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Digicel’s upcoming IPO spells debt relief

Published:Sunday | June 28, 2015 | 12:00 AM
Digicel founder and chairman Denis O'Brien.
Digicel's headquarters overlooking the Kingston waterfront.

Denis O'Brien's plan to offer shares in his Digicel Group to the public and list the telecommunications company on the New York Stock Exchange signals a shift away from debt to equity.

While the high level of disclosure that comes with such a move might seem uncharacteristic of the Irish billionaire, he won't be exposed to a takeover anytime soon.

The Class A shares to be sold in the initial public offering (IPO) - the price and amount of which are yet to be disclosed - do not carry the voting power of the Class B shares, which are not up for


Those shares "provide Mr O'Brien the ability to control the outcome of most matters requiring shareholder approval" once his holdings do not fall below 10 per cent of the company's issued shares, according to a filing to the US Securities and Exchange Commission (SEC).

The filing also sheds a little more light on the two special dividends totalling US$950 million, which was paid out to the owner within the last three years. However, Digicel made it clear that it does not expect to use the proceeds from the upcoming issue of the common shares to fund dividends to common shareholders.

"Digicel intends to use the net proceeds of the offering for general corporate purposes, including capital expenditures and acquisitions, and to repay existing indebtedness," said the filing issued to the SEC on Friday.

The telecom's debt has grown by 9.6 per cent annually over the past three years to reach US$6.5 billion as at March 2015. Coupled with the fact that it generates most of its revenue in the local currencies of the 31 markets within which it operates, rising debt translated into finance costs growing from US$414 million in the 2012 financial year to US$600 million.

What is more, growth in earnings before interest, tax, depreciation and amortisation (EBITDA) averaged less than three per cent a year over the same period, and even fell from US$1.22 billion in the year ending March 2014 to US$1.18 billion a year later.

Therefore, paying off debt with capital raised through an IPO would right-size the company's balance sheet - its total liabilities exceeded its assets by US$2.86 billion as at March 2015. Still, its working capital improved from the US$724 million deficit at the end of March 2014 to a surplus of US$213 million at the end of the latest financial year.

A cash injection into the company would also help Digicel's increasing appetite for expansion cash - capital expenditure rose from US$376 million in 2012 to US$632 million last year.

"Digicel's cumulative capital expenditure in the three years ended March 31, 2015 was US$1.5 billion, representing 43.3 per cent of adjusted EBITDA and 18.8 per cent of revenue over that period," said Friday's filing.

"Digicel's capital expenditure reflects its significant investment in upgrading and developing its networks and infrastructure to develop a leading communications and entertainment platform in each of the markets it serves."

Nearly 40 per cent of the telecom's capital expenditure last year was in relation to expanding its mobile network, while US$90 million, or 14 per cent, was spent rolling out towers across Myanmar, where it leases the telecommunications infrastructure to a mobile provider there named Ooredoo.

Digicel is currently evaluating expressions of interest to buy its 75 per cent stake in the tower company.

But its fibre-to-the-home (FTTH) roll-out throughout Jamaica, Trinidad and Tobago and Barbados, which is a critical component of Digicel's plan to develop this "leading communications and entertainment platform", has taken off. The company reported that its FTTH network passed 257,000 homes - 95,000 in Jamaica - as at May 28.

Its entry into the fixed broadband and subscriber television markets has become increasingly important, given that main competitor Cable and Wireless Communications Plc recently acquired the largest provider of such services in the Caribbean, Columbus International. It is also of growing importance because mobile revenue has been declining, particularly as it relates to voice calls.

Mobile voice revenue fell from around US$2 billion in 2013 to US$1.83 billion in 2014 to US$1.68 billion in the last financial year. The growth in mobile data revenue from under US$600 million in 2013 to S$762 million in 2015 was not enough to offset the decline in voice.

In the meantime, Digicel's cable TV and broadband services are picking up. Those business segments generated US$31.6 million in revenue in the year ending March 2105, compared with the fledgling US$3.1 million it raked in two years before.