Denis O’Brien sells his ‘Shelly-Ann’ vision to Digicel investors

In a detailed on-camera presentation to potential investors this month, a sharp-suited Denis O'Brien laid out his plans for Digicel, which which looks set to pull the trigger on a near $2 billion flotation by October 7th.

In between folksy references to “shedloads” of cash and “cracker” business opportunities, he described Digicel’s efforts to transform itself from a mobile player to a broad-based telco with fixed-line, cable television and media interests.

“Our goal is to earn every dollar the consumer spends on communications” in its 31 Pacific and Caribbean markets, he said, using a fictional example.

O’Brien called her Shelly-Ann.

“Shelly-Ann wakes herself up using her Digicel handset,” he said. “She goes onto her news app, Loop (which is owned by Digicel).”

On the bus to work, Shelly-Ann checks Facebook and consumes data on Digicel's network.

At her office, Digicel provides the broadband and the cloud computing facilities.

“Shelly-Ann goes home from work, and on the way she makes a few calls and maybe texts her boyfriend,” said O’Brien.

“And when she gets home, she puts on cable television – Digicel Play.”

Digicel, O’Brien said, wants “13.6 million Shelly-Anns” across the region. This is the growth vision the billionaire is pitching to investors, although most of the cash raised in the initial public offering (IPO) will actually be used to pay down debt.

On Tuesday, Digicel set a price range for its flotation, which could raise up to $2.3 billion, although the company based its projections on raising $1.8 billion.

About $1.3 billion of it will go towards defraying its enormous $6.5 billion debt pile.

The rest is being lined up to fund at least 15 potential acquisitions for which Colm Delves, Digicel's chief executive, said the company is the "preferred bidder".

The deal will value Digicel at about $10 billion, including its debt. O’Brien’s estimated 60 per cent stake, which will give him 94 per cent control of the voting rights, will be worth close to $3 billion.

O’Brien, who has taken $1.1 billion in dividends in the past three years, has told investors he will not take any of the flotation proceeds in dividends.

The offer documents, however, clearly disclose the upside for his company Island Capital.

Market opportunity

Island will take 0.5 per cent of the flotation proceeds in an advisory fee. Island is also due to get a 0.5 per cent fee on Digicel debt paydowns and on acquisitions, suggesting O’Brien could effectively earn a total of close to $20 million.

Given his total control of the business, investors must place their trust in the abilities of O’Brien, Ireland’s most successful businessman, to maximise the market opportunity.

"Investors are being asked to buy in to what O'Brien has historically done, which is to grow the business," said David Holohan, the head of research at Merrion Capital.

Holohan said the challenge for Digicel would be to grow revenues and profits, on the back of its $1.5 billion of network investment and acquisitions in the last three years.

Digicel’s revenues have flatlined at about $2.8 billion, although it is still growing when the effect of the strengthening dollar is stripped out.

The company has told potential investors that its investments will soon see it return to strong topline and bottom-line growth.

Holohan said the strengthening dollar was a “fact of life” it must deal with. Much of Digicel’s revenues are in weaker currencies, such as Haitian gourde, which are weakening against the dollar by up to 8 per cent a year recently.

That makes it relatively more expensive for Digicel to pay its dollar-denominated debt.

The recent decision of the US Federal Reserve to delay an interest rate rise, which would strengthen the dollar further, has "bought Digicel some time", Holohan says.

“Maybe that’s why they have chosen to IPO it now, before a rate rise kicks in.”

Currency risk aside, Digicel must deliver on its growth plan.

In the presentation recorded for investors, O'Brien, chief executive Colm Delves and chief financial officer Laurence Hickey were all bullish about Digicel's prospects as a total telecommunications and media provider.

However, Steven Hartley, principal telecoms analyst at Ovum, believes the company is in a "sticky situation".

All the mobile “easy pickings” are gone, he says, and geographically it has nowhere left to go to drive growth.

“It has to play more in the markets it is already in. It has no choice, it has to go down this route. But it is going to be an expensive business,” said Hartley.

Expensive

Apart from its entry into business markets and selling customers high-speed fibre services, a central plank of Digicel’s strategy is to acquire “content”, such as sports and television programming, to deliver to its customers.

It runs the Caribbean Premier League cricket competition, for example.

"Buying content is an expensive pastime," says Hartley. Investors, like Mexican mogul Carlos Slim, can buy content with deals for rights across his vast network, but Digicel is of a much smaller scale, the analyst argues.

“It has to set up its ability to acquire these rights from scratch. It is in a sticky situation.”

He said there may also be opportunities for Digicel to drive revenue by opening up its network capacity to other telco operators.

“There are no easy options left. It needs high-spending customers and this could damage its everyman image.

“Its competitors will be ready for it this time. I’m confident Digicel will have no problem finding ways to spend its money.”

O’Brien, meanwhile, is pinning his hopes on Shelly-Ann. By October 7th, we should know if investors have also bought into his vision.