Saturday 16 December 2017

What does Denis do now, as Digicel's planned IPO stalls?

Last week billionaire Denis O'Brien pulled the Digicel IPO set for New York in a move that surprised many analysts at home and abroad. But it's far from game over for the mobile giant

'In our circumstances, when you don't have to do an IPO and you're not hitting your price target, you just defer and move it out a year,' said Denis O'Brien last week
'In our circumstances, when you don't have to do an IPO and you're not hitting your price target, you just defer and move it out a year,' said Denis O'Brien last week
John Mulligan

John Mulligan

This morning, Denis O'Brien and his team at Digicel should still have been nursing post-flotation hangovers.

But instead, the communications company founded by the billionaire over a decade ago, could be facing an altogether different headache - what to do after cancelling its initial public offering (IPO) plans last week.

The company, built from scratch by Mr O'Brien after he secured a mobile licence to operate in Jamaica in 2000, had intended to raise between $1.8bn and $2bn (€1.6bn and €1.8bn) on the New York Stock Exchange on Friday from the sale of about 39pc of Digicel's equity.

Despite that, Mr O'Brien, who is chairman, would have retained almost complete control of the business.

But in the past few weeks, the landscape for IPOs soured.

That, coupled with wider investor concerns regarding emerging markets, made the Digicel flotation a harder sell, especially at the $13-$16 a share price range the company had hoped to achieve. Potential investors were looking for a significant discount to that range, but it was something on which Mr O'Brien wasn't really prepared to budge.

Other firms that did float on the New York market within the past couple of weeks were seeing their shares sold at a discount to their expected ranges, meaning they were raising less money than they anticipated.

"It was a very difficult time for a deal like that to get away," according to Steve Malcolm, a senior analyst with London-based equity research firm Arete.

"Three or four months ago, it probably would have had a pretty good chance. But what's happened since is that there's been a huge sell off in emerging markets. We've had a very big move against the high yield debt market where yields have gone up a lot and risk appetite has gone down," he added.

"None of that is directly related to Digicel, but obviously it operates in a bunch of markets where those things are important."

Bermuda-headquartered Digicel operates in 31 countries across the Caribbean, the Pacific and Latin America and has 13.6m subscribers.

Its emerging market focus was enough to give some investors jitters. It has also been coping with a significant depreciation in the Jamaican dollar versus the US dollar. Jamaica and Haiti are Digicel's biggest markets, after Papua New Guinea.

Mr O'Brien has insisted the failure to launch is largely irrelevant.

"In our circumstances, when you don't have to do an IPO and you're not hitting your price target, you just defer and move it out a year," he told CNBC on Wednesday.

"The discount people are looking for has widened. Were not backed by private equity… so we didn't need to do an IPO at any time," he added. "It's opportunistic from our point of view and we'll come back. We don't need any funding at the moment. It's a great feeling not to need any funding."

Digicel planned to use between $1.2bn and $1.3bn of the flotation proceeds to cut its $6.5bn in gross debt. Mr O'Brien insisted last week that the debt isn't an issue, with no material maturities due until 2021.

But that debt pile could now weigh on Digicel's growth strategy.

"The balance sheet remains highly levered and without the injection of fresh equity, Digicel's gearing limits any material acquisitions," according to David Holohan, the head of research at Merrion Capital.

But Mr O'Brien has insisted the cancellation of the IPO doesn't alter its plans. Digicel is "generating a huge amount of cash," he told CNBC, and can pursue its M&A strategy and "really develop our business".

Digicel, as with many other global telecoms companies, has seen its revenues flatline. They were $2.8bn (€2.5bn) last year, but it still generates significant cash flow of $814m on earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.2bn.

"Digicel needed this (flotation) cash to finance its continued expansion in its core markets," according to Andy Kitson, senior global ICT industry analyst at BMIResearch. "It's got to be disappointing for them that they weren't able to proceed."

He said that Digicel's revenue growth has stalled because it has arrived at a "natural plateau" in its expansion.

"They've been operating in these markets for many years. How to grow revenue is a question that the telecoms industry is facing all over the world, not just in the markets in which Digicel operates," he explained.

"We're seeing operators becoming more desperate to keep their revenues growing - and they're adding more products to the mix, and trying to convince us to upgrade to superior packages. In markets where the infrastructure doesn't support that, then you've got to compete on pricing - and that's where Digicel's battlefield is."

And if Digicel returns to investors next year to drum up interest in another tilt at a flotation, Steve Malcolm thinks that some underlying issues may have to be addressed.

While Mr O'Brien was planning to sell about 39pc of the equity in Digicel, he was intending to retain 94pc of the voting control at the group. That may have spooked some potential investors.

"The whole corporate governance thing is an issue," claimed Mr Malcolm. "For a long time, people were very relaxed about differentiated debt restructures with scions - for want of a better word - having all control for a relatively small economic interest. That misalignment is a bigger issue when you're just coming to market. If you have a track record in the public or grey markets it's not so difficult. You're not questioning anyone's ability - but investors like to have a say when they buy into a company."

Mr Malcolm said that Digicel, whose chief executive is Colm Delves, has been a "huge success story" but that a lot of cash has been taken out of the business over the past few years following strong investments.

"They have harvested the fruits of those investments quite substantially. I think we're all a little hesitant when a business has been growing very quickly, slows down quite a lot, and then asks investors to put some money in," he added.

The question now will be how much of its strategy that was predicated on achieving a flotation will Digicel be able to pursue without having gone to market?

We'll simply have to wait and see, but its debt profile will certainly limit the chance to make any large scale acquisitions.

One positive: Cable & Wireless, the once sloth-like incumbent in the Caribbean before Digicel came to town, still has some way to go on its more than decade-long journey to catch up with its rival.

"Digicel still has a lot of strengths," according to Andy Kitson.

"It has a lot of forward thinking, a lot of technological expertise that Cable & Wireless either lacks or can't put into effect in the Caribbean markets.

"Cable & Wireless is still run on a utility ethos," he said, adding that the cancellation of the planned Digicel IPO won't benefit its rival.

And while Digicel might have to ride out the next year or so without possibly being able to do as much as it had hoped, it's almost certain to come back to explore the flotation again.

When it does, Steve Malcolm thinks there will be interest.

"I'm sure people will give it a good look," he said. "Markets tend to be quite forgetful. If conditions are better and some of the perceived emerging markets risk is gone away or reduced, then people will look - and I'm sure Digicel will have a very good chance."

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