Digicel flotation success hinges on O’Brien convincing investors
Proceeds from second-biggest US flotation of the year will go to paying down debts
Denis O’Brien will relinquish about 40 per cent of the company’s equity but barely a scrap of control. Photograph; Dara Mac Donáill/The Irish Times
If the Digicel flotation goes ahead as planned next week, Denis O’Brien will relinquish about 40 per cent of the company’s equity but barely a scrap of control. His remaining 60 per cent of the equity will control 94 per cent of the voting rights.
The billionaire can, in this sense, have his Digicel cake and eat it, with control maintained via a special class of “B” shares that have greater voting rights. The proceeds of the flotation will largely be used to pay down some of Digicel’s debt, with the remainder going to fund operations and investment.
Success in the flotation will depend on Digicel’s ability to persuade investors that it can develop its markets – based largely in the Caribbean and South Pacific – moving on from mobile voice services to more advanced, higher-end cable TV, data and business services. In turn this requires major investment.
Digicel is seeking between $13 and $16 a share for the tranche of shares that will hit the market next week. If it hits the midpoint of this range, Digicel will have an enterprise value of about $10 billion (€9 billion) – calculated by adding its market capitalisation to its debts. This is once it has paid down about $1.3 billion of debt, which in the flotation documents it has suggested it will do.
The company says it has not yet decided which bits of its roughly $6.5 billion of debt it will try to take out. O’Brien has perfectly timed his interventions in the bond market in recent years to refinance much of its most expensive debt at lower rates, so these most recent tranches are likely to remain untouched.
Its most expensive outstanding debt is a $2 billion group of bonds due in 2020, which costs a chunky 8.25 per cent, or $165 million, in annual interest payments. This represented close to 30 per cent of Digicel’s financing costs last year.
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The company has until September 2016 to take out this particular tranche of expensive debt without incurring a significant penalty, which would make it a likely target for the IPO proceeds, topped up with some of the company’s existing cash.
The biggest advantage to floating Digicel in New York is that it raises the proceeds in US dollars, the currency in which its debts are denominated.
Most of Digicel’s revenue is denominated in currencies such as the Jamaican dollar, the Haitian gourde and the Papau New Guinea kina. These currencies are falling at up to 8 per cent annually against the greenback, wiping out its growth in these regions when converted back into US dollars.
Digicel’s Big Apple foray will take an even bigger bite out of its currency risk.
Depending upon where within the targeted range the share price falls, Digicel will have about $400 million of the flotation proceeds left over to fund network investment and acquisitions. The company is engaged in a huge fibre rollout, while it is also gobbling up broadcast and media companies across the Pacific and Caribbean regions. Last week, for example, it sealed a $5.75 million buyout of Sky Pacific television company in Fiji.
O’Brien’s class B shares, which will have 10 times the voting power of other shareholders, will convert to ordinary class A shares if he sells them. This suggests both classes of shares are roughly equal in value. O’Brien’s post-flotation stake in Digicel could therefore be worth close to $3 billion, putting a solid value on the biggest component of his personal wealth.
Digicel has lubricated all of O’Brien’s investment decisions in recent years. He has taken out more than $1.1 billion in dividends in the last three years, but he has also squeezed cash from the company in other ways. His Island Capital gets a $500,000 annual “management fee” for advisory services to Digicel, while it also gets 0.5 per cent of the value of any transactions for which it is engaged. Last year it received $12 million in such fees.
Digicel pays an O’Brien company about $8.7 million annually for the use of his private jet, while a division of his Siteserv engineering company also received $26 million in the three months to the end of June in fibre rollout fees.
The flotation documents also reveal that O’Brien’s Island Capital is due a fee of approximately $6 million for advising on the upcoming flotation.
Now the flotation will spread the risk of expansion to other investors – assuming they can now be persuaded to sign up.