Decision to pull Digicel’s IPO is a huge blow to Denis O’Brien

Digicel’s decision to pull its IPO in New York less than 48 hours before it was due to announce the pricing is a huge blow to Denis O’Brien.

Not financially as he wasn’t due to take any money off the table directly, but in terms of his reputation and the questions now about what happens next for Digicel and where it finds funds for expansion.

A successful IPO in New York this week would arguably have given O’Brien something more tangible than hard cash – credibility.

No matter how hard he tries, O'Brien struggles to attract popular support in Ireland. This is largely a legacy of the Moriarty Tribunal's second report, which found that former communications minister Michael Lowry assisted O'Brien in his bid to secure a mobile phone licence for Esat Digifone in the 1990s.

O’Brien has vehemently disputed the tribunal findings but the negative findings continue to follow him around.

The Irishman might also be losing his touch. O’Brien made his name as a brilliant salesman in the early days of the telecoms/technology revolution but more recently he has faced challenges.

In 2013, Digicel failed to secure a telecoms licence in Burma having applied many of the same tactics – having boots on the ground early, getting to know the movers and shakers, and spending money in advance on infrastructure, jobs and sponsorships to demonstrate commitment – to its application that had proved so successful in previous years in Ireland, the Caribbean and the Pacific islands. This loss must have hurt.

This time around, O’Brien was trying to sell an IPO for a heavily indebted telecoms company whose revenues have flatlined in the past couple of years. Digicel is still heavily reliant on voice traffic and needs cash to pursue acquisitions in the growing areas of data, fibre and TV content.

Deal structure

He also structured the deal in such a way he would have kept 94 per cent control of the business even though he would have owned just 60 per cent of the equity. In effect, he was asking investors for their cash but not their input – a bold move at a time when corporate governance is very much in focus. American investors are a tough crowd to please.

It's the biggest Irish stock market flop since Tony Ryan abruptly pulled GPA's IPO in 1992.Eircom pulled its flotation last year but the Irish telco had twice previously been listed on the stock market.

There had been growing speculation in recent days that Digicel’s float might have to be pulled. Last week five IPOs in the US all came in below their projected price range, the first time since 2004 that more than four offerings in one week gave price concessions to investors, according to Dealogic. At the midpoint of the €13 to $16 share price range indicated to the markets, the IPO would have been valued at $1.8 billion, giving the company a market value of $4.6 billion. At that level, O’Brien’s stake would have been valued at $2.8 billion.

There were four legs to Digicel’s growth story stool as sold by O’Brien – data, cable and content, business solutions and diaspora.

Between 2013 and 2015, data’s share of Digicel’s revenue rose to 27 per cent from 21 per cent with voice heading in the other direction.

Over the same period cable TV and broadband popped up on its revenue pie chart for the first time with a 1 per cent share.

Digicel has made seven acquisitions in this sector in the past 18 months as it seeks to pad out its quad play offering.

Business solutions is a “cracker” of an opportunity, according to O’Brien, as a potential €3 billion market with high margins.

The diaspora segment (immigrants in the US sending mobile top-ups via wire transfer to family members in Digicel’s markets) currently generates about $128 million annually for Digicel. It’s a highly profitable and is denominated in US dollars, the company’s reporting currency.

Headwinds

But there are many headwinds facing Digicel.

Having previously been the monopoly buster, Digicel now receives more scrutiny from regulators.

Revenues have flatlined and it was loss making in its most recent financial year, shedding 500 staff through a voluntary severance programme.

Rival Cable & Wireless has woken from its slumber, beefing up its operation with the $3 billion acquisition earlier this year of Columbus, a cable TV and broadband operator.

This resulted in John Malone, owner of Virgin Media in Ireland, becoming a significant shareholder in the combined business.

Malone is a formidable rival.

Digicel is also heavily indebted – about $6.5 billion – with a net leverage of 5.4 times earning.

This has effectively closed off debt markets for additional lending, which were seen as one of the reasons behind its decision to IPO.

Some €1.3 billion of the flotation proceeds was earmarked to pay down debt. Not anymore.

The reasons behind Digicel’s failed IPO will be picked over in the days ahead while the company will be busily involved in damage limitation.

Last night it was suggested that a key consideration for pulling the IPO was that he did not want to sell off part of the company too cheaply.

Pulling the flotation has robbed Digicel of $400 million that was earmarked for acquisitions to fuel its growth.

O’Brien now has to convince his lenders that Digicel’s growth story remains strong. He’ll need to sharpen his sales pitch to pull it off.

Twitter: @CiaranHancock1