Challenging times ahead as Denis O’Brien exits tough 2016

It is unclear why Ireland’s richest man has sought to raise so much cash

A transcript recently emerged of an analyst warning about the debt carried by Digicel which is owned by Denis O’Brien. Photograph: Dara Mac Donaill

A transcript recently emerged of an analyst warning about the debt carried by Digicel which is owned by Denis O’Brien. Photograph: Dara Mac Donaill

 

Jamaican cinema magnate Douglas Graham told his shareholders last week that Digicel, Denis O’Brien’s Caribbean telco, had outbid his Palace Amusement Company for the rights to I Am Bolt, a film about the sprinter and lanky lothario, Usain Bolt.

Universal Studios holds the distribution contract and Graham explained that the local rights for Hollywood flicks usually went to his company.

But not this time.

Graham, a venerable old soul who clearly has an ear for the dramatic, reportedly reprised an immortal movie line when describing Digicel’s wooing of Universal: “Digicel . . . made them an offer they couldn’t refuse”.

It was obviously a jocular jibe, but it also highlighted the financial heft that Digicel, with a successful operation comprising 14 million subscribers across more than 30 territories, deploys when required in its home markets.

Elsewhere last week, however, the company’s financial firepower was brought into question.

This also brought a renewed focus onto the fact that Digicel has stopped paying O’Brien a a huge chunk of his personal income.

Debt mountain

Since a transcript emerged last week of an analyst presentation in London warning about Digicel’s $6.2 billion debt mountain and revealing its Project Swan cost-cutting plan, the company has fought a publicity bushfire.

From Ireland right across its Caribbean stomping ground, stories emerged highlighting the CreditSights agency’s view that the company’s debts are “unsustainably high” and suggesting Digicel, although operationally sound, may be “stressed”.

If there was consternation internally at the deluge of media queries, publicly Digicel stayed aloof, issuing the same terse two-line statement to all comers – dismissing the analysis and reiterating its “positive outlook”.

A swan, after all, remains graceful on the water even if paddling like hell beneath the surface.

This not-so-soft focus on Digicel is an unwelcome distraction for O’Brien at the tail end of 2016, at a time when he has no shortage of issues with which to grapple across his empire.

It emerged earlier this year that Digicel, once his trusty ATM, suspended dispensing him with dividend cash in order to satisfy bondholders.

The company has been a source of significant personal earnings for him – a guaranteed minimum of $40 million annually. Adding in special dividends, it paid him close to $1.1 billion between 2013 and 2015 alone.

Selling assets

As his income has been cut, O’Brien has also been selling assets over the last 18 months.

He offloaded Topaz in March to a Canadian company in a deal worth a total of €258 million in cash, plus a quantity of debt, before suing the buyer over the payment and then settling the case.

He also sold an office building in Dublin, Canada House, for €85 million.

In 2015, he had sold recruitment business ChinaHR and his €80 million stake in Australian publisher APN.

O’Brien also considered selling his Quinta Do Lago golf resort in Portugal for €220 million, before pulling the sale when potential offers fell short.

He abandoned a $2 billion plan last year to float 40 per cent of Digicel on the stock market when investors refused to meet his asking price.

It is unclear why O’Brien who, according to Forbes, is the richest Irishman, has sought to raise so much cash.

Over the same period, he has also sought to buy assets – such as a proposed deal to buy an Italian mobile network which didn’t proceed.

He is also considering investing further in European hospitality assets, and he told Bloomberg in September he will invest $450 million on a network of undersea telecoms cables in the Caribbean.

Declined to comment

He declined to comment to The Irish Times on a detailed set of queries, which included whether he is facing cash calls at his other businesses and whether he is seeking dividends elsewhere.

Financial statements filed by two of his companies this week – Communicorp and Beacon Medical Group – detail how O’Brien has stepped in to meet financial requirements for these businesses.

O’Brien put capital of about €95 million into Beacon Medical, which owns a private hospital in Sandyford. The payment was made by way of a promissory note from a Jersey entity controlled by him.

The accounts reveal most of the new capital was used to pay off loans to other O’Brien companies.

“[It] was just a capital investment by our majority shareholder that was used to repay shareholder loans owing to that same shareholder. No cash actually ended up in Beacon,” the medical group said.

“There has been no requirement for any further cash investment by the shareholder in the hospital, since the acquisition in April 2014.”

Beacon is loss-making so it is unlikely to be stumping up for a dividend to O’Brien anytime soon.

Accounts for Communicorp, his radio group which owns Newstalk and Today FM, indicate he was called upon to make a cash injection of close to €8 million last year, on top of a €16 million cash injection the year before.

Communicorp is the largest and most successful commercial radio group in the State but O’Brien has continually been required to fund ongoing losses.

Expensive acquisitions

Communicorp has also borne the weight of expensive acquisitions, such as the €200 million boom-time buyout of Today FM and FM104.

The businessman has now pumped at least €150 million of his own cash into the group, including a total of €85.5 million in directors’ loans, as well as equity injections and a bulky capital contribution reserve.

Neither O’Brien nor Communicorp would say whether he was called upon for cash again in 2016.

“We do not comment on unfiled financial statements,” said Communicorp.

It was also reported in the Sunday Times, at the weekend, that Communicorp recently agreed a reorganisation of its loan facilities with Ulster Bank. It has €40 million in bank loans.

The group would not say what additional commitments to the bank may have been required to secure the reorganisation, although it is understood the deal involved a rescheduling of repayments.

In common with many traditional media businesses, Communicorp is loss-making, so it also does not pay O’Brien any dividends. The accounts show, however, it pays him €660,000 annually in rents.

Boardroom split

Over at Independent News & Media (INM), where O’Brien is the main shareholder with just under 30 per cent, an aborted proposal to buy Newstalk from Communicorp has led to a bitter boardroom split over how much the station was worth.

INM, under its chief executive Robert Pitt, commissioned a valuation for the radio station that fell well short of the price sought by O’Brien’s wholly-owned charge, Communicorp.

Pitt fell out with Leslie Buckley, INM’s chairman and O’Brien’s long-time close ally, over the proposal, which, if consummated, would easily plug any cash shortfall at Communicorp that might arise in 2016.

INM has acknowledged there was an “issue” between the two men and that Pitt complained to other directors.

The company would not comment this week when asked if O’Brien got involved in calming the dispute, which appears to have quietened for now.

INM has also been lacerated recently by politicians – such as Fine Gael TD Noel Rock – and unions for proposing to wind up its defined benefit pension scheme, which would devastate the pension payouts of deferred members.

For the company, it would have the benefit of a one-off boost for INM’s balance sheet at a time when it also appears to be paving the way to pay a dividend, with a recent capital restructuring approved by shareholders.

Such capital restructurings are usually undertaken to enable dividend payouts, and INM said it will review its dividend policy this year, with cash expected to be over €86 million at year end.

Shareholders would, presumably, welcome a payment.

O’Brien’s stake, for example, is currently worth only about 10 per cent of the estimated €500 million-plus he invested, which enabled his ousting of Tony O’Reilly.

Unprecedented action

But, just as at the beginning of 2016 – when it was dealing with the fallout of the failed attempt at a New York flotation – Digicel is the O’Brien company that looks most deserving of the entrepreneur’s attention.

It is currently in the middle of a third year of earnings decline, as it continues to spend hundreds of millions of dollars on its network and grapples with currency weakness in some of its main emerging markets.

Digicel has had to take unprecedented action to lower its debt burden. It recently hired management consultants McKinsey and Goetzpartners to help it come up with a plan to improve its capital structure.

Michael Chakardjian, an analyst with CreditSights, said the move is not surprising, given that its debt is more than six times earnings.

Digicel plans to cut the ratio to 4.5 by early 2019, as $2.5 billion of network investment begins to pay off by boosting profits and O’Brien’s team take a red pen to costs.

This is where Project Swan comes in, shrinking back office functions and consolidating technology.

“With leverage at unsustainably high levels, it is not surprising that management is increasingly focused on its balance sheet,” said Chakardjian.

“Management has presented a plan which, if executed, would be fantastic. However, we see management’s plans to improve margins as opaque. By their own admission, the company is trying to do something they have never done before.”

Two clear challenges stand out.

Volatility

Firstly, Digicel’s earnings have been dogged in recent years by currency weakness in its three main markets against the US dollar, in which it reports its figures and in which it has borrowed.

The Jamaican dollar has fallen 18 per cent against the greenback in the past three years, while the Haiti gourde has plunged 36 per cent.

In Papua New Guinea, meanwhile, the kina has fallen by more than 23 per cent.

Indeed, Alvin Lim, a credit analyst at Fitch Ratings in the US, which rates Digicel’s debt five levels below what it considers investment grade, said that foreign exchange rate volatility could “dilute” Digicel’s plans to ease its debt burden as there is “some currency mismatch” between its dollar-denominated debt and earnings in emerging markets.

“Digicel’s rating mainly reflects the company’s high leverage and negative free cash flow generation, as well as its historically high shareholder distribution,” said Lim, adding that the company’s key challenges are to boost free cash flow after a massive investment drive, and proactively manage its “debt maturities profile”.

Bondholders in Digicel have to be mindful of the entity in which they are invested. While the main operating company contains the Caribbean business, a holding company above it also contains Papua New Guinea.

Papua New Guinea sought a loan from the International Monetary Fund (IMF) earlier this year. If the country does get a loan, it could come with the requirement to devalue the currency, according to Chakardjian.

Secondly, while the comfort of not having to refinance a major bond until September 2020 – when a $2 billion tranche falls due – it must repay $219 million of loans in its next financial year.

Huge success

“If you have covered Digicel for a long time, one of the positives you will likely recall is that the company tends to have a good liquidity position,” said Chakardjian. “However, we no longer believe that to be the case.”

While the analyst accepts Digicel is a sound business with a good long-term future, he is worried about so-called “cash burn” in the short term.

Cash on the group’s balance sheet amounted to $241 million at the end of September.

Documents disclosed by Digicel to US market regulators last year showed its cash ranged from $500 million to over $1 billion from 2013 to 2015.

Still, that was at a time when Digicel was in the middle of heavy investment.

Either way, the group has “limited equity cushion”, according to Chakardjian It is also restricted by its own covenants from taking on more debt.

O’Brien has confounded his critics in the past, most notably by setting Digicel up in the first place more than 15 years ago, when few outside of his own tight-knit circle thought it would work.

It has been a huge success.

It is clear, however, that, as we enter 2017, O’Brien has plenty of issues in his in-tray.

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