The Ultimate Guide To The Digicel New York Stock Exchange IPO. Plus An Infographic!

If Digicel successfully lists on the New York Stock Exchange later this year (2015) that would be a very big thing for Digicel (the company itself), its employees, its owners and leadership, and for the Caribbean on a whole. The company is no doubt operated at high international standards with a global outlook (no questions there). However Digicel does most of its business in the Caribbean, and investors will be asked to make a big bet on this region or as Fitch describes it ‘countries with low ratings’, including Jamaica, Haiti and Papa New Guinea (Digicel’s three largest markets).

Along with the macroeconomic concerns, Mr. O’Brien (Digicel’s Chairman) will face increased scrutiny on how he has run the business he founded almost 15 years ago and what are the plans to drive the future of the business for the next 10 to 20 years. In the points below I outline information about the company, the numbers behind the Initial public offering, it’s current debt situation, and 12 burning questions and concerns that Mr. O’Brien must successfully and convincingly answer for this IPO to become a success.

The Company

• Digicel defines themselves as ‘…a leading provider of communications services in the Caribbean and South Pacific regions… providing a comprehensive range of mobile communications, Business Solutions, Cable TV & Broadband and other related products and services to retail, corporate (including small and medium-sized enterprises) and government customers.’
• The company was founded by Irish billionaire Denis O’Brien in 2001. Denis O’Brien is also Digicel’s Chairman and its majority shareholder.
• “Digicel is in the process of evolving from a pure mobile telecommunications company into a leading total communications and entertainment provider,” the IPO document states.
• Digicel has unquestionably been an huge success story and is the number one player in 21 of the 31 markets in which it operates.
• It is also engaged in a massive rollout of fibre-to-the-home in Jamaica, Trinidad and Tobago and Barbados.
• Digicel is also beefing up its content capabilities, such as entertainment and sports programming.
• It recently signed a deal with Manchester City football club, for example, to provide it with tailored content for customers.

Other Company Highlights

• Digicel sold its Honduras business to Mexican billionaire Carlos Slim but was blocked by regulators from completing a similar transaction in El Salvador, where revenues retreated 10 per cent last year.
• Denis O’Brien has taken US$1.1 billion in dividends out of Digicel in the past three financial years.
• Some 94 per cent of its customer base is prepaid.
• Digicel has accumulated total debt of $6.5 billion  (€5.9 billion) through bond issuance.
• The IPO document suggests Panama is a big drain on the company and it has been forced to withdraw from Burma with its tail between its legs. Digicel spent US$31 million on its 2013 application, which failed.

The IPO Numbers

• Digicel currently provides mobile communications services to 13.6 million subscribers (from an aggregate population of approximately 32 million people) in 31 markets in the Caribbean and South Pacific regions, up from 400,000 on March 31, 2002 representing a compound annual growth rate (CAGR) of 32.3%.
• They have reported a loss of US$157.6 million on revenue of US$2.79 billion for the year ended March 31, 2015 compared with a profit of US$43.5 million on revenue of US$2.75 billion a year earlier.
• Digicel’s operating free cash flow was $548.5 million for the year ended March 31, 2015 and $737.7 million for the year ended March 31, 2014, which as a percentage of revenues was 19.6% for the year ended March 31, 2015 and 26.8% for the year ended March 31, 2014. (Digicel uses “operating free cash flow” and “adjusted operating free cash flow”, which are non-IFRS measures, to illustrate the underlying cash generation of its business).
• Digicel’s adjusted operating free cash flow, which excludes certain non-recurring capital expenditures, was $814.1 million for the year ended March 31, 2015, and $804.1 million for the year ended March 31, 2014, and as a percentage of revenue was 29.1% and 29.2% for the years ended March 31, 2015 and 2014 respectively.
• As a percentage of revenue, cash flow from operating activities was 15.5% for the year ended March 31, 2015 compared to 16.3% for the year ended March 31, 2014.
• Digicel’s capital expenditure last year was $650 million (€586 million). Ratings agency Fitch estimates the group will spend close to another $1 billion over the next 24 months.
• Based upon standard multiples of Digicel’s earnings and also the value of its main competitor, Cable & Wireless, it is estimated that Digicel is worth somewhere between $8 billion and $10 billion, including its $6.5 billion debt.
• Its annual financing costs, however, are still in dollars – $600 million last year alone. This is eating into Digicel’s free cash flow and its ability to fund independently its fibre rollout and to take on any new acquisitions.
• The Group has paid $1.0 million in 2015, (2014: $1.8 million, 2013: $1.2 million) to Communicorp Group Limited and Island Capital Services Limited, (both companies controlled by Mr. Denis O’Brien) in respect of expenses paid by these two companies on behalf of the Group. Reimbursed expenses include legal and professional fees, travel and accommodation costs.
• Digicel Group Ltd sponsors sprinters Usain Bolt and Shelly Ann Fraser-Pryce and also the West Indies cricket team.

And Now, Time For the Infographic

You can download the infographic here

You can download the infographic here

The Debt

• Digicel is at the reasonable limit of its borrowing capacity. It needs equity.
• Michael Hasenstab, bond guru  of Franklin Templeton has emerged as a major backer of Ireland’s richest man, Denis O’Brien. According to recent filings by the Templeton Global Total Return bond fund, it holds Digicel bonds with a market value of $800 million (€721.3 million).
• O’Brien has managed to tap some of the biggest bond investors in the world relentlessly. An International Monetary Fund report last October highlighted that almost one-third of Digicel’s debt was then held by the top five global buyers.  Holders of its debt includeFidelity Investments and Goldman Sachs.
• Due to O’Brien’s astute playing of the bond bubble in the last two years – he has refinanced its most expensive debt at lower rates and pushed out most of the maturities beyond 2020.
• Digicel’s $6.5 billion debt is all denominated in US dollars, but the currencies in the three largest markets where it raises its revenues are falling against the greenback by up to 8 per cent annually.

The Offering

• The company intends to list on the New York Stock Exchange (NYSE) under the ticker ‘DCEL’.
•  The first release of shares will possibly be in October.
•  O’Brien’s near 100 per cent shareholding will be diluted although he has structured the offering in such a way that he will retain control of the business through the issue of “class B” shares that will have 10 times the voting rights of the shares being sold to investors.
• Being registered in Bermuda also allows Digicel to sidestep some of the NYSE’s corporate governance rules.
• Underwriters on the IPO are J.P. Morgan, UBS Investment Bank, Citigroup, Barclays, and Credit Suisse.
• The filing included a nominal fundraising target of $200 million, but did not reveal how many shares the company planned to sell or their expected price.

Possible Questions / Concerns

1. How much equity is Denis O’Brien willing to give up, and how much is Digicel worth?
2. How will the market respond to the millions of dollars Digicel pays each year to other companies associated with O’Brien?
3. No change in the status quo? –   Doug Brake, a telecoms policy analyst with a Washington think tank told The Irish Times he doesn’t think Digicel’s IPO “signals much of a change in strategic direction” for the company. “The offering is clearly structured such that O’Brien retains virtually all control and decision-making power. Concerned?
4. Digicel’s plans are complicated by the fact that it operates in so many different countries. Building out fibre in one country is tricky enough, never mind 31 spread around the globe.
5. What of the relation with Cuba? Communist Cuba is the one obvious outliers in the Caribbean but that could change in the years ahead now that relations with the US are thawing.
6. The IPO document lists 29 pages of potential risks. Many detail how regulators are impacting on the business, a factor of its dominant position in many countries. O’Brien doesn’t much care for regulators.
7. Digicel’s debt is held in dollars but its revenues are collected in local currencies, most of which have dropped in value against the dollar in recent years.  Adverse currency movements were the main reasons behind revenues in Haiti and Jamaica dropping by more 3 per cent last year.
8. It needs to diversify into higher-end cable TV and data services and sell more business packages in the face of stiffer competition, while upgrading its infrastructure and servicing a hefty debt. All under a more public spotlight.
9. Before it was announced that the company was planning to float, Fitch released a note on Digicel in May that opined on the company’s high-octane balance sheet.  Fitch said its rating on Digicel was “tempered by [its] aggressive shareholder distributions, high leverage and concentration in countries with low ratings”.
10. What about the resurgence of Cable & Wireless / Flow? Moody’s, another ratings agency, also pointed recently to Digicel’s exposure to Jamaica as a reason for caution. “Jamaica is struggling to revive its economy and experiencing competitive telecom pricing,” it said. The emergence of a resurgent Cable & Wireless is a competitive obstacle for Digicel as it tries to build its fixed-line business, however currency depreciation in these markets is the biggest problem facing O’Brien’s company.
11. A $2 billion tranche of bonds, paying a hefty 8.25 per cent rate, matures in 2020 and O’Brien has a deadline of September next year to buy them back cheaply. Perhaps he will target those bonds with the flotation proceeds?
12. As Digicel grows its content capabilities, it may eventually look to open or acquire a broadcasting arm for the group?

What other questions do you have re Digicel’s intention to go public?

Sources