Stakes raised for Denis O’Brien’s Digicel

His 11th-hour decision to halt plans to raise an enormous $2bn in the US by selling shares for the first time has considerably raised the stakes for Denis O’Brien and his indebted Caribbean company Digicel.
Stakes raised for Denis O’Brien’s Digicel

It raises the major question whether he has missed the boat to pay down a substantial part of the telecom company’s debt and fight off competitors in the company’s home patch.

It is a decision that will not have gone unnoticed by Digicel’s major competitor, Cable & Wireless Communications, in most of the 31 markets across the Caribbean and South Pacific where Mr O’Brien’s has built his telecoms businesses over the past 15 years.

Digicel’s growth, like many telecom companies, has been fuelled by debt. In Digicel’s case, it has been driven by huge amounts of debt, totalling $6.5bn.

That IPO cash was therefore to be used to do two things: Pay down $1.3bn from the debt pile with the rest to be used to expand into new products and services as revenue growth dried up.

In an early sales prospectus filed to the US watchdog, the Securities and Exchange Commission, on July 31, Digicel identified C&W as its principal competitor.

Another “risk factor” it highlighted was its need for “significant capital expenditure” to develop its business. It had spent almost $648m in the 12 months to the end of March this year.

C&W shares are therefore something of a proxy for the privately-held Digicel.

The Chinese economic slowdown sparked a major rout of markets and currencies across many emerging markets. Since Digicel first hinted this summer at plans to float on the markets, C&W shares have slumped by as much as 15%, and are down 10% since Digicel’s filing on the July 31.

Mr O’Brien indicated yesterday in an interview with CNBC he was not prepared to scale back the price of the company in the IPO despite the onslaught the markets faced this summer.

There is mixed evidence that IPOs have been rocked by the market volatility.

Accountants PwC said that following a slump in the last three months, the outlook for Europe’s IPOs looks a lot more promising.

Amid market volatility, 53 IPOs were completed on European exchanges in the third quarter, down 30% from a year earlier, it said. CPI Card Group, a US cards payment firm, cut the size of its IPO yesterday by a third.

And it probably matters a lot more where the businesses are located. Yesterday, Amundi Group, a European asset management giant reportedly planned to press ahead with a shares sale, while re-insurer IRB Resseguros of Brazil postponed its IPO plan.

In the same SEC filing in July, there are indications of the risks facing Digicel. It said that while its debts are in US dollars, the revenues it generates on the ground are “predominantly denominated in local currencies...”

While many of these currencies are fixed to the dollar, there is no guarantee that such an arrangement could last, it said.

David Holohan, head of research at Merrion Capital, said he remains surprised at the decision to pull the IPO, and he believes it will be some time before Digicel makes a second attempt.

“If you look at the effect of the Chinese market slowing down that is likely to be pervasive for some time,” Mr Holohan said.

Digicel “will have to face these headwinds and it would have made more sense for it to float the company and deal with those headwinds as a public company as opposed rather than try to deal with them as a highly leveraged private company, which may be more difficult over time,” he said.

For some, the stalled IPO raises memories of an abandoned shares sales by Tony Ryan’s air-leasing giant GPA in the early 1990s.

Mr O’Brien told CNBC that Digicel’s revenues are healthy and the company does not need funding.

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