Friday 22 March 2019

Behind prudent decision by O'Brien to postpone IPO

Martina Devlin

Denis O'Brien, founder and chairman of Digicel
Denis O'Brien, founder and chairman of Digicel

WHETHER he likes it or not, people are interested in Denis O'Brien.

Why wouldn't they be? That Midas touch always attracts attention, especially someone who manages to emerge from a recession with his wealth not just intact but gilded.

In that context, the billionaire businessman's close-to-the-wire decision to call off the flotation of his mobile operator Digicel is intriguing. It was due to start trading on the New York Stock Exchange on Friday, and the cancellation could be construed as damage limitation.

The same could be said for the reason advanced for the retreat - stock market volatility. It may be the truth, but not necessarily the whole truth.

That amoral entity, the market, didn't buy into his proposition, and soundings showed it would not draw the anticipated level of investment if he proceeded. That's the capitalist system. It only cares for the bottom line, and the bottom line on the Digicel deal was that investors didn't hear enough ching-ching.

Mr O'Brien dressed up in a smart dark suit and pink tie to make the pitch in a roadshow presentation - it's instructive to watch; I tuned in on to see him in full flow.

I've always heard he was a salesman to his fingertips but never saw it in action till now.

The proof was there. He wasn't just trading in the common currency of facts and figures; there was plain speaking, the occasional flash of self-deprecation, and several Irishisms including "we have spent a savage amount of money on our networks" .

One minute he was talking about "Shelly Anne", a notional customer in the Caribbean whose every digital need his company can service, the next he was explaining how the Jamaican diaspora was a growth lever for Digicel.

They emigrate to North America and send home mobile phone credit to their loved ones. It's a long way from reversing the charges in a phonebox to ring your mum, which is what I used to do as a student.

There was one surreal moment when he described his "Eureka moment" - spotting two mobile phone licences on sale in Jamaica and sending a team there on his behalf, meanwhile "we were in a pub in Ireland bidding on the phone".

It's a mental picture I struggle with, I confess, but apparently that was the birth of Digicel. You could see how Mr O'Brien charms people, and why he'd be in demand as an after-dinner speaker if his business empire failed. But his pitch on this occasion wasn't persuasive enough for investors. What he was proposing wasn't any old offering, for all his understated approach, but - to use the technical term - a whopper.

It would have been the second biggest in the US this year, and aimed to raise between $1.6bn and $2.3bn, with $1.3bn set aside for paying down debt. Some money from the flotation was to be set aside for more acquisitions. "We want to take advantage of a number of deals that we have where we're the preferred bidder," Mr O'Brien said during his pitch. Not with our cash, answered the market.

As founder and chairman, he was intending to retain a 61pc equity stake in the company, but keep 94pc control. It would take an exceptional sales pitch to make that look like a golden opportunity. A two-tier share scheme meant ordinary investors were being offered A shares but he held on to B shares with 10 times the voting rights of every A share. He'd have the right to decide which directors were appointed to the board, and have control over decisions such as mergers and acquisitions, sale of assets, salaries, dividend payments, and the entire direction of the company.

If investors bought into Digicel and subsequently believed that mistakes were being made, they could struggle to reverse policy.

Enormous jurisdiction over the company was left resting in one pair of hands - Denis O'Brien's - and that raises corporate governance issues. Fundamentally, it doesn't rest easy with best practice. Perhaps, even so, he could have persuaded investors if Digicel wasn't so heavily leveraged. While it has debts of $6.5bn, they don't have to be repaid till 2021. But inevitably they must act as a burden on the company - which is running at a loss. The latter implies that Digicel is either over-leveraged or not operating as efficiently as it ought to be, or both.

All things considered, investors need a hefty incentive to persuade them to take a gamble. That Irish charm alone, in evidence during the pitch, wasn't enough.

Mr O'Brien did nothing wrong by walking away from the flotation. It was a prudent decision in view of market conditions, with five Wall Street public offerings last week all selling below the expected range due to deteriorating market conditions.

But it is undeniably a setback. While nobody can read the stock market with any certainty, there were sufficient indicators recently to suggest that flotations were high risk.

He can, of course, return to the stock market at some future date. But if he does, it's possible he'll have to offer to sell more of the company at a lower price to instil investor confidence.

Irish Independent

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