Monday 19 March 2018

Digicel targets local supplier deals to share currency risk

Job cuts could hit 2,000 workers as Irish-owned giant goes through transformation, writes Samantha McCaughren

Businessman Denis O’Brien. Photo: Bloomberg
Businessman Denis O’Brien. Photo: Bloomberg
Samantha McCaughren

Samantha McCaughren

Irish-owned telecoms company Digicel is working with local suppliers to mitigate the risk of currency fluctuations, which have hit revenues and profits at the group.

Over the past 12 months, the strong dollar has been a significant challenge for the company, which operates in 31 countries in the Caribbean and Asia Pacific regions. It is understood that the company will seek to share the currency risk with partners across its markets.

The company, which is owned by businessman Denis O'Brien, said last week that it will cut 25pc of its workforce as part of a plan to transform the business. Sources said that this would equate to between 1,800 and 2,000 jobs and that the final tally could be higher than 25pc. The group will centralise its operations into regional hubs housing back office centralised functions and shared services.

"The company sees a lot of opportunities to do things differently and take costs out of the business," said an industry source. "Unfortunately some of that relates to headcount."

Digicel also announced that it has signed a global-partnership agreement with Chinese telecommunication solutions company ZTE for an ongoing network upgrade programme.

On Friday, the company had a quarterly call with bond analysts and outlined that it has already started reducing employee numbers.

The savings delivered by the new operating model, including the reduced headcount, combined with growth in the business, will result in it becoming deleveraged, analysts were told.

In a recent note from ratings agency Fitch, it was estimated that Digicel would require at least $1.1bn of EBITDA (earnings before interest, taxes, depreciation, and amortisation) to achieve break-even free cash flow with reduced capital expenditure in the full year 2018 and 2019. It is understood the company expects to more than achieve this, although EBITDA will be down in the year to March 2017.

In 2015, O'Brien - who is the biggest shareholder in INM, the publisher of this newspaper among others - planned to raise as much as $2bn in an initial public offering in the US before shelving the sale, due to volatility in stock markets.

David Holohan, an analyst with Merrion Capital, said that cost-saving plans were to be expected. "It's a reflection of the fact that at some point they may look to return to the equity markets and look to IPO the business," he said.

"In order to do that they need to be able to demonstrate that costs can be reduced."

He said that the partnership with ZTE would help bring the company to the next level. "It is a natural fit for Digicel to announce the partnership with that company. Ultimately, it reflects the fact that the terrestrial telecoms market has gone ex-growth for some time, even in emerging markets."

This means that the initial growth in markets with low penetration for mobile phone usage levelled off and the challenge for Digicel is to encourage customers to use more sophisticated, and therefore more expensive, services.

This largely relates to data, as is used in more mature markets.

At the time of the planned IPO, some analysts questioned how likely it was that populations in poorer countries such as Haiti would migrate to more complex services.

However, Digicel remains confident that its customers will follow the patterns seen in Europe and elsewhere and is already achieving improved revenue per users in many countries.

Said Holohan: "While the rest of the world was moving towards data, they were still using analogue services, but they ultimately will move towards data like we are seeing in the rest of the world. That means you need to continually try to be at the forefront of technology and one of the challenges in telecommunications is that there is constantly a large capital expenditure bill.

"That capital expenditure requirement doesn't diminish and you just have to fund it through better cost management elsewhere in the firm.

"Had they proceeded with the IPO, the equity markets would have been open but when you're a private company that already has a significant amount of debt, your options are much narrower."

In addition to the savings, the company expects good growth from several parts of the business including a cable business in Jamaica, Barbados and Trinidad. This business had startup losses, but that has turned EBITDA positive in the last quarter of 2016.

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