as follows:
Chief Chief Executive Financial Officer Officer Total 2011 Shares ...... 666,193 7,800 673,993 Share awards not vested ...... 105,063 45,228 150,291 2010 Shares ...... 648,647 905 649,552 Share awards not vested ...... 99,431 37,720 137,151
Severance payments
If employment of the executives is terminated by Millicom, severance payment of up to 12 months salary is payable.
31. Non-cash investing and financing activities
The following table gives details of non-cash investing and financing activities for continuing operations for the years ended December 31, 2011, 2010 and 2009.
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Investing activities Acquisition of property, plant and equipment (see note 17) ...... (37,929) (90,779) (45,399) Asset retirement obligations (see note 17) ...... (4,876) 16,683 (24,209) Financing activities Vendor financing and finance leases (see note 17) ...... 37,929 90,779 45,399 Share based compensation (see note 24) ...... 17,264 30,718 10,175
32. Commitments and contingencies
Operational environment
Millicom has operations in emerging markets, namely Latin America and Africa, where the regulatory, political, technological and economic environments are evolving. As a result, there are uncertainties that may affect future operations, the ability to conduct business, foreign exchange transactions and debt repayments and which may impact upon agreements with other parties. In the normal course of business, Millicom faces uncertainties regarding taxation, interconnect, license renewal and tariff arrangements, which can have a significant impact on the long-term economic viability of its operations.
Litigation
The Company and its operations are contingently liable with respect to lawsuits and other matters that arise in the normal course of business. As of December 31, 2011, the total amount of claims against Millicom’s operations was $127 million (December 31, 2010: $143 million) of which $1 million (December 31, 2010: $6 million) relate to joint ventures. As at December 31, 2011, $7 million (December 31, 2010: $9 million) has been provided for these claims in the consolidated
F-174 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
32. Commitments and contingencies (continued) statement of financial position. Management is of the opinion that while it is impossible to ascertain the ultimate legal and financial liability with respect to these claims, the ultimate outcome of these contingencies is not anticipated to have a material effect on the Group’s financial position and operations.
Sentel GSM S.A. (“Sentel”) license
The Sentel license to provide mobile telephony services in the Republic of Senegal has been challenged by the Senegalese authorities. As of today, Sentel continues to provide telephony services to its customers and effectively remains in control of the business. However, the government of the Republic of Senegal published on November 12, 2008 a decree dated as of 2001 that purports to revoke Sentel’s license.
Sentel’s twenty year license was granted in 1998 by a prior administration, before the enactment in 2002 of the Senegal Telecommunications Act. Although the current Senegalese government has, since 2002, acknowledged the validity of the Sentel license, it has also requested that Sentel renegotiate the terms of the license. Sentel has indicated its willingness to negotiate only certain enhancements to the license and data services and the extension of the duration of the license.
On November 11, 2008 Millicom International Operations B.V. (MIO B.V.), a wholly owned Millicom subsidiary and Sentel instigated arbitration proceedings with the International Center for the Settlement of Investment Disputes (ICSID) against the Republic of Senegal under provisions of the Sentel license and international law. MIO B.V. and Sentel seek compensation for the purported expropriation of the Senegal license and monetary damages for breach of the license.
On the same day, the Republic of Senegal instigated court proceedings in the Republic of Senegal against Millicom and Sentel and sought court approval for the revocation of Sentel’s license and sought damages against Sentel and Millicom.
In July 2010, the ICSID panel ruled that it has jurisdiction over the claims brought by Sentel and MIO B.V., overruling the objections to ICSID’s jurisdiction made by the Republic of Senegal. On November 10, 2010, the Republic of Senegal withdrew its action against Sentel and Millicom in the court proceedings in Senegal. A hearing on the merits of the case was held in December 2011, and a final decision on the case is expected in 2012.
Due to the nature of the dispute, the status of the process for arbitration proceedings, a lack of qualitative information from which to assess possible outcomes, and a lack of financial information, significant uncertainties exist as to the financial impact (if any) of the dispute. The uncertainties are such that, at the date of filing of these consolidated financial statements, it is not practicable to include a reasonable and accurate assessment of the possible financial effect of this dispute.
F-175 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
32. Commitments and contingencies (continued)
Lease commitments
Operating leases:
The Group has the following annual operating lease commitments as of December 31, 2011 and 2010.
2011 2010 US$ ’000 US$ ’000 Operating lease commitments Within: one year ...... 62,480 63,375 Between: one to five years ...... 157,843 235,195 After: five years ...... 18,587 143,390 Total ...... 238,910 441,960
Operating leases comprise mainly of lease agreements relating to land and buildings. The operating lease terms and conditions reflect normal market conditions. Total operating lease expense from continuing operations was $96 million in 2011 (2010: $83 million, 2009: $73 million – see note 11).
Finance leases:
The Group’s future minimum payments on finance leases were $453 million at December 31, 2011 (2010: $120 million) and mainly comprised leased towers in Ghana, Tanzania, DRC and Colombia under 12 year leases (see note 17). Other financial leases are not material and mainly consist of lease agreements relating to vehicles used by the Group.
The Group has the following finance lease commitments as of December 31, 2011 and 2010.
2011 2010 US$ ’000 US$ ’000 Finance lease commitments Within: one year ...... 36,507 6,874 Between: one to five years ...... 153,212 33,438 After: five years ...... 263,303 79,430 Total ...... 453,022 119,742
Capital commitments
As of December 31, 2011 the Company and its subsidiaries and joint ventures have fixed commitments to purchase network equipment, land and buildings and other fixed assets for a value of $370 million (2010: $207 million), of which $46 million (2010: $19 million) relate to joint ventures, from a number of suppliers.
In addition, Millicom is committed to supporting Colombia Móvil S.A., its operation in Colombia, through loans and warranties. The maximum commitment is $264 million and remains until the time the total support from Millicom equals the support from the founding shareholders of Colombia Móvil S.A.
F-176 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
32. Commitments and contingencies (continued)
Contingent assets
Due to late delivery by suppliers of network equipment in various operations, Millicom is entitled to compensation. This compensation is in the form of discount vouchers on future purchases of network equipment. The amount of vouchers received but not recognized as they had not yet been used as at December 31, 2011 was $0.2 million (2010: $1 million).
Dividends
The ability of the Company to make dividend payments is subject to, among other things, the terms of indebtedness, legal restrictions and the ability to repatriate funds from Millicom’s various operations. As at December 31, 2011, $94 million (December 31, 2010: $60 million) of Millicom’s retained profits represent statutory reserves and are undistributable to owners of the Company.
Foreign currency forward contracts
As of December 31, 2011, the Group held foreign currency forward contracts to sell Colombian Pesos in exchange for United States Dollars for a nominal amount of $84 million (2010: $84 million). Net exchange losses on these forward contracts for the year were $2 million (2010: $15 million).
Ownership agreements with non-controlling shareholders
As of December 31, 2010 the agreement with the non-controlling shareholder to increase Millicom’s ownership of its cable businesses in El Salvador from 55% to 100% was pending regulatory approval.
33. Related party transactions
The Company conducts transactions with its principal shareholder, Investment AB Kinnevik (“Kinnevik”) and subsidiaries, and with tower companies in which it holds a direct or indirect equity interest in Ghana, DRC, Tanzania and Colombia. Transactions with related parties are conducted on normal commercial terms and conditions.
Kinnevik
The Company’s principal shareholder is Kinnevik. Kinnevik is a Swedish holding company with interests in the telecommunications, media, publishing, paper industries and financial services. As of December 31, 2011 and 2010, Kinnevik owned approximately 36% of Millicom. During 2011 and 2010, Kinnevik did not purchase any Millicom shares. There are no loans made by Millicom to or for the benefit of these related parties.
During 2011 and 2010 the Company purchased services from Kinnevik subsidiaries including fraud detection, procurement and professional services.
Helios towers and American towers
The Group acquired a 40% equity investment in the associate company Helios Towers Ghana in 2010 and in the associate companies Helios Towers DRC, Helios Towers Tanzania and ATC
F-177 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
33. Related party transactions (continued)
Colombia B.V. in 2011 (“Tower companies”). Millicom sold and leased back a portion of its tower assets in each of these countries and received related tower operation and management services (see note 7). The Group has future lease commitments in respect of the Tower companies (see note 32).
The following transactions were conducted with related parties:
2011 2010 2009 US$ ’000 US$ ’000 US$ ’000 Purchases of goods and services (Kinnevik) ...... 5,958 4,000 1,000 Lease of towers and related services (Associates) ...... 21,864 8,738 – Gain on sale of towers (Associates) ...... 54,419 7,521 – Total ...... 82,241 20,259 1,000
As at December 31, the Company had the following balances with related parties:
2011 2010 US$ ’000 US$ ’000 Payables Finance lease payables ...... 126,823 41,253 Other accounts payable ...... 10,077 637 Total ...... 136,900 41,890 Receivables from sale of towers ...... 76,677 –
34. Financial risk management
Terms, conditions and risk management policies
Exposure to interest rate, foreign currency, non-repatriation, liquidity and credit risks arise in the normal course of Millicom’s business. The Group analyses each of these risks individually as well as on an interconnected basis and defines and implements strategies to manage the economic impact on the Group’s performance in line with its financial risk management policy. Millicom’s risk management strategies may include the use of derivatives. Millicom’s policy prohibits the use of such derivatives in the context of speculative trading.
Interest rate risk
Interest rate risk generally arises on borrowings. Borrowings issued at floating rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group’s exposure to risk of changes in market interest rates relates to both of the above. To manage the risk, the Group’s policy is to maintain a combination of fixed and floating rate debt with target for the debt to be equally distributed between fixed and variable rates. The Group actively monitors borrowings against target and applies a dynamic interest rate hedging approach. The target mix between fixed and floating rate debt is reviewed periodically. The purpose of Millicom’s policy is to achieve an optimal balance between cost of funding and volatility of financial results, while taking into account market conditions as well as our overall business strategy. At December 31, 2011, approximately 51% of the Group’s borrowings are at a fixed rate of interest or for which variable rates have been swapped for fixed rates under interest rate swaps (2010: 36%).
F-178 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
34. Financial risk management (continued)
To comply with internal policies, in January 2010 Millicom entered into an interest rate swap to hedge the interest rate risk of the floating rate debt in three different countries (Tanzania, DRC and Ghana). The interest rate swap was issued in January 2010 for a nominal amount of $100 million, with maturity January 2013.
In 2010 Millicom entered into interest rate swaps to hedge the interest rate risks on floating rate debts in Honduras and Costa Rica. The interest rate swap in Honduras was issued for a nominal amount of $30 million, with maturity in 2015, and in Costa Rica for a nominal amount of $105 million with maturity in 2017.
The table below summarizes, as at December 31, 2011, our fixed rate debt and floating rate debt:
Amounts due within 1 year 1–2 years 2–3 years 3–4 years 4–5 years >5 years Total (in thousands of U.S. Dollars, except percentages) Fixed rate ...... 261,840 118,930 134,273 97,007 45,742 584,489 1,242,281 Weighted average nominal interest rate ...... 4.37% 6.02% 6.13% 5.66% 6.02% 8.85% 6.98% Floating rate ...... 359,586 194,066 191,260 193,967 198,659 58,459 1,195,997 Weighted average nominal interest rate ...... 5.31% 5.50% 4.75% 6.27% 5.98% 2.17% 5.37% Total ...... 621,426 312,996 325,533 290,974 244,401 642,948 2,438,278 Weighted average nominal interest rate ...... 4.91% 5.70% 5.32% 6.06% 5.99% 5.19% 6.97%
The table below summarizes, as at December 31, 2010, our fixed rate debt and floating rate debt:
Amounts due within 1 year 1–2 years 2–3 years 3–4 years 4–5 years >5 years Total (in thousands of U.S. Dollars, except percentages) Fixed rate ...... 69,761 36,361 60,987 64,885 70,409 549,062 851,465 Weighted average nominal interest rate ...... 5.69% 6.19% 6.35% 5.89% 6.66% 8.81% 7.87% Floating rate ...... 485,703 334,637 193,167 246,496 155,378 85,190 1,500,571 Weighted average nominal interest rate ...... 7.25% 6.25% 6.39% 6.29% 6.70% 4.55% 6.55% Total ...... 555,464 370,998 254,154 311,381 225,787 634,252 2,352,036 Weighted average nominal interest rate ...... 7.05% 6.25% 6.38% 6.20% 6.69% 8.25% 7.03%
A one hundred basis point fall or rise in market interest rates for all currencies in which the Group had borrowings at December 31, 2011, would increase or reduce profit before tax from continuing operations for the year by approximately $12 million (2010: $15 million).
F-179 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
34. Financial risk management (continued)
Foreign currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures where the Group operates. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations.
Millicom seeks to reduce its foreign currency exposure through a policy of matching, as far as possible, assets and liabilities denominated in foreign currencies. In some cases, Millicom may borrow in US dollars where it is either commercially more advantageous for joint ventures and subsidiaries to incur debt obligations in US dollars or where US dollar denominated borrowing is the only funding source available to a joint venture or subsidiary. In these circumstances, Millicom accepts the remaining currency risk associated with financing its joint ventures and subsidiaries, principally because of the relatively high cost of forward cover, when available, in the currencies in which the Group operates.
The following table summarizes debt denominated in US$ and other currencies at December 31, 2011 and 2010.
2011 2010 US$ ’000 US$ ’000 Total US$ ...... 1,605,850 1,571,757 Colombia ...... 504,337 522,994 Chad ...... 86,411 72,754 Tanzania ...... 34,584 56,659 Bolivia ...... 46,305 43,878 Ghana ...... 18,670 40,565 Guatemala ...... 11,249 20,552 Other ...... 130,872 22,877 Total non-US$ currencies ...... 832,428 780,279 Total ...... 2,438,278 2,352,036
At December 31, 2011, if the US$ had weakened/strengthened by 10% against the other functional currencies of our operations and all other variables held constant, then profit before tax from continuing operations would have increased/decreased by $112 million and $137 million respectively (2010: $105 million and $129 million respectively). This increase/decrease in profit before tax would have mainly been as a result of the conversion of the results of our operations with functional currencies other than the US dollar.
Non-repatriation risk
Most of the operations in which we have interests receive substantially all of their revenues in the currency of the countries in which they operate. We derive substantially all of our revenues through funds generated by our local operations and, therefore, we rely on their ability to transfer funds to the Company.
Although there are foreign exchange controls in some of the countries in which our mobile telephone companies operate, none of these countries currently significantly restrict the ability of these operations to pay interest, dividends, technical service fees, royalties or repay loans by exporting cash, instruments of credit or securities in foreign currencies. However, existing foreign exchange controls may be strengthened in countries where we operate, or foreign exchange
F-180 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
34. Financial risk management (continued) controls may be introduced in countries where we operate that do not currently impose such restrictions, in which case, the Company’s ability to receive funds from the operations will subsequently be restricted, which would impact our ability to pay dividends to our shareholders.
In addition, in some countries, it may be difficult to convert large amounts of local currency into foreign currency because of limited foreign exchange markets. The practical effects of this are time delays in accumulating significant amounts of foreign currency and exchange risk, which could have an adverse effect on the Group’s results of operations.
Credit and Counterparty risk
Financial instruments that potentially subject the Group to credit risk are primarily cash and cash equivalents, pledged deposits, letters of credit, trade receivables, amounts due from joint venture partners, supplier advances and other current assets and derivatives. Counterparties to agreements relating to the Group’s cash and cash equivalents, pledged deposits and letters of credit are significant financial institutions with investment grade ratings. Management does not believe there are significant risks of non-performance by these counterparties. Management has taken steps to diversify its banking partners. We are also managing the allocation of deposits across banks so that the Group’s counterparty risk with a given bank stays within limits which have been set based on each banks credit rating. This way we are avoiding any significant exposure to a specific party.
A large portion of turnover comprises prepaid airtime. For customers for whom telecom services are not prepaid, the Group follows risk control procedures to assess the credit quality of the customer, taking into account its financial position, past experience and other factors.
Accounts receivable are mainly derived from balances due from other telecom operators. Credit risk of other telecom operators is limited due to the regulatory nature of the telecom industry, in which licenses are normally only issued to credit worthy companies. The Group maintains a provision for impairment of trade receivables based upon expected collectability of all trade receivables.
As the Group has a large number of internationally dispersed customers, there is no significant concentration of credit risk with respect to trade receivables.
Liquidity risk
Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group has incurred significant indebtedness but also has significant cash balances. Millicom evaluates its ability to meet its obligations on an ongoing basis using a recurring liquidity planning tool. This tool considers the operating net cash flows generated from its operations and the future cash needs for borrowing and interest payments and capital and operating expenditures required in maintaining and developing local business.
The Group manages its liquidity risk through use of bank overdrafts, bank loans, vendor financing, Export Credit Agencies and Development Finance Institutions (“DFI”) loans, bonds and finance leases. Millicom believes that there is sufficient liquidity available in our markets to meet ongoing liquidity needs. Additionally, Millicom is able to arrange offshore funding through the use of Export Credit Agency guarantees and DFIs (IFC, PROPARCO, DEG and FMO), who have been established specifically to finance development in our markets. Millicom is diversifying its financing with commercial banks representing about 51% of its gross financing, Bonds 18%,
F-181 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
34. Financial risk management (continued)
Development Finance Institutions 12%, partners 11%, financial leases 6% and suppliers 2%. The Group is therefore not dependent on a few sources of financing but is relying on various financing opportunities.
The tables below summarize the maturity profile of the Group’s net financial liabilities at December 31, 2011 and 2010.
Less than Year ended 31 December 2011 1 year 1 to 5 years >5 years Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 Total borrowings (see note 27) ...... (621,426) (1,173,904) (642,948) (2,438,278) Cash and cash equivalent ...... 881,279 – – 881,279 Time deposit ...... 269 – – 269 Pledged deposit (relating to bank borrowings) . . 297 49,371 – 49,668 Net cash (debt) ...... 260,419 (1,124,533) (642,948) (1,507,062) Future interest commitments(ii) ...... (135,667) (342,098) (26,484) (504,249) Trade payables (excluding accruals) ...... (340,684) – – (340,684) Derivative financial instruments ...... (14,884) (8,016) – (22,900) Put option ...... (745,145) – – (745,145) Other financial liabilities (including accruals) .... (861,831) – – (861,831) Trade receivables ...... 276,944 – – 276,944 Other financial assets ...... 334,181 37,359 – 371,540 Net financial asset (liability) ...... (1,226,667) (1,437,288) (669,432) (3,333,387)
Less than Year ended 31 December 2010 (As Restated)(i) 1 year 1 to 5 years >5 years Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 Total borrowings (see note 27) ...... (555,464) (1,162,320) (634,252) (2,352,036) Cash and cash equivalent ...... 1,023,487 – – 1,023,487 Time deposit ...... 3,106 – – 3,106 Pledged deposit (relating to bank borrowings) . . 7,261 49,963 0 57,224 Net cash (debt) ...... 478,390 (1,112,357) (634,252) (1,268,219) Future interest commitments(ii) ...... (145,664) (346,193) (26,109) (517,966) Trade payables (excluding accruals) ...... (315,058) – – (315,058) Derivative financial instruments ...... – (18,250) – (18,250) Put option ...... (769,378) – – (769,378) Other financial liabilities (including accruals) .... (734,448) – – (734,448) Trade receivables ...... 253,258 – – 253,258 Other financial assets ...... 200,630 17,754 – 218,384 Net financial asset (liability) ...... (1,032,270) (1,459,046) (660,361) (3,151,677)
(i) Restatement – see note 4
(ii) Includes unamortized difference between carrying amount and nominal amount of debts.
Capital management
The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value.
F-182 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
34. Financial risk management (continued)
The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may make dividend payments to shareholders, return capital to shareholders or issue new shares. Millicom is rated by one independent rating agency, namely Moody’s, which upgraded Millicom’s rating by one notch to Ba1, which is just one notch below investment grade. The Group monitors capital using primarily a net debt to adjusted operating profit ratio, as well as a set of other indicators.
2011 2010 US$ ’000 US$ ’000 Net debt ...... 1,507,062 1,268,219 Adjusted operating profit (see note 10) ...... 2,087,217 1,840,624
Ratio Ratio Net debt to adjusted operating profit ratio ...... 0.7 0.7
The Group reviews it gearing ratio (net debt divided by total capital plus net debt) periodically. Net debt includes interest bearing loans and borrowings, less cash and cash equivalents and pledged deposits related to bank borrowings. Capital represents equity attributable to the equity holders of the parent.
2010 2011 (As Restated)(i) US$ ’000 US$ ’000 Net debt ...... 1,507,062 1,268,219 Equity ...... 2,445,554 2,389,633 Net debt and equity ...... 3,952,616 3,657,852 Gearing ratio ...... 38% 35%
(i) Restatement – see note 4
35. Financial instruments
The fair value of Millicom’s financial instruments is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair value of all financial assets and all financial liabilities except debt and financing approximate their carrying value largely due to the short-term maturities of these instruments. The fair values of all debt and financing have been estimated by the Group based on discounted future cash flows at market interest rates.
F-183 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
35. Financial instruments (continued)
The following table shows the carrying and fair values of financial instruments as at December 31, 2011 and 2010: Carrying value Fair value 2010 2010 2011 (As Restated)(i) 2011 (As Restated)(i) US$ ’000 US$ ’000 US$ ’000 US$ ’000 FINANCIAL ASSETS Loans and receivables Pledged deposits ...... 49,371 49,963 49,371 49,963 Other non-current assets ...... 37,359 17,754 37,359 17,754 Trade receivables, net ...... 276,944 253,258 276,944 253,258 Amounts due from non-controlling interests and JV partners ...... 158,782 99,497 158,782 99,497 Prepayments and accrued income ...... 119,362 89,477 119,362 89,477 Other current assets ...... 146,615 75,311 146,615 75,311 Cash and cash equivalents ...... 881,279 1,023,487 881,279 1,023,487 Total ...... 1,669,712 1,608,747 1,669,712 1,608,747 Current ...... 1,582,982 1,541,030 1,582,982 1,541,030 Non-current ...... 86,730 67,717 86,730 67,717 FINANCIAL LIABILITIES Debt and financing (see note 27) ...... 2,438,278 2,352,036 2,262,974 2,246,644 Trade payables ...... 224,089 202,707 224,089 202,707 Payables and accruals for capital expenditure ...... 333,551 278,063 333,551 278,063 Derivative financial instruments ...... 22,900 18,250 22,900 18,250 Put option ...... 745,145 769,378 – – Amounts due to non-controlling interests and JV partners ...... 92,677 97,919 92,677 97,919 Accrued interest and other expenses ...... 263,747 228,360 263,747 228,360 Other liabilities ...... 74,259 24,380 74,259 24,380 Total ...... 4,194,646 3,971,093 3,274,197 3,096,323 Current ...... 2,363,960 2,152,257 1,618,816 1,382,879 Non-current ...... 1,830,686 1,818,836 1,655,381 1,713,444
(i) Restatement – see note 4
Call option and put option related to Telefonica Cellular S.A. DE CV (Celtel) As described in note 5, on July 1, 2010 Millicom reached agreement with its local partner in Honduras whereby Millicom’s local partner granted Millicom an unconditional call option for the next five years for his 33% stake in Telefonica Celtel and as consideration, Millicom granted a conditional put option for the same duration to the local partner. The put option can only be exercised in cases of a change of control of Millicom International Cellular S.A. or Millicom’s subsidiary that holds the shares in Celtel (except if the change of control is in favour of Investment AB Kinnevik, the current largest shareholder of Millicom, or management of Millicom). Millicom believe that a change of control transaction that triggers the local partner’s right to exercise his put is currently highly unlikely to happen during the term of the put option and have therefore determined the fair value of the put option to be immaterial at both December 31, 2010 and 2011.
F-184 Millicom International Cellular S.A. Notes to the consolidated financial statements (continued) as of December 31, 2011, 2010 and 2009
35. Financial instruments (continued)
The call option price is a fixed multiple of the EBITDA of Celtel in the year the option is exercised. As the fixed multiple exceeded the fair value multiples (based on comparable transactions and including a control premium) at December 31, 2011 and 2010, and as there were no expectations that the Honduran market characteristics would significantly change over the term of the call option, Millicom determined the fair value of the call option to be immaterial at both December 31, 2011 and 2010.
Fair value measurement hierarchy
Effective January 1, 2009, Millicom adopted the amendment to IFRS 7 for financial instruments that are measured in the Statement of Financial Position at fair value, which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
• Level 3 – Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
Derivative financial instruments are measured with reference to Level 2, except for the call options in Colombia (see note 7) and the call and put options in Honduras (see note 5 and note 28) which are measured with reference to level 3. The Honduras put option liability is carried at the present value of the redemption amount and is therefore excluded from the fair value hierarchy. No other financial instruments are measured at fair value.
36. Subsequent events
Dividend
On February 8, 2012 Millicom announced that the Board will propose to the Annual General Meeting of the Shareholders a dividend distribution of $2.40 per share to be paid out of Millicom’s profits for the year ended December 31, 2011 subject to the Board’s approval of the 2011 Consolidated Financial Statements of the Group.
On February 8, 2012 Millicom announced that the Board has approved a share buyback program of up to $300 million for the 2012 year.
F-185 THE ISSUER Millicom International Cellular S.A. 2, rue du Fort Bourbon L-1249 Luxembourg
LEGAL ADVISORS TO THE ISSUER as to matters of U.S. federal as to matters of and New York law Luxembourg law
Orrick, Herrington & Sutcliffe NautaDutilh Avocats Luxembourg (Europe) LLP 2, rue Jean Bertholet 107 Cheapside L-1233 Luxembourg London EC2V 6DN Grand Duchy of Luxembourg United Kingdom
LEGAL ADVISORS TO THE INITIAL PURCHASERS as to matters of U.S. federal as to matters of and New York law Luxembourg law
Latham & Watkins (London) LLP Loyens & Loeff, Avocats à la Cour 99 Bishopsgate 18-20, rue Edward Steichen London EC2M 3XF L-2540 Luxembourg United Kingdom
LEGAL ADVISORS TO THE TRUSTEE
White & Case LLP 5 Old Broad Street London EC2N 1DW United Kingdom
INDEPENDENT AUDITORS Ernst & Young S.A. PricewaterhouseCoopers, Société coopérative 7, Rue Gabriel Lippmann, 400, Route d’Esch Parc d’Activité Syrdall 2, L-1471 Luxembourg Luxembourg, L-5365 Munsbach
TRUSTEE, TRANSFER AGENT AND REGISTRAR LUXEMBOURG PRINCIPAL PAYING AGENT LISTING AGENT Citigroup Global Markets Citibank, N.A., London Branch Deutschland AG Banque Internationale Citigroup Centre 5th Floor, Reuterweg 16 à Luxembourg S.A. 25 Canada Square 60323 Frankfurt, 69, route d’Esch Canary Wharf Germany L-2953 Luxembourg London E14 5LB United Kingdom Millicom International Cellular S.A.
J.P. Morgan Standard Bank
BNP PARIBAS
Printed by RR Donnelley 465703 Millicom International Cellular S.A. $500,000,000 43⁄4% Senior Notes due 2020