Seen here in this April 2006 file photo, from left, are Digicel chairman and founder of Digicel, Denis O'Brien, and Digicel Group CEO Colm Delves, at the Digicel Trinidad launch. - File Keith Collister, Business Writer
Digicel Group's successful bond offering last week, which raised US$1.4 billion for the telecoms, was one of the largest high yield instruments issued out of the Latin American and Caribbean region.
Colm Delves in an exclusive interview with the Financial Gleaner on the issue, also tagged the bond as the 'first' to employ the financially innovative 'toggle' pricing in the region.
These payment-in-kind (PIK) securities allow the borrower to make a choice to either keep paying interest, or defer paying interest, at the price of a higher interest rate.
According to Delves, the deal was first and foremost an opportunity for Digicel Limited's majority shareholder Denis O'Brien to buy out the minority shareholders in his 78 per cent owned (on a fully diluted basis) company.
In an independent valuation, Digicel Limited was valued at US$2.4 billion, putting O'Brien's stake at US$1.87 billion, of which he will reinvest between US$1 billion and US$1.1 billion into the new Digicel Group.
The transaction is similar to a private equity deal, in that O'Brien has substantially increased his stake in the business at the price of higher leverage.
Responding to whether Digicel had considered doing an initial public offering, Delves confirmed officially for the first time that the telecoms had.
"We considered all the options, including a potential initial public offering (IPO). However, the potential upside in the business given our growth trajectory led us to draw the conclusion that it was more appropriate to maximise his ownership in the business than dilute it and an IPO would clearly have diluted it."
Another reason to go the debt route was the "plentiful liquidity in the international debt market. We were very pleased with the overall pricing achieved on the bonds."
Digicel has experienced fast revenue growth to date, with fiscal year revenues at March 2007 expected to exceed the psychologically important US$1 billion mark - it's currently at US$475.8 million for the first six months ending September 30 - compared with less than one third of that full year figure at the end of March 2004.
Said Delves: "Most existing markets are growing at double digit rates."
However, according to its offering memorandum, Digicel's losses inthe six months ended September 30, 2006 increased substantially to US$105 million compared with near breakeven in the comparable period of September 2005.
Delves advised that the losses were specifically a function of the upfront cost in building such a high level of subscribers in such a short period of time in Haiti and Trinidad.
He added that it was Digicel's policy to invest up front more heavily than most telcos to get out of the red as quickly as possible.
The company still has a lot of growth ahead of it, said Delve "not so much in Jamaica, where Digicel already has a large market share and the market is highly penetrated."
Near term, he sees the main growth opportunities as Haiti, Guyana, Suriname and El Salvador.
MARKET GROWTH
In response to a question as to whether the acquisition of the number four player in El Salvador was a good idea when it was normally the top two companies in a market that made the money, Delves noted that since the acquisition on October 2, they were up 40 per cent in the number of subscribers - even without the planned relaunching of the network ? purely on the back of the introduction of new phones and marketing.
Digicel has more than doubled its subscribers in Guyana since the February 14 launch, literally painting the town red as in Haiti, with 15,000 people attending their free concert.
The Guyanese president had used the opportunity to signal that Guyana was "open for business." Digicel's business was boosted by a decision to abolish duty on phones.
In Haiti, the company is already number one with over one million customers in only eight months, a number which Delves believes Digicel can double in the coming year.
Despite Haiti's poverty, its average revenue per customer (ARPU) a key metric, was actually slightly higher than anticipated for Haiti, reflecting the unrecorded purchasing power of Haiti's largely cash economy and the impact of remittances which Delves estimates to be at Jamaican levels.
Accepting that Trinidad had been a tougher proposition, Delves noted that he was looking forward to interconnection there.
"True liberalisation of their market will only come to fruition once there is an appropriate interconnection agreement in place similar to all the other countries in the Caribbean," he said.
"This generally requires active intervention by the Government".
BOND OFFERING
The investors who purchased Digicel's debt came from a wider geographical area than its last issue, split 65 per cent from North America, 30 per cent from the U.K and Europe, and for the first time 3.0 per cent from Asia.
As with its previous bond issue in 2006, Digicel targeted both emerging market and high yield investors, for a combined total of 300 accounts.
According to Delves, the investors were impressed with Digicel's growth rate. Apart from the usual questions about Digicel's future growth and the competition, the investors appeared intrigued by Jamaica and Digicel's success there, and even more intrigued by Digicel's new Haitian business, which the telco believes could surpass Jamaica in terms of sales.
The issue was oversubscribed five-fold, with the result that many investors were cut back severely in the amount of bonds allocated to them. To Delves, this was a sign that "The market oversubscription signifies their belief and confidence in the overall strategy."
Referring to the fact that many investors have had a long track record with Digicel founder Denis O'Brien, having also successfully invested in the Irish telecom group ESAT, of which O'Brien was also the founder in 1991, Delves said: "We are experienced bond issuers, with Digicel's predecessor ESAT issuing debt since 1996, and have never failed to meet our promises. Denis has a huge amount of credibility and a very loyal following based on consistent delivery both at ESAT and subsequently Digicel."
keithcollister@cwjamaica.com
