Cantillon: Digicel feels the pinch as US Fed unwinds

There are downsides to operating a mobile phone company across large numbers of small, independent markets with their own currencies, as Denis O'Brien's Digicel has found out.

Digicel this week issued its third-
quarter results to its bondholders. Total group revenues slipped by 2 per cent to $699 million, although the group increased its operating profits by 18 per cent to $210 million by apparently strangling its cost base.

Digicel’s model is built on breakneck growth and it added a net 404,000 subscribers over Q3, bringing its total to almost 13.5 million.

So how did it end up losing sales?

The answer lies in part with the Federal Reserve. The US signalled in recent months that it plans to unwind its bond- buying stimulus programme – tapering – which watered down the value of the US dollar. As the programme gets close to being unwound, the dollar has strengthened. Digicel's Q3 results attribute the sales slide to "local currency depreciation, relative to the US dollar, particularly in Haiti, Jamaica and Papua New Guinea", the heart and soul of its business.

The Jamaican dollar, for example, has weakened against the US dollar by 13 per cent compared to the same period last year. Subscriber numbers stayed constant, but its sales fell 16 per cent. Digicel says that if the effect of the strengthening dollar is stripped out, its call revenues grew by 3 per cent. The group, however, has borrowed more than $5 billion in the US currency that must be paid back.

The more the US dollar strengthens, the faster Digicel has to grow to stand still. The problem for the group is that commentators seem to agree that the value of the dollar is only going one way – up. This is not good for Digicel.