Executive Summary / Key Takeaways

• The Puerto Rico Overhang Obscures a Strong Core: Liberty Latin America's stock trades at a deep discount because its Puerto Rico segment—plagued by a disastrous AT&T (T) migration, $1 billion in impairments, and unsustainable leverage—masks the strong performance of its other segments, which generated 7% rebased OIBDA growth in Q3 2025 and are driving toward mid-3x leverage without Puerto Rico.

• Infrastructure Moat Drives B2B Resilience: The company's 97% gigabit-ready fixed network, 50,000 km subsea fiber system (recently doubled with MAYA-1.2), and expanding 5G footprint create a durable competitive advantage in wholesale and enterprise connectivity, with Liberty Networks delivering 55.9% OIBDA margins and 6% rebased revenue growth while competitors struggle with terrestrial limitations.

• Separation Plan De-Risks the Investment Case: Management's commitment to separate Liberty Puerto Rico by H1 2026, combined with a $250 million secured financing that provides near-term liquidity, creates a clear catalyst to remove the primary source of volatility and reveal the underlying cash generation power of the remaining business.

• Cost Discipline Supports Margin Expansion: A comprehensive efficiency program is delivering results across all segments, with consolidated adjusted OIBDA margins expanding 340 basis points year-over-year in Q2 2025 and capital intensity falling to 13% of revenue, positioning the company for sustained free cash flow growth even without revenue acceleration.

• Critical Variables to Monitor: The success of Puerto Rico's "return to basics" strategy (churn reduction, billing fixes, new Liberty Mix product) and the outcome of the Costa Rica merger appeal (blocked by SUTEL in September 2025) will determine whether LILA can achieve its separation timeline and realize the full value of its infrastructure assets.

Setting the Scene: A Regional Telecom with a Balance Sheet Problem

Liberty Latin America, incorporated in 2017 in Hamilton, Bermuda, operates as a federation of telecommunications businesses across 20+ countries in Latin America and the Caribbean. The company makes money through three distinct layers: residential fixed-mobile bundles, B2B enterprise connectivity, and wholesale subsea capacity. This diversified model—spanning Liberty Caribbean, CW Panama, Liberty Networks, Liberty Puerto Rico, and Liberty Costa Rica—should provide geographic and segment-level resilience. Instead, it has become a case study in how one troubled division can distort the perception of an entire enterprise.

The industry structure favors scale and infrastructure ownership. In most markets, LILA operates as a leading duopolist or challenger, competing against giants like América Móvil (AMX) (Claro) and Millicom (TIGO) (Tigo) in Central America, and T-Mobile (TMUS) in Puerto Rico. The core demand driver is digital transformation—governments and enterprises need reliable, high-capacity connectivity to modernize operations. LILA's 4.81 million homes passed and 50,000 km of subsea fiber position it uniquely to capture this demand, particularly in the Caribbean where island geography makes fiber infrastructure prohibitively expensive to replicate.

Yet the company's current positioning reflects a strategic miscalculation. The 2021 acquisition of AT&T's Puerto Rico operations was meant to create a fixed-mobile convergence powerhouse. Instead, it created a quagmire. The migration of 1+ million subscribers revealed fundamental weaknesses in billing systems, customer data transfer, and network integration. As CEO Balan Nair admitted, "Undeniably, 2024 was a very challenging year for us in Puerto Rico. And with hindsight, we underestimated how difficult the migration and recovery would be." This underestimation resulted in $501 million in goodwill impairment in Q3 2024 and a further $494 million spectrum impairment in Q2 2025, turning Puerto Rico into a black hole of value destruction.

Technology, Products, and Strategic Differentiation: The Subsea Moat

Liberty Latin America's core technological advantage lies in its integrated fiber and subsea network. The August 2025 launch of MAYA-1.2 doubled capacity on the critical MAYA-1 cable system, a 2,386 km upgrade that strengthens international connectivity and digital resilience. This matters because it clears the path for Manta, a new pan-regional subsea cable system that will establish a foundation of monthly recurring revenue for years to come. While competitors like América Móvil focus on terrestrial mobile dominance, LILA's subsea assets create a natural monopoly on cross-border bandwidth that is economically impossible to replicate.

The 97% gigabit-readiness across LILA's fixed footprint is not just a network statistic—it translates directly into pricing power and churn reduction. In Puerto Rico, the new "Kepon" product defaults to mobile network during power outages, addressing a critical pain point in hurricane-prone markets. In Costa Rica, the "Planes Libre" offering is successfully migrating prepaid customers to postpaid, adding 130,000 subscribers in nine months. These innovations leverage the same infrastructure to capture higher ARPU and lower churn, with Liberty Puerto Rico's new Liberty Mix product showing a 40% ARPU increase in early results.

Fixed-mobile convergence (FMC) represents the strategic glue binding these assets. With 23% FMC penetration in Puerto Rico (but only 10% "real" FMC customers), 35% in C&W Caribbean, and nearly 35% in Costa Rica, LILA has significant room to deepen customer relationships. Each percentage point of FMC penetration reduces churn and increases lifetime value, creating a self-reinforcing cycle that competitors without integrated networks cannot match. The 5G launches in five markets, including Barbados as the second Caribbean market, provide the mobile layer necessary to complete this convergence strategy.

Financial Performance & Segment Dynamics: Puerto Rico Masks Core Strength

The segment-level results reveal a tale of two companies. Liberty Networks, the wholesale and subsea business, generated $116.7 million in revenue and $65.2 million in adjusted OIBDA in Q3 2025, delivering a 55.9% margin that reflects the moat-like nature of international bandwidth. This segment's 6% rebased revenue growth and stable margins demonstrate consistent demand from enterprises and governments needing reliable connectivity, particularly in Colombia and the Dominican Republic where IT-as-a-service offerings are building monthly recurring revenue.

Liberty Caribbean and CW Panama show similar resilience. Caribbean posted 46.8% OIBDA margins in Q3, driven by postpaid mobile additions and broadband stability despite competitive pressure in Trinidad. Panama's 36.1% margin reflects successful prepaid-to-postpaid migration and a 33% sequential expansion in B2B revenue from government and enterprise wins. These segments are executing the playbook: leverage infrastructure to capture higher-value customers while cutting costs through digitization and AI-driven workforce efficiency.

Then there is Liberty Puerto Rico. The segment's Q3 2025 revenue declined 5% rebased to $298.2 million, while adjusted OIBDA grew 7% to $95.5 million, producing a 32% margin. The OIBDA growth is entirely from cost cutting—$200 million in run-rate savings from terminating the AT&T transition services agreement and staff efficiencies—not operational improvement. The $494 million spectrum impairment in Q2 2025, "primarily attributed to challenges related to the operationalization of this spectrum," crystallizes the problem: LILA paid for assets it cannot effectively deploy. With $2.9 billion of Puerto Rico's $8.4 billion total debt and leverage described by management as "unsustainable," this segment is a structural drag on the entire enterprise.

The consolidated numbers tell a misleading story. Q3 2025's $1.11 billion in revenue (up 2% rebased) and $433 million in adjusted OIBDA (up 7% rebased) appear modest. But excluding Puerto Rico, the remaining business generated approximately $3.2 billion in revenue and $1.3 billion in adjusted OIBDA in 2024, with free cash flow nearly $200 million—70% higher than the consolidated figure. The 13% capital intensity and 26% adjusted OIBDA less P&E additions margin in Q3 2025 show that the core business is a cash-generating machine being suffocated by Puerto Rico's $2.9 billion debt burden and operational losses.

Outlook, Management Guidance, and Execution Risk

Management's decision to withdraw three-year guidance in Q1 2025 was a tacit admission that Puerto Rico's recovery would consume all the "buffers" built into the original $1 billion free cash flow target. As Nair explained, "the challenges in Puerto Rico in 2024 pretty much ate up most of my buffers." The new guidance framework focuses on near-term execution: robust Q4 cash flow (expected to be strong despite Hurricane Melissa, mitigated by $81 million in parametric insurance proceeds), continued cost reduction through H1 2026, and commercial momentum in B2B and residential.

The Puerto Rico recovery plan centers on "return to basics"—fixing billing quality, reducing churn, and reshaping the cost base to reflect smaller scale. Early signs are mixed: postpaid losses are lower than Q2, churn is "tracking in the right direction," and the Liberty Mix product shows promise. But FMC penetration remains at only 23%, and competitive pressure from T-Mobile's aggressive handset subsidies continues. The $250 million secured financing raised in Q3 provides liquidity, but management acknowledges the capital structure is "unsustainable" and a "liability management process is underway."

The separation plan, targeted for H1 2026, is the critical catalyst. By spinning off Puerto Rico, LILA aims to unlock value by revealing the true earnings power of the remaining business, which would have mid-3x leverage and enhanced free cash flow generation. This is not dependent on completing the liability management exercise, suggesting management is committed to the separation even if Puerto Rico's debt must be restructured. The Costa Rica merger appeal, with a response expected by mid-November 2025, adds another layer of execution risk—if denied, LILA must implement cost savings that were previously deferred, potentially impacting near-term margins.

Risks and Asymmetries: What Can Break the Thesis

The primary risk is that Puerto Rico's operational bleeding continues, consuming more cash and preventing separation. If churn doesn't stabilize, if billing issues persist, or if Hurricane Melissa's impact (mobile traffic at 80% of pre-storm levels, 40% of fixed customers online) creates long-term network damage, the segment could require additional capital injections beyond the $250 million financing. This would strain the entire LLA group's liquidity and delay the separation timeline, leaving investors holding a structurally impaired asset.

Regulatory risk is material and immediate. SUTEL's prohibition of the Costa Rica merger was "unexpected," and while an appeal is pending, a final denial would force LILA to compete in the most competitive fixed market in the region (five nationwide players) without the scale benefits of consolidation. This would pressure margins and slow the postpaid migration strategy that added 130,000 subscribers in nine months. The broader regulatory environment also includes new U.S. tariffs announced in April 2025, which could increase handset costs in Puerto Rico and compress mobile margins.

Natural disasters remain a persistent threat. Hurricane Melissa's impact on Jamaica demonstrates the vulnerability of island operations. While parametric insurance provides $81 million in proceeds, the full impact on 2025 and 2026 results cannot be estimated and depends on power restoration. This creates earnings volatility that competitors with more continental exposure (like América Móvil's Mexico focus) do not face.

The debt burden is the structural vulnerability. With 7.67x debt-to-equity and Puerto Rico accounting for $2.9 billion of $8.4 billion total debt, the company is highly leveraged. While the remaining business has "long-term" capital structures with 80% of debt due in 2031 or beyond, Puerto Rico's unsustainable leverage could trigger covenant violations or forced asset sales if operational performance doesn't improve. The weighted average interest rate of 7.40% is materially higher than competitors like T-Mobile (6.80% effective rate), reflecting LILA's risk premium.

Competitive Context: Infrastructure vs. Scale

Against América Móvil, LILA's subsea network is a qualitative differentiator. AMX's terrestrial dominance in mobile and fixed services across 18 countries gives it unmatched scale, with 290 million wireless subscribers and $11.65 billion in quarterly revenue. However, AMX's focus on consumer markets leaves it weaker in international enterprise connectivity, where LILA's 50,000 km of subsea fiber provides lower latency and higher reliability for B2B customers. LILA's 6% wholesale growth outpaces AMX's enterprise segment, suggesting the moat is defensible, but AMX's 60.34% gross margins and 21.52% operating margins reflect superior scale efficiency that LILA cannot match in overlapping consumer markets.

Millicom is the most direct competitor, overlapping in Panama and Costa Rica. TIGO's $1.42 billion quarterly revenue and 26.48% operating margins are comparable to LILA's core business, but its terrestrial focus limits B2B growth. The blocked Costa Rica merger highlights the regulatory constraints both face, but also reveals LILA's willingness to consolidate markets where it holds infrastructure advantages. LILA's 36.5% OIBDA margin in Costa Rica (vs. TIGO's 26.48% operating margin) suggests better execution, though TIGO's 5.98% dividend yield reflects its mature cash generation.

Telefónica (TEF)'s Latin American divestiture strategy (selling Ecuador to Millicom in November 2025) creates opportunity. As TEF streamlines its portfolio, LILA can capture market share in the Caribbean where TEF is retreating. However, TEF's 13.00% operating margin in its remaining markets reflects the challenge of operating in volatile Latin American economies, a risk LILA shares through its Panama and Costa Rica exposure.

T-Mobile is the existential threat in Puerto Rico. With 40-50% mobile market share, superior 5G speeds, and aggressive handset subsidies, TMUS is winning the postpaid battle. LILA's fixed-mobile bundles and "always-on" Kepon product are defensive strategies, but TMUS's $21.96 billion quarterly revenue and 22.23% operating margins give it resources to outspend LILA indefinitely. The separation plan is partly an admission that competing head-to-head with TMUS in mobile while managing a fixed network is structurally disadvantaged.

Valuation Context: Paying for the Overhang

At $8.87 per share, LILA trades at 0.41x sales and 8.16x free cash flow—multiples that suggest a business in distress. The negative 16.57% profit margin and -47.02% ROE reflect Puerto Rico's impairments, not core operations. Excluding Puerto Rico, the remaining business generated nearly $200 million in free cash flow on $3.2 billion revenue, implying a 6.25% FCF margin that would command a multiple of 12-15x in a normalized market—suggesting the core business alone could be worth $12-15 per share.

The EV/EBITDA multiple of 6.32x is below the 5.78x of América Móvil and 5.99x of Millicom, despite LILA's higher growth profile in B2B. This discount reflects the Puerto Rico overhang and execution risk. The debt-to-equity ratio of 7.67x is the primary constraint; until separation reduces consolidated leverage, the stock will trade on Puerto Rico's distress, not the core business's quality.

Peer comparisons highlight the opportunity. TIGO trades at 1.50x sales with 19.59% profit margins, while AMX trades at 1.26x sales with 7.24% margins. LILA's 0.41x sales multiple implies a 65-70% discount to peers, even though its core business margins are comparable. The separation plan is designed to close this gap by revealing the true earnings power and reducing leverage to the mid-3x range, which would support a valuation re-rating.

Conclusion: Two Paths to Value

Liberty Latin America presents a binary investment case. If management successfully separates Puerto Rico by H1 2026 while stabilizing its operations through the "return to basics" strategy, the remaining business will emerge as a high-margin, infrastructure-led connectivity provider with mid-3x leverage and strong free cash flow generation. The subsea network, 97% gigabit-readiness, and accelerating B2B momentum provide durable competitive advantages that justify a significant valuation re-rating from the current 0.41x sales.

If Puerto Rico's bleeding continues, if the Costa Rica merger appeal fails and forces margin-dilutive competition, or if natural disasters create additional cash calls, the separation could be delayed and the debt burden could overwhelm the core business's cash generation. The $250 million secured financing provides a buffer, but not an indefinite one.

The critical variables are execution in Puerto Rico and regulatory clarity in Costa Rica. Investors should monitor churn trends, the pace of billing system fixes, and the mid-November SUTEL appeal decision. The infrastructure moat is real and valuable, but it remains trapped inside a balance sheet problem that only a successful separation can solve.