Digicel’s goals are the same, despite IPO flop

As the media picked apart Denis O'Brien's decision to yank the $2 billion flotation of Digicel, its biggest rival quietly kicked it while it was down. In the context of O'Brien's transatlantic bother, an otherwise innocuous statement by Cable & Wireless Communications (CWC) morphed into a delicious act of Schadenfreude.

O’Brien terrorised CWC when he launched Digicel across the Caribbean in the early noughties, and the mobile and cable operator still bears the scars. Relations between them are as warm as ice. As CWC observed on Wednesday, in the aftermath of Digicel’s climbdown, it took its chance to land another blow.

When O'Brien took to the airwaves to reassure lenders and the investors who had just spurned him that Digicel would grow regardless in new segments such as cable television, CWC announced it had won the exclusive Caribbean rights to broadcast English Premier League football for the next two seasons.

Football rights in the region are currently held by Digicel’s cable company Sportsmax, which in the flotation documents is held up as exemplifying the new direction O’Brien wanted to take his telco: from pure mobile operator to multiplatform media company.

Soccer has an enormous following in the Caribbean. But from next season, if Manchester United supporter (and Digicel-sponsored athlete) Usain Bolt wants to watch his favourite team at home, he will have to sign up with Digicel’s rival.

The announcement appeared timed to send Digicel a competitive message, a flipping of the corporate bird.

Growth plans

“All these growth plans that the flotation was for, Digicel’s moves into fixed-line and cable and so on . . . how will it get the money now?” asked

Steven Hartley

, principal analyst at telecoms research firm

Ovum

.

Although the bulk of the hoped-for $1.7 billion flotation proceeds were to pay down debt, about $400 million was earmarked for investments, including up to 15 acquisitions in the pipeline as part of Digicel’s proposed shift to a multimedia company.

Digicel has hit the ceiling of its debt metrics, with about $6 billion of net debt. It needed equity for a clear route to growth.

In an interview on CNBC on Wednesday, O’Brien tried to scoff at the notion that Digicel might now struggle to fund its capital plans.

“We have more than $800 million of free cash flow,” he said, adding that it was “a great feeling not to need funding” and that the flotation was “opportunistic”.

Why then was he so keen to sell 40 per cent of Digicel without a payout? The markets, as O’Brien has pointed out himself, are particularly volatile, which also begs the question as to precisely what opportunity he spotted.

Further investment

Hartley, who has been consistently cautious about Digicel’s chances of success against more established cable operators such as CWC – even prior to O’Brien pulling the flotation – said the company would have to invest further to stay in the game.

O’Brien has consistently drawn attention to the $1.5 billion of network investment for which Digicel has stumped up in the past few years. This investment, he says, will eventually ensure new customers, revenues, growth and cash.

“They will lose all of that investment unless they put in even more,” said Hartley. “They need to keep investing just to remain competitive. They still have to scale up. Running a telco is expensive. It’s a never-ending game of poker with your competitors, who are all doing the same.”

Detail

The level of detail on every aspect of the company’s performance and strategy revealed in the pulled flotation documents is another major problem with Tuesday evening’s decision to halt proceedings.

All the related party transactions, the contracts for O'Brien's private jet, the tens of millions of fees to Siteserv for fibre rollout, the fees to O'Brien's Island Capital, the risks, the opportunities, the weakness, the strengths: they're all in there. Its competitors now know what colour underpants Digicel wears.

Might Digicel now attract a suitor, or a strategic partner? It could solve Digicel’s equity-debt problem. Certainly, if Digicel was to pursue a transformative acquisition to fast-track its change strategy, it would probably have to finance it with a cash and shares deal.

Altice, the Dutch-headquartered telecoms outfit headed by Patrick Drahi, a sort of French-Moroccan Denis O'Brien, is often whispered about as a potential suitor for Digicel.

Hartley suggested Millicom, a Luxembourg-headquartered telco that operates in 14 markets in Africa and Latin America, as another possibility.

“It flies under the radar. But it would be a logical fit business-wise, although less so geographically.”

On Digicel’s turf in the Caribbean and Spanish-speaking parts of Latin America, there lies another possible suitor. Carlos Slim’s América Móvil is one of the most successful telecommunications company in the world. Hartley suggested a Slim deal for Digicel would make sense to everybody, except regulators.

“They’d have a job getting it past the authorities,” he said.

However, the recent merger between CWC and Columbus Communications, against which O'Brien had competition concerns, showed Caribbean regulators can be pragmatic when required.

David Holohan, head of research at Merrion Capital, says he finds it hard to understand why O'Brien wouldn't lower his price to get the IPO away. He could have released a bigger chunk than the proposed 40 per cent to get it away, the argument goes.

It has been suggested that he might have raised the $1.7 billion if he had relinquished closer to 60 per cent of the equity. Under the flotation plan, O’Brien’s shares still had 10 times the voting power, so he would have still retained overall control.

“He was floating it for all the right reasons: de-gear, raise capital to fund growth etc. Without the flotation, he’s sitting on this store of wealth and he can’t tap it,” he said.

Holohan is unequivocal that the failed IPO means Digicel will have to crimp its growth plans. It will be interesting to see how many transactions it completes from the 15 acquisitions that chief executive Colm Delves said it had lined up.

“Without the IPO, the balance sheet can’t sustain what Digicel said it wanted to do. It will have to pare back growth. They can continue in the same direction, but just not as quickly as planned.”

O’Brien and Digicel have been quick to put out the line that it is business as usual, despite this week’s disappointment.

Holohan agrees, but with a wholly different perspective. “Without de-gearing, I don’t see much change from Digicel from what we’ve seen in recent years, which is pretty uninspiring growth.”

Another quandary facing Digicel now is how O’Brien can drive topline revenue growth in a hostile currency environment.

Steve Malcolm, an analyst with Arete, believes Digicel's ability to be "disruptive" has been "crimped".

“Personally, I think CWC is a much more serious competitor for Digicel than it was a few years ago. With higher debt, Digicel will be less able to be disruptive in markets where they compete.”

O’Brien is probably a little down after such a high-profile disappointment, but even his biggest critics know he is not out. He has surprised his competitors before, even if those were more benign times.

Regardless of who has the football broadcasting rights, it’s game on.