Mobile/cellular communications giant, Digicel, is in dire financial straits, and recently filed for bankruptcy. How did the company, which has a presence in nearly 30 countries worldwide, get to this point?

 

If you had scanned through the weekly roundup of Caribbean ICT/technology news, which was published on Monday, 25 May, you would have noted several reports on Digicel, and the fact that it filed for bankruptcy in the United States (US). The company is said to be in debt to the tune of USD 7.4 billion as at the end of the third quarter of 2019. Moreover, an additional USD 1 billion in debt is due to mature in 2021, and another USD 4 billion by 2024.

To that end, the company has sought Chapter 15 recognition in a federal bankruptcy court in the Southern District of New York, in the US. In the filing, provisional liquidators from KPMG were appointed, who will be overseeing the already agreed debt reduction initiatives. One of the items on the agenda is a refinancing scheme that is expected to reduce the debt by USD 1.7 billion. Further, and effective from May and expected to last until April 2021, the company has asked its employees to take a temporary salary reduction, due to the financial losses caused by COVID-19.

To those who had been paying attention, Digicel’s current financial hardships would not have been a surprise. The current predicament was predicted from as early as 2009, and is likely to continue well into the foreseeable future. But how did the company get here?

 

Rapid expansion with other people’s money

Within the Caribbean region, we must credit Digicel as being an important impetus for the low-cost and nearly ubiquitous mobile/cellular service that we currently enjoy. The rivalry that it has had with Cable & Wireless (then LIME, and now Flow), has resulted in both companies being aggressive in their promotions and in the service plans they offer. However, in less than 10 years, starting in 2001, Digicel established a presence in nearly 30 countries worldwide. In some instances, existing operations were acquired, but inthe majority of cases, networks had to be built from scratch.

The infrastructure works would have been expensive, as many of the countries are small, with challenging terrain, and in some instances, were multi-island states. For acquisitions, extensive upgrades may have been necessary; hence in addition to financing the sale, there would have been a sizeable investment in the infrastructure and the business.

In order to sustain that rapid rate expansion, and although the company was highly successful and profitable especially in some of the larger markets in which it established as presence, such as Jamaica and Haiti, the company opted to finance most of its expansion via loans. The company’s operating profits, which totalled hundreds of millions of dollars yearly were paid out as dividends to shareholders. For example, it was reported that between 2012 and 2015, the company paid Digicel Chairman and primary shareholder, Denis O’Brien, “$1.1 billion in dividends. He receives a quarterly payment of $10 million each year. In addition, he was paid special dividends of $650 million in February 2014 and $300 million in June 2012” (Source:  The Irish Times).

 

A one-trick pony?

Initially the premise of Digicel’s business model seemed two-pronged. One, the company would to seek to secure asymmetric mobile interconnection rates with the incumbent telecoms provider, with the latter paying considerably more to terminate calls on Digicel’s networks. Two, the company would roll out as extensive network, offering as much coverage as was feasible, in order to connect those who previously never had access. Hence, when it finally launched operations, it tended to eclipse the incumbent, in terms of customer base, and with highly lucrative interconnection rates, it would have had robust revenue from several streams.

However, very soon, both the regulators and incumbent understood the strategy, and its inherent disadvantages. More importantly, regulatory principles had evolved, and asymmetric rates were no longer supported, and resulted in the loss of a key source of revenue for Digicel – especially since in many countries it ended up having the larger network, and would have to pay out to others.

Further, as we have all seen, over the nearly 20 years Digicel has been in existence, voice-based services have been overtaken by the Internet, and we have witnessed the convergence of voice, data and video services on that single medium.  However, it could be argued that the company has not been as nimble (or as innovative) to evolve with the times, and more importantly, to find ways to bolster revenues as the demand for voice-only services declined.

 

Could the end be near?

With its debts maturing, its cancelled Initial Public Offering on the New York Stock Exchange in 2015, the future for Digicel has looked bleak for several years. However, initial reports are that the current restructuring deal will give the company much-needed breathing room. However, even with the sale of some of its assets, and the continued streamlining of its operations, it not yet clear how the company will get completely out of its current predicament.

At this juncture, Digicel’s operations in the Caribbean region might be among the most valuable in its footprint, as it has put up its Pacific business, which would include its operations in Samoa, Tonga, Fiji, Nauru, Vanuatu and Papua New Guinea, as collateral in its restructuring deal. However, it still remains to be seen whether or not, it might be able to rise from the proverbial ashes intact, or the extent to which it will need to excise parts of the operations in order to save the rest.

 

 

Image credit:  Chris Potter (flickr)

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