At first, the bondholders came slowly for control of Denis O’Brien’s Digicel business, and then they came quickly.
ounded in 2001, control of the firm is now likely to shift to a group of bondholders – which will see the man behind the business retain just a 10pc or 20pc stake.
While the terms of the deal have yet to be finalised, it looks like a number of triggers pushed Digicel and its multi-billion dollar debts into an inflection point which will see it change hands.
Digicel had already been through two major debt restructurings in the last four years, and the next batch of nearly $1bn in bond repayments fell due this month.
O’Brien extracted €1.7bn in dividends from Digicel between 2007 and 2015
In 2018, O’Brien negotiated with bondholders to push back the repayment on some bonds by a few years. Two years later, a debt restructuring saw bondholders write-off $1.6bn, as part of an agreement in which O’Brien invested $50m of his own money.
This time around, O’Brien appeared ready to put up another fight by seeking a 90-day extension on the repayment of the due bonds – but very quickly the bones of a much more radical debt deal was agreed by bondholders representing 50pc of Digicel’s $4.5bn debt.
The Esat founder will remain on the board as a director, will keep his shareholding, and will receive incentive shares – to ensure his contacts, knowledge and experience across Digicel’s multiple markets stays in-house.
It reads like a ‘no hard feelings’ and ‘we don’t want this to end badly’ type deal.
O’Brien clearly had few alternatives. The collapse in revenues in Haiti caused by a surge in civil and violent unrest, as well as a cholera outbreak, deprived the group of one of its key markets.
Another huge factor has been the rise in interest rates, which would have left Digicel unable to re-finance these debts at manageable or sustainable levels. At the end of December, it had only $350m left in ‘stand-alone’ cash, at a time when nearly $1bn of debt was approaching due for repayment.
Last year it had to sell one of its jewels – Digicel Pacific – in a $1.8bn deal backed by Telstar and the Australian government. In 2018, it sold 218 French West Indies communications towers for $90m. It was running out of things to sell.
We cannot know where all O’Brien’s €1.7bn in dividends was invested
The other factor in all of this was O’Brien himself. If he had battled and found some complex restructuring route to retain majority ownership and control, he would have ended up effectively working for the bondholders for the next several years.
When both debt deals are considered, bondholders will end up saying goodbye to a staggering $3.4bn of Digicel debts which once peaked at $7bn.
For O’Brien, there is the ignominy of losing control of a company that he worked very hard to create in 25 markets all across the world. It would have been better for him if he had sold his controlling stake back when it was more valuable, rather than have it essentially taken as part of a deal with creditors.
Looking back at the development of Digicel over the last decade, there were opportunities to ensure a different outcome. Despite the massive billions in headline figures swirling around Digicel, some basic truths were there.
The company’s revenue growth path stalled after 2013. Despite huge EBITDA earnings, by 2020 it had racked up almost $700m of losses in recent years. And it was battling with growing competition, currency fluctuations and instability in a number of its markets.
Its debts were denominated in dollars, but the currencies in which it received much of its revenues were falling against the dollar. Debt-financing was becoming a lot more expensive.
If O’Brien had sold a chunk of the business, or floated it on the stock market in 2013, he could have sold the growth story before other factors began to squeeze the business.
US stocks enjoyed their best performance in 16 years in 2013. It was the best year for IPOs since 2000. It was Denis’s time to go for the IPO. But in 2013 he was busy trying win a major mobile licence competition in Burma.
Burma’s population is 52m, and a licence would have required a lot of work on the ground. Digicel didn’t win the licence, which instead went to O’Brien’s former Digifone partners, Telenor. They ended up losing $700m on their investment after the military coup of 2021 when they had to pull out.
It was a lucky escape for O’Brien – but he had missed the best chance to float.
He did decide to go for an IPO in New York in 2015.
This was a big move. O’Brien was going to float 40pc of the company, raise $1.8bn for debt repayment and capital investment. Digicel would have been valued at $4.6bn.
This would of course have bolstered the balance sheet, reduced debt, and given the firm significant international credibility. But less than 48 hours before announcing the share pricing, O’Brien pulled the plug.
At the time, he justified his move.
“Why would you sell your front garden when you know it is worth a lot of money, and why would you sell at a discount?” he said, telling CNBC that he would come back to the market in time “when the conditions are right for our business”.
It is hard to know exactly what the level of interest was from the market – but clearly O’Brien felt it wasn’t enough. I wonder how he feels about that now? Not having a capital injection from the IPO put a greater strain on the finances of the business when investing in new technology.
But back in 2015 there were other issues at play . The company’s revenue growth trajectory had peaked two years earlier. O’Brien wanted to sell 40pc of the equity – but retain 95pc of the voting control. He wanted bondholders’ money, but not so much their input.
Several IPOs in the previous weeks had disappointed on price. Digicel had made a loss of $157m on revenues of $2.79bn that year. But a year earlier it had made a profit of $43m on revenues of $2.75bn.
In October 2015, O’Brien was not selling an simple high-growth/high-return story to a rising market. Two years earlier, he would have been.
On the other hand, this is a man who extracted $1.9bn (€1.7bn) in dividends from Digicel between 2007 and 2015. Taking that much out in what were the good days of fast growth was probably his smartest move.
If he hadn’t, it would have left more money to invest in the business, and its borrowing needs would have been lessened.
However, Digicel was always a risk. It managed to build an international telecoms presence with 13m subscribers in small, often impoverished markets where it is very difficult to do business. By taking out so much money in the good days, O’Brien was ensuring bondholders were taking a lot more of that risk.
O’Brien did well from Digicel, and some of his other companies did too
We cannot know where all O’Brien’s €1.7bn in dividends was invested. We know he lost about €500m on his INM takeover battle with Tony O’Reilly. He loaned €150m to Communicorp, his radio empire, before converting those loans into equity. Communicorp was later sold for a reported €100m to Bauer Group.
He spent significant sums on property in Dublin 4 – including a site he bought from UCD, houses around Raglan Road, and a €35m house on Shrewsbury Road, which he then sought to flatten.
However, along the way he invested very successfully in commercial property. He bought the Siteserv business, which has done very well. He also bought a shareholding in the Topaz petrol station chain, which was sold in 2015 for €258m.
O’Brien might lament the loss of control of Digicel, but until this new bondholder deal is done, it isn’t clear what financial value the equity in the company actually has. It is a loss of face and control. The financial loss had already occurred.
Not only has O’Brien done well from Digicel, some of his other companies have too.
Documents disclosed at the time of the 2020 bond restructuring showed that Siteserv (now called Actavo) received $83.1m during a three-and-a-half-year period from Digicel to install a fibre-optic network and maintain other facilities.
Digicel paid $28.3m to use a jet owned by an O’Brien company over the same timeframe. It also paid $3.9m of annual rent on its Kingston HQ.
Those documents revealed the predicament that Digicel’s Panama operations found themselves in. Digicel owned just 45pc of the company behind the Panama operation.
Denis O’Brien personally owned 51.9pc. He stopped providing finance to the company in 2011 and it had received loans of $590.3m from the wider Digicel Group.
In 2020 it didn’t see those loans being repaid and its total investment was valued at just $35.9m. Digicel pulled the plug in April last year by withdrawing from Panama.
If controlled by bondholders, the dynamic of Digicel will change. It will be a less-indebted company, with more equity value on its balance sheet.
Bondholders will be incentivised to increase its value to get back some of the $3.4bn they are writing off.
But bondholders may end up more focused on shorter-term repayment goals than building long-term value in the business.
Despite the controversy of his business career, Denis O’Brien built a significant international enterprise around the world – and that remains his biggest achievement.
Digicel has delivered important services in poorer countries such as Haiti, and given the obvious Irish connections with the firm, it was a training ground for a raft of Irish executives. That may all change now.
