On Thursday, in this space, the issue of the place of local, and by extension regional, investors in the future of the regional telecommunications industry was raised. By my calculation, when you add the Caribbean revenues of Digicel, CWC and Columbus together, the regional telecommunications industry generates revenues estimated at about US$5 billion. And about US$1.5 billion is a fair estimate of the EBITDA (earnings before interest, taxation, depreciation and amortisation) generated in the Caribbean by the telecom sector. The dividend income paid to the shareholders of the big three telecom operators in the region in the current financial year is likely to be between US$800 and US$900 million. That’s because CWC will pay its shareholders US$106.6 million in dividends, while Digicel executive chairman Denis O’Brien, who owns about 94 per cent of the private group, has already paid himself a US$650 million dividend.
Given the inevitable recovery of regional economies, the easily predictable further consolidation of the Caribbean’s telecom sector, the rollout out of enhanced mobile data (known as LTE, the 700 MHz spectrum) and the convergence of fixed and mobile offerings, it is almost guaranteed that the sector will be much more profitable in the future than it has been in the past.
While this space would be the last to question owners of companies getting decent returns on their investment, the question is: How can regional investors benefit from this avalanche of dividend income that will start flowing out of the Caribbean next year? Generally, the only way that regional investors will be able to benefit from increasingly profitable regional telecom companies is by directly owning shares in those companies.
Option I
That’s why it was argued on Thursday that the best policy option for the T&T Cabinet would be to swap National Enterprise Ltd (NEL’s) 51 per cent stake in TSTT for a stake in CWC.
The advantage of this option is that it would allow T&T’s institutional and individual investors to own a significant percentage of a company (CWC/Columbus/TSTT) that will distribute US$ dividend cheques twice a year and which is expected to be significantly more profitable in the future than the three companies operating separately. This is because of the US$700 million in synergies that CWC CEO Phil Bentley spoke about at the analyst meeting in London two Thursdays ago. Swapping 51 per cent of TSTT for a stake in the enlarged CWC would mean that TSTT becomes 100 per cent owned by CWC, but NEL would have a stake in CWC, estimated at around 15 per cent, and directors on the CWC board. In effect, the T&T Government would be giving up management control and majority ownership of TSTT for enhanced dividends, board influence and a minority ownership stake in CWC.
Competitive environment
In T&T, initially CWC/Columbus/TSTT combination would be the leader in fixed broadband, the leader in cable, the leader in landline and second to Digicel in mobile. But the point needs to be made that if the transaction goes forward without the TSTT swap, CWC/Columbus would initially dominate the fixed broadband and cable television markets in T&T anyway. Initially, Digicel would maintain its leadership in mobile voice and data and TSTT in landline. But Digicel has applied for a subscription television licence in T&T and recently commenced a significant investment in fibre-to-business, which is expected to be quickly followed by fibre-to-homes in high-income neighbourhoods. Therefore, the initial lead of the combined entity (CWC/Columbus/TSTT) in television could be short lived. And the lead in fixed broadband will end as soon as Digicel is able to rollout its fibre-to-homes offering.
But T&T subscription television market is already quite competitive with DirecTV offering satellite television and Green Dot offering digital cable television. As for the more lucrative part of the broadband market—which targets the business sector—that is expected to remain competitive given T&T’s other corporate broadband providers such as Green Dot (which provides both digital cable television and fixed broadband to homes), Lisa Communications (which provides Voice over IP, fixed broadband and security services to businesses) and Massy Communications (voice and fixed broadband to business clients). The only service that the combined entity may have market dominance in is the fixed-broadband-to-the-home market. But that dominance would soon be moot, given the imminence of the grant of two LTE licences—which would allow mobile broadband to subscribers and provide them with a real option to fixed broadband.
$1.8 billion bond issue
The other aspect of TSTT’s future is its $1.8 billion bond issue on the local capital market that is meant to fund about 45 per cent of the company’s $4 billion capital expenditure programme to 2018 as well as its employee separation plans. These plans were blessed by both GORTT and CWC as TSTT’s joint shareholders. In terms of TSTT's leverage ratios, its profitability and ability to cover principal and interest payments with its cash flows well into the future, the TSTT bond is a safe bet as its numbers are strong—especially compared to other local and regional issuers. There is significant interest in the $1.8 billion bond transaction by investors because of TSTT’s low current leverage, its ability to service its existing $1 billion 2005 bond in a competitive environment and its projected cash flows in such an environment.
What happens if either CWC or Columbus is granted one of the two LTE licences that the Telecommunications Authority (TATT) tendered earlier this year? Because CWC/Columbus requires TSTT’s cell towers and other aspects of telecom infrastructure to be able to rollout the LTE network in T&T in the 18-month timeframe set by TATT, there is absolutely no doubt in my mind that LTE could be a significant windfall for TSTT...whether it gets a 4G licence or not. It behooves Cabinet to facilitate TSTT closing its bond Issue via statements of support as this will ensure that the business plans for the company are in place. The expected revenue windfall to TSTT from the rollout of LTE by CWC/Columbus makes NEL's 51 per cent stake in TSTT even more valuable, and this improved valuation would help NEL to increase the number of CWC shares it acquires in a swap for CWC shares. But some local institutional and high net worth investors may be awaiting more information on the settlement of plans for TSTT’s future ownership before committing to the bond issue.
Option II
Most people agree that the option that the Government may find to be most low-risk politically would be for NEL to acquire the 49 per cent of TSTT from CWC. This appears to be the low-risk choice because the Government probably envisions that the representative trade union at TSTT would resist ownership of the company by CWC. Prime Minister Kamla Persad-Bissessar may believe that it would be politically challenging for the government to be seen to be giving up control of an important company so close to an election. But, given the history of incompetence, political interference and under investment by Telco (TSTT's 100 per cent state-owned predecessor) the argument can be made that NEL (or GORTT) buying 49 per cent of TSTT from CWC is neither good business or good politics.
This is particularly true because TSTT has not as yet closed the $1.8 billion bond meantioned earlier. If NEL purchases the 49 per cent stake from CWC, and local fixed-income investors are turned off by the prospect of a return to the bad old days of Telco, NEL may have to find about US$200 million (TT$1.3 billion) to pay CWC for the 49 per cent stake in TSTT and $1.8 billion to fund 100-per cent state-owned TSTT’s retrenchment and capital expenditure programmes. The Prime Minister and her Minister of Finance should consider trying to sell a $3.1 billion "TSTT bailout" on political platforms in the run up to the general election—or to NEL shareholders, who include the Corporation Sole with 66 per cent, NGC with 17 per cent and T&T’s individual and institutional investors with 17 per cent.
NEL acquiring CWC’s 49 per cent may seem like the most politically palatable option but it makes no commercial sense. It may also doom TSTT to years of 100 per cent state ownership as no foreign telecom operator is going to want to partner with TSTT in the future as the prospect of organic growth in the Caribbean has been closed off by the CWC acquisition of Columbus.—and
Is buying 49 per cent stake in TSTT a trap and will Cabinet fall for that chain up?
Digicel responds
Digicel has no fear of competing with anyone. However, what we must insist on is the ability to compete on a level playing field. It is clear that the proposed merger is going to lead to a very significant concentration and the lessening of competition in certain key markets. Digicel’s concern is that the proposed transaction is not rushed through simply because CWC and Columbus unilaterally fix deadlines and seek to impose them across the region. It is not for Columbus or LIME to say when TATT (or any other agency should complete its work)- this is the tail wagging the dog. All Digicel is seeking is the transaction, and its attendant impact on the market, is subjected to a proper rigorous assessment.
There is a real risk that this merged entity will seek to strangle vibrant competition and corner the market such that it reverts to a monopolistic environment. These concerns can only be properly addressed through a comprehensive review process which is conducted in an open, transparent way. A rushed process or a botched process could result in an unassailable advantage being granted to the merged entity which would might never be remedied through legislative or regulatory intervention down the line. TATT needs to conduct this process in accordance with international best practice; not in accordance with CWC’s / Columbus’ impertinent demands.