Wednesday 24 January 2018

Where does a stalled IPO leave Digicel?

Digicel is a major player in dozens of countries, and it sponsors the likes of superstar athlete Usain Bolt, pictured top with Tipperary hurling great Eoin Kelly
Digicel is a major player in dozens of countries, and it sponsors the likes of superstar athlete Usain Bolt, pictured top with Tipperary hurling great Eoin Kelly
Donal O'Donovan

Donal O'Donovan

Denis O'Brien was brought down to earth this week with a bump, when the billionaire cancelled a planned $1.8bn stock market listing of Digicel at the eleventh hour.

In effect, cancelling the IPO meant turning down the price offered by the market for a 39pc share in Digicel and walking away from an important fund-raising event empty-handed.

Unlike most big commercial deals, stock flotations are played out in the full glare of media - they call them the public markets for a reason.

The work involved in the final stages of an initial public offering (IPO) is gruelling for executives and directors, involving hundreds of individual meetings with sceptical, hard-headed investors who aren't afraid to put the biggest of corporate beasts through their paces.

In the case of a listing on the New York Stock Exchange, which Digicel had planned, it means flying visits to all of America's big commercial heartlands - not just New York but Los Angeles, Chicago and beyond.

And it was all for nought. Denis O'Brien and his management team, led by chief executive Colm Delves, came away empty-handed, at least in the short term.

But, by cancelling the share sale, Mr O'Brien and his Irish-dominated team opted to suffer bruised egos rather than a bruised balance sheet.

Mr O'Brien put a brave face on the decision to scrap the deal in a TV interview on Wednesday morning in the US.

"We're very happy that we pulled the IPO and we'll come back to the market in time, and when the market conditions are right for our business," he said.

While he owns a mass of other business assets, including in Ireland, Digicel catapulted Denis O'Brien from multi-millionaire to billionaire status.

It is a far-flung telecoms empire that spans the globe - from Haiti to Papua New Guinea and 29 other countries in between.

During the IPO process O'Brien revealed more than ever before about the inner working of the group - where its money comes from, where that money goes, where it sees its strengths and its weaknesses, and crucially how its sees itself developing strategically into the future - including that it had an eye to take over 15 businesses with some of the proceeds from the IPO. No doubt that's all made for crucial reading over the past month for rivals, including TV3 owner John Malone-backed Cable & Wireless, and Carlos Slim's American Movil.

In terms of damage to the Digicel business, the relatively minor issue of providing additional insight to rivals is about the worst outcome of the cancelled deal. Aside of course from missing out on the money.

Because the stall Digicel set out for investors showed clearly that the business needs capital to develop its profitability.

Raising equity was the best and cheapest way to do that, but that door has slammed shut, at least for now. Before this year Digicel tapped the public debt markets whenever it needed capital.

But the bond market isn't an option because at $6.5bn Digicel's current debt pile is as much as it can take on. In fact, most of the money Digicel was looking to raise in New York would have been used to cut debt by paying back bondholders early.

Analysts reckon the third option, keeping the business in neutral until the equity markets improve, isn't realistic. Having reached 13.6 million customers, Digicel needs to offer much more than a straight-forward mobile phone service if it wants to retain subscribers and at the same time scramble higher up the value chain by offering more heavy data services, such as video and ultimately pay-TV.

"Telecoms is a cash-burning industry by its very nature," according to Andy Kitson, senior global ICT industry analyst at BMIResearch.

"Building infrastructure connecting all these disparate islands is a highly capital intensive business."

"They're working in a lot of isolated and sparsely populated regions. If they want to offer a universal service, they have to lay the fibre, put the microwave towers into isolated towns and communities."

So standing still isn't a runner, especially now that key Digicel rival Cable & Wireless, a once-sleepy incumbent, is reaping the benefits of its takeover of cable provider Columbus International in the Caribbean.

Jerry Dellis, an analyst at Jefferies in London, wrote in a research note earlier this year that the deal means Cable & Wireless can offer so-called quad play - the holy grail of multi-media consumer packages - in a market like Jamaica where it lags Digicel in the mobile phone market.

So, having parked its IPO plans, Digicel is going to have to find capital to draw on in the short term to hold its own in a dynamic and competitive environment.

On Wednesday, in his first interview after calling off the share deal, Denis O'Brien indicated that the money is likely to come from within the business. Digicel throws off $800m of free cash a year, he said.

Funding growth from income is an option - but won't have the transformative impact of a big bang capital raising.

A fourth strategy could be an off-market sale of a minority Digicel stake to a private investor. That would raise the cash Digicel is after, but at the price of giving a serious say in the business to an outsider.

With six years before any major bonds fall due, Digicel certainly isn't under any immediate pressure from the debt markets, but its own bond investors and the potential shareholders still out there in New York and LA will be watching closely to see what Digicel does next.

Irish Independent

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