OPERATOR SERIES: Can Digicel survive its debt storm?

By
Monday, March 13, 2017

The rise of Irish-owned mobile operator Digicel in the Caribbean and Central America during the first decade of the century was nothing short of remarkable.

Founded in Jamaica in April 2001 by Irish businessman Denis O'Brien (pictured), Digicel arrived at the right place and at the right time – the beginning of the mobile telephony revolution in Latin America. Small nations, such as Haiti, badly needed competition, but attracted little or no interest from big telecom players.

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Building on his experience of creating Esat Telecom Group in 1991 to compete against the former state-owned telephone company in Ireland, O'Brien took on UK-owned Cable & Wireless (CWC), which had a monopoly in many markets and whose presence in the British colonies of the Caribbean dated back to the 1880s.

Digicel was quicker and smarter than its rival in understanding what consumers needed, and imported the freshest commercial ideas from Europe such as rollover minutes and a strong focus on customer service. It quickly established itself as the dominant mobile operator in the Caribbean.

The 2000s were spent mainly expanding throughout the Caribbean, Central America and into the small northern nations of South America – Suriname and Guyana – as well as repeating the same model in tiny, remote Pacific Island nations like Fiji, Samoa and Tonga.

With consolidation mostly done, Digicel has spent the last number of years diversifying its consumer offerings with Digicel Play – home entertainment bundles of pay TV and broadband built up through the acquisitions of cable companies – and Digicel Play Go, an online live streaming service offering sports and TV programs from a mobile device. The company has also built out a competitive corporate IT business.

Today, after investing a total of US$5bn, Digicel has 14mn subscribers in 31 markets, of which 30 have 4G and 13 hav LTE. Pay TV is available in nine markets.

Digicel's Caribbean and Central American footprint (Credit: Digicel)

NOT ALL SO HUNKY DORY

But after years of seemingly unassailable growth, Digicel's financials are not looking so rosy. The company faces a combination of high debt and currency fluctuation, as well as a marked change in consumer behavior that will require major investments in networks over the coming years.

In October, 2015, O'Brien, now chairman of Digicel Group, cancelled plans for an IPO on the NYSE to raise 1.7bn euros (US$2bn) to reduce debt, saying investors were not prepared to pay what the company was worth.

As a private company, Digicel does not publish numbers, but different ratings agencies have put Digicel's debt at over 6bn euros, more than six times its Ebitda, which has reportedly been in decline for three years. Part of the challenge is paying off dollar-denominated debt in depreciating currencies such as those of Jamaica, Haiti and Papua New Guinea.

According to Barclays, quarterly revenue for the July-September period fell 6% to US$650mn, while Ebitda rose 1% to US$285mn.

Voice calls account for more than half of Digicel's income, which is falling fast in line with the rest of the industry, while income from broadband is not growing fast enough to offset it, according to comments made by CreditSights debt analyst Michael Chakardjian to bond investors in December.

Meanwhile, what started as a cost-cutting program called 'Project Swan' became what was announced in February as 'Digicel 2030,' a major transformation strategy and redesign of organizational structure.

This will result in an approximate 25% reduction of the global workforce (some 1,500 jobs to be lost from the approximately 6,500 permanent workforce) over the next 18 months; the first step in the process was a voluntary buyout program that started on March 1.

The company also announced a partnership with ZTE for a multi-year network upgrade program.

Telcos worldwide are at the same crossroads. Digital transformation is upon us and the pressure is on to become more nimble in adapting to increasingly digital savvy customer demands and to compete against, or work with, over-the-top players, whose costs are a fraction of those of network operators.

Digicel 2030 will create two hubs for the Caribbean and Central American regions, and two for the Pacific region, and will handle the group's billing, payroll and administration, while freeing up staff on the ground to focus on sales.

In a statement, CEO Colm Delves said the company is "taking the bull by the horns and daring to be different by challenging the status quo and by innovation-led growth."

Digicel says it will take a "digital first" approach, giving customers more contact and self-care options through multiple digital channels like live chat.

Many telcos are going down this path. Telefónica went a step further, announcing in February the launch of what it called a fourth platform, dubbed AURA, which allows users to manage their data and digital experiences with the operator based on cognitive computing.

The other keystone to Digicel 2030 is network upgrades. Over the last three years Digicel has invested US$1.65bn in rolling out fiber to the home and 4G LTE connectivity.

SPEED IS OF THE ESSENCE

To emphasize its focus on speed, Digicel launched a marketing gimmick last year naming the world's fastest man, Jamaica's Usain Bolt, as its 'chief speed officer.'

PR stunts aside, the company is testing fiber to the home technology in several markets. Some US$100mn have been invested in an FTTH rollout in Jamaica and speeds of 10,000Mbps were tested in 2016 with XG-PON technology from Huawei.

In March 2016, Digicel said it was investing US$389mn in FTTH deployments in Barbados and Trinidad and Tobago, and in September it tested 100Gbps in Barbados.

In terms of 4G LTE, the Caribbean and Central America have in general been slower to roll out the technology than their South American counterparts. This has been in part due to the size and maturity of the markets but also to the slowness of regulators to award spectrum. Indeed, Digicel only launched LTE in its flagship market of Jamaica last June. LTE was launched in the British Virgin Islands in January this year.

Elsewhere, spectrum has been awarded and is pending infrastructure rollouts in the French overseas territories of Guadeloupe, French Guiana, Martinique, Saint Barthélemy and Saint Martin, as well as in Bermuda and El Salvador (the latter due to occur in the next three-to-four months with an investment of US$450mn).

While 4G rollouts are still in progress, the partnership with ZTE will also have preparation of networks for 5G in mind, given that technology is now on the horizon.

COMPETITION

On its backfoot since Digicel's entry into the Caribbean market in the early aughts, the fortunes of main regional rival CWC appear to be turning, following its US$7.4bn acquisition last May by European TV and telecoms giant Liberty Global. (See BNamericas' Operator Series Could Liberty forge a path to US-LatAm mobile synergies?)

CWC had already strengthened its competitive position considerably through the acquisition of Colombus Communications, which gave it an enhanced submarine network plus its pay TV service unit Flow.

CWC's position in the home entertainment space can only get stronger with Liberty Global's financial backing and its experience in pay TV and streaming TV services, like its Prime offering in Europe.

CWC is also a serious competitor to Digicel in the area of corporate IT services. In this growing business area, Digicel has a number of Tier III data centers in countries including Trinidad & Tobago, Jamaica and El Salvador. The company offers managed network services connecting to 150 countries and across 23 of its 26 Caribbean markets.

Digicel has also sought infrastructure autonomy through the acquisition of the Caribbean Fiber Network in 2014 – a 3,100km fiber optic cable network connecting 12 countries, from Trinidad and Tobago to Puerto Rico, and on to the US.

Digicel is also tinkering with other ideas like mobile payment services, available in partnership with Scotiabank in Haiti since 2010 and in Jamaica since 2015 following the acquisitions of financial transaction processing services companies Prism Holdings and Paymaster.

The ship may now be headed in the right direction, but whether it can get to port before it runs out of steam is another question.