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Lee-Chin: Flow has been a game changer in telecoms market

Published:Friday | November 14, 2014 | 12:00 AM

To sell 13 per cent stake under the Columbus-CWC tie-up

Avia Collinder, Business Reporter

Jamaican-Canadian investor Michael Lee-Chin, whose firm Portland Private Equity (PPE) co-founded Columbus International Inc with the Risley group around 2005, says a decade later the telecoms has been pivotal to the delivery of top-notch cable TV and lowering the cost of Internet services for consumers across the region.

Lee-Chin, in a Financial Gleaner exclusive, also came out in support of Cable & Wireless Communications' (CWC) pending acquisition of Columbus, saying the returns in "social good and development" that the founders reaped were likely to continue under CWC.

CWC has reached agreement with Columbus for sale of its Flow networks in seven markets and Karib Cable in a deal valued at US$3 billion and including US$1.85 billion in cash and shares. The balance is debt which will be taken over by CWC.

Lee-Chin stands to benefit from the deal.

Speaking alongside one of his chief lieutenants, Robert Almeida, in Kingston on Wednesday, the investor who made his fortune in the mutual fund market, said Columbus represented billions of dollars of investment in Jamaica and other Caribbean nations that led to the creation of new industries as "efficiencies in cost and technology" were realised in several markets.

Internet costs were cut by 85 per cent, creating space for new industries to thrive, he said.

Those outcomes, he said, vindicated PPE's focus on the sector.

PPE is now a minority shareholder in Columbus with a reduced 13 per cent stake. It started with almost 50 per cent shareholding and, over time, has invested US$65 million of its own funds in the telecoms. Its 13 per cent share of the US$1.85 billion offer would, by Financial Gleaner estimates, work out to US$240 million.

Three shareholders, Brandon Paddick, John Risley and John Malone, will take a 36 per cent stake in CWC under the deal, but Lee-Chin's payout is expected to be in cash only.

Lee-Chin said he would completely exit his investment in Columbus when the transaction closes.

Almeida, the managing partner for PPE, said of the company's returns from its Columbus investment: "We have a portfolio of investments which earn in the 20 to 25 per cent return rate and this would be consistent."

Lee Chin is chairman of Portland Private Equity, sponsor of the AIC Caribbean Fund, chairman of National Commercial Bank Jamaica, and founder and chairman of Portland Holdings Inc, the latter being the primary vehicle for his diversified investments.

PPE's first Caribbean fund raised US$225 million. Its second fund, recently closed on US$100 million towards a final target of US$300 million, and will continue to invest in a core portfolio of "tele-communications, electricity, insurance, road infrastructure and real estate" assets, according to Almeida.

The investment in Columbus, Lee-Chin said, was based on the company's key principles.

"We don't invest willy-nilly. We get excited when: one - there is a difference between perception and reality; two - when there is a lack of equity capital going into a region, an industry, a business; and number three - we get excited when there are inefficiencies," he said.

"So in 2005, when we invested in Columbus, all three of those pre-conditions were met."

To illustrate this point, Lee-Chin said a data line in 2005 in the Bahamas cost US$48,000 per month, but after Columbus announced that it would built its own undersea fibre cable from the United States to The Bahamas, the price dropped immediately to US$24,000.

Columbus went ahead and built its submarine cable.

"When we landed, the incumbent dropped their price from US$24,000 to about US$16,000 and then to US$6,000 per month. That is an 85 per cent reduction in the cost of telecoms," he said.

Lee-Chin said the same was true for the interventions in Jamaica.

"Nine years ago, it had a similar situation. Columbus brought the price down by a similar 85 per cent. That was a function of lack of competition then. At an 85 per cent discount, other industries can be spawned, like the call centre business, BPO businesses, and so on. Columbus, we saw, was a necessary infrastructure that was not present by virtue of cost that was preventing development of other industries. We became very excited."

Columbus was initially funded by Portland and Risley, who later reached out to other investors. The partners later raised debt capital for the telecoms - "the combination of all which was millions of US dollars spent to build out the network which was necessary to create the infrastructure which has turned into industries and jobs," Lee-Chin said.

Columbus currently offers broadband, fixed-line telephony and cable or subscriber television services to a customer base of about 700,000 - operating as Flow in Jamaica, Trinidad & Tobago, Barbados, Grenada, St Vincent & the Grenadines, St Lucia, and CuraƧao and as Karib in Antigua.

Its business-to-business dealings are executed through subsidiary Columbus Business Solutions, and it offers fibre connectivity to some 42 markets through Columbus Networks.

The company's crowning moment, said Almeida, was when John Malone decided to become an investor two years ago.

Malone, who he describes as one of the largest global investors in telecoms, owns 22 per cent of Columbus through one of his private companies.

With a net worth of US$7.4 billion as cited by Bloomberg's Billionaires Index, Malone also owns 60 per cent of Caribbean cable and broadband provider Liberty Cablevision of Puerto Rico LLC, as well as Liberty Interactive Corp and Liberty Media Corp, which has share interests in the Starz pay-TV channel, Live Nation Entertainment Inc and Viacom Inc.

When Flow entered the Jamaican market, in 2006, Lee-Chin said the cable TV market was fragmented and operating at subpar levels.

"You had, like, 42 different cable companies and they were all delivering subpar services, subpar reception. So Flow came in and brought world-standard cable, telephony [and] Internet, in terms of cost and service. The package that is now experienced in Jamaica is in some cases better than what we have in Canada," he said.

The decisions that fed into the sale of Columbus to CWC, he said, was "not for us to speak about" even while asserting that the pending merger would "further encourage competition".

It's unclear whether such an endorsement will sway the deliberations of regulators who will review and approve the acquisition across Columbus' eight operating markets, especially with signals from St Vincent that it was wary of a tie-up of the two telecoms, in which it sees the potential for monopolisation of internet services.

CWC rival, Digicel Group, has also pledged to push for an aggressive review of the deal.

"Two strong competing companies are better than 42 weak ones," said Lee Chin, referring to the proliferation of players in what was nevertheless a high-cost environment for business in Jamaica nine years ago.

Almeida says the face-off between CWC and Digicel is likely to result in beneficial changes for consumers.

"You need competition. That is what we, Flow/Columbus, brought to the region - we brought competition and a dramatic reduction in cost. What is left today are two very strong players, Cable and Wireless/ Columbus and Digicel," he said.

"Certainly, if two heavyweight fighters get into the ring, they will not be throwing half-punches. They will be trying to knock out each other. So that in itself will ensure that you have price competitiveness, technology competitiveness, service competitiveness, and the country will benefit," he adds.

"Digicel is not a pushover; it's a heavyweight."

Lee Chin indicated meantime that he was bullish about CWC, and said he may invest in the "successor company", referring to the entity to be created from the pending merger with Columbus, sometime in the future.

The CWC/Columbus deal will attract attention to the Caribbean from investors globally, Lee-Chin insists.

"The perception is that the Caribbean is not a large enough pool to invest big capital in. With this US$3-billion deal being announced - I think this was the largest deal in Latin America this year - it is high-profile and will certainly alert a lot more investors that the Caribbean is really a great place to be investing in - which will redound to the benefit of the Caribbean people," he said.

Regarding the new projects being pursued by Portland funds, Lee-Chin said that these could not be disclosed now.

"What we can say is that Jamaica remains a primary focus for our private equity fund and also a primary focus for Portland Holdings," he said.

Said Almeida: "The best way to think about where are we likely to be investing is to think about all the biggest problems in the region that require capital."