Digicel flotation comes at crunch time for Denis O’Brien firm

Denis O'Brien's Digicel's planned flotation is a signal that the business has arrived at a crossroads. Since he founded it with the launch of a new mobile service in Jamaica in 2001, the company has grown across the Caribbean, central America and the south Pacific to the point where it has 13.6 million customers in 31 countries.

Its approach has always been simple: to go into small, under- developed markets where telecoms networks could be built relatively cheaply, and take on the – usually state-owned – incumbents by competing aggressively on price, backed with sharp marketing.

The formula worked extremely well. Within 15 months of its launch in Jamaica, it was the number one player and it replicated this performance in country after country. An exotic sounding mix of countries was responsible for the $2.8 billion revenues it earned in its last financial year.

Papua New Guinea headed that list, contributing $500 million; Haiti, where O'Brien also built a hotel, was second with $478 million; while Digicel's original market, Jamaica, ranked third with $421 million. One of the few exceptions to the rule was Myanmar, where the company failed to get the licence in the first place.

Handsome rewards

This has translated into handsome rewards for O’Brien himself. Digicel paid him dividends totalling $1.1 billion over its last three financial years. He receives a regular $40 million a year payment, $10 million a quarter.

On top of that, he received a special dividend of $650 million in the year to the end of March 2014 and a similar payment of $300 million in the previous 12-month period.

The form signalling the company’s intention to float indicates he will not benefit directly from the exercise.

Steven Hartley, principal analyst with London-based telecoms consultancy, Ovum, explains that the approach has reached its natural end. "Digicel is running out of those sorts of markets," he says. "That model has run its course."

At the same time, it is up against tougher competition than the incumbents it saw off in the past. In its original market, Jamaica, one of Digicel's rivals is Claro, backed by the world's richest man, another telecoms billionaire, Carlos Slim.

US giant, Cable & Wireless Communications (CWC) recently bought Columbus, which has businesses in a number of Digicel's territories, such as Barbados and Trinidad and Tobago. The Irishman's company fought hard against the merger, warning that it was anti-competitive, but regulators allowed the transaction in any case.

At the same time, technology is changing. Smartphones have taken over and networks have to beef up to provide their customers with more data. Meanwhile, Digicel is moving into fixed-line services, providing cable TV and broadband services in nine countries. It is building fibre networks in Jamaica, Trinidad and Tobago and Barbados. All this is very capital-intensive.

Hartley points out that if the company wants to expand and defend its market positions, it has no choice but to reinvest in its networks. On that basis, he argues that a flotation makes sense. “It has reached a point in its evolution where that is the natural next step,” he says.

‘General corporate purposes’

As Digicel has yet to say how much it intends to raise from the flotation, it is not possible to say what it will spend and where. The document filed with the US Securities and

Exchange Commission

yesterday simply says proceeds will be used for “general corporate purposes” including acquisitions, capital spending and repaying debt.

The company has a heavy debt burden. Total liabilities on March 31st were $7.5 billion, of which $6.3 billion was long- term debt. Over $5 billion of that figure was accounted for by a series of bonds, while most of the balance consisted of secured term loans. Digicel has consistently used bond sales as its primary means of raising money since its foundation.

News of the planned flotation had a lot of industry sources speculating the proceeds would be used to pay down debt.

However, selling shares simply for this reason may not prove very attractive to investors, according to David Holohan, analyst with Dublin firm, Merrion Capital Group.

“It would have to be a mix,” he says. “It’s very unlikely that they would use equity to pay down all that debt.” Holohan points out that with consolidation moves afoot in the European industry, now is a good time to float a telecoms business. “There is good demand for telecoms assets,” he says.