Wednesday 21 February 2018

'Branding this as failure is misguided: never confuse emotion with business'

Huge bouts of volatility and turbulence have been sweeping across financial markets

Denis O'Brien's decision may have been the right one in business terms
Denis O'Brien's decision may have been the right one in business terms

Joe Gill

An IPO process is not something that can be decided on a whim or turned on and off at a moment's notice. It requires an exhaustive amount of resources to prepare a company for a stock market listing.

Extensive and detailed documentation and regulatory submissions are required to present any business to the equity investment community. In the period between launching an IPO and completing it a company is exposed to the slings and arrows of outrageous fortune that define public equity markets.

When Digicel first indicated its consideration of an IPO last June equity markets were relatively benign.

Between then and now huge bouts of volatility and turbulence have swept across financial markets including sectors of direct relevance to Digicel's investment thesis and the fund management community it targeted for support.

That market weakness can be directly connected to two dynamics which influenced the outcome for the communication group: firstly, the amount of money available for investing shrunk; and secondly, the valuation offered by investors for the equity offered by Digital declined.

In the month of August alone global hedge fund investors lost an eye-popping $78bn as equity markets fell, especially in so called emerging markets.

A company always directly compared with Digicel - Cable and Wireless - was worth 18pc more on the stock exchange in June compared to last Friday. That peer's valuation fall and the sharp decline in demand for emerging market equities provided a hugely challenging backdrop against which Digicel strove to sell its story.

Two weeks ago Goodbody co-led the sale of €228m worth of equity in Origin Enterprises on behalf of the food group Aryzta.

A similar transaction took place last March but the investor sentiment we encountered in London and New York that time was materially different.

In March economic forecasts worldwide were benign, stock market indices were rising and investors were clearly confident. This time fear and prudence defined investor sentiment.

Many institutional investors had incurred a torrid month during which a huge company like Volkswagen had its share price collapse.

The giant commodity conglomerate Glencore's share price had bungee jumped viciously. Bio-tech valuations imploded. All these elements were further hurting investor confidence and in so doing made the Origin equity offer a tough transaction.

That shark-infested water was the same pool in which Digicel was trailing an IPO. Its task was compounded by exceptionally poor sentiment towards so called emerging markets which include geographies to which it is exposed.

Despite engaging blue chip global legal and financial advisers, and committing to an extensive and detailed investor roadshow, Digicel could not convert sufficient demand at the valuation it deemed acceptable to its objectives.

Branding this episode as some form of reputational failure is misguided.

Never confuse emotion with business. If Digicel delivers on its plan to drive cashflows while retiring debt, and if equity markets stabilise, the 100pc equity controlled by Mr O'Brien could yet convert in to a handsome sum.

He will be better served focussing on operational efficiency while ignoring the headlines that, like equity markets, are fickle and subject to short memories.

Joe Gill is director of Corporate Broking with Goodbody Stockbrokers

Sunday Indo Business

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