Digicel flotation depends on O’Brien selling growth story

Denis O’Brien caught everyone on the hop last Friday with the announcement of an initial public offering (IPO) on the New York Stock Exchange for Digicel, the mobile phone business that he launched in 2001, in Jamaica. This will be about raising an as yet unspecified amount of funds for the company rather than for O’Brien, who has taken $1.1 billion in dividends out of Digicel in the past three financial years.

His near 100 per cent shareholding will be diluted although he has structured the offering in such a way that he will retain control of the business through the issue of “class B” shares that will have 10 times the voting rights of the shares being sold to investors.

Being registered in Bermuda also allows Digicel to sidestep some of the NYSE’s corporate governance rules. It will be interesting to see how this sits with American investors, maybe not now but over time. Issues around corporate governance usually rear their head only when something goes wrong, as we have seen in this jurisdiction in recent years in relation to rows at One51 under Philip Lynch and at NTR.

And how will they take to the millions of dollars Digicel pays each year to other companies associated with O’Brien?

Like all telecoms companies around the world, Digicel is a cash-hungry business. It made its name by wiping the eye of slumbering incumbent rivals across the Caribbean, Central America and the Pacific Islands in offering mobile voice, which still accounts for 87.3per cent of its business. Some 94 per cent of its customer base is prepaid.

However the game has changed in the intervening years. It’s all about quad play (mobile, cable TV, broadband and fixed line) now and building out fibre networks, which requires a lot of capital. “Digicel is in the process of evolving from a pure mobile telecommunications company into a leading total communications and entertainment provider,” the document states.

Digicel’s plans are complicated by the fact that it operates in so many different countries. Building out fibre in one country is tricky enough, never mind 31 spread around the globe.

Having already accumulated total debt of $6.5 billion through bond issuance, O’Brien had pretty much run out of road with debt markets. An equity listing was the next logical move. It helps de-risk O’Brien’s exposure to Digicel without surrendering control.

Digicel has unquestionably been an huge success story and is the number one player in 21 of the 31 markets in which it operates. Communist Cuba is the one obvious outlier in the Caribbean but that could change in the years ahead now that relations with the US are thawing. It hasn’t been all been jam though for Digicel. The IPO document lists 29 pages of potential risks. Many detail how regulators are impacting on the business, a factor of its dominant position in many countries. O’Brien doesn’t much care for regulators.

While the Caribbean and the Pacific islands have been hugely successful ventures, central America has been a different story. Digicel sold its Honduras business to Mexican billionaire Carlos Slim but was blocked by regulators from completing a similar transaction in El Salvador, where revenues retreated 10 per cent last year.

The IPO document suggests Panama is a big drain on the company and it has been forced to withdraw from Burma with its tail between its legs. Digicel spent $31 million on its 2013 application, which failed.

Sadly for O’Brien, the old tricks he had used to good effect in the Caribbean and the Pacific – having boots on the ground early, getting to know the movers and shakers early and spending money in advance on infrastructure, jobs and sponsorships to demonstrate commitment – didn’t work in Burma.

The strong US dollar is also affecting the business. Digicel’s debt is held in dollars but its revenues are collected in local currencies, most of which have dropped in value against the dollar in recent years. Adverse currency movements were the main reasons behind revenues in Haiti and Jamaica dropping by more 3 per cent last year.

Revenue overall rose 1.5 per cent to just under €2.8 billion but the company slipped into the red, largely due to a spike in finance costs and an increase in administrative expenses.

The merger of Cable & Wireless with Columbus International has created a major rival to Digicel in the Caribbean. John Malone, owner of cable TV giant Liberty Global, owns 13 per cent of the merged business, which is set to go toe to toe with Digicel.

O’Brien has skilfully established Digicel as one of the world’s leading mobile phone companies, albeit in a chain of small markets. However, the company is now at a major crossroads. It needs to diversify into higher-end cable TV and data services and sell more business packages in the face of stiffer competition, while upgrading its infrastructure and servicing a hefty debt. All under a more public spotlight.

This IPO will stand or fall on O’Brien’s ability to sell a growth story for Digicel and to persuade investors they will get a good return for their money. Let the game begin. Twitter: @CiaranHancock1