It is clear that there is an expectation that the proposed acquisition of the Columbus group by Cable & Wireless Communications (CWC) will be of greater benefit to the shareholders of CWC and the Columbus group than if the two companies had remained separate.The proof that the combined entity should be more profitable can be distilled from the fact that Columbus' three main sellers (founders John Risley and Brendan Paddick and cable tycoon John Malone) spurned an all-cash offer from Digicel, opting instead to take a 36 per cent stake in the combined entity.No savvy investor–and all three of the Columbus investors are clearly very shrewd men–declines an offer of cash in favour of shares in an enterprise they are selling unless they are pretty sure that the return on their investment from shares will be much greater than any new investment bought with the cash.
Some of the financial rationale that would have driven the acquisition include the following:For the six-month period ending September 30, 2014, CWC declared earnings before interest, taxation, depreciation and amortisation (EBITDA) of US$277 million with growth of five per cent. On the Columbus side, for the six months ending June 30, 2014, the company that we in T&T know as Flow, reported EBITDA of US$118 million with growth of 16 per cent.According to the 59-page CWC-Columbus transaction announcement dated November 6, Columbus acquired a cable company in Colombia that has subsidiaries in Costa Rica and Panama for US$146 million. That company is expected to add US$17 million of EBITDA to Columbus, which was experiencing EBITDA growth of 16 per cent before accounting for the acquisition.So by my estimate, the combined company could have a 2015 pro forma EBITDA of US$895 million–with US$582 million coming from CWC and US$313 million from Columbus–and that is before the substantial synergies (also known as savings) that the companies expect to derive from the combination.
The expectation is that those operating and capital expenditure synergies (net present value) will amount to US$700 million in the first three years following the close of the transaction and that "the enlarged group will benefit from approximately 45 per cent of these synergies by end of year one." Forty-five per cent of US$700 million is US$315 million.The cost of generating the synergies is expected to be about US$49.5 million in the first year, which means that there is an expectation that the combined and enlarged CWC would generate substantial incremental EBITDA.And that is not even considering the as-yet unquantified revenue synergies that the new CWC would derive from being able to sell bundled phone packages from Flow retail stores and bundled cable packages from LIME stores.
Not to mention the craziness of being able to watch Flow content on your Samsung or Apple smartphone anywhere, anytime, and being able to pay one flat-rate bill for that privilege. Caribbean people would love that–although it is clear that regional employers will not.And it is clear that most of the revenues and profits that CWC generates come from the Caribbean.During the six-month period ending September 30, 2014, CWC generated US$848 million in revenues from its operations throughout the Caribbean, in Panama and in the Seychelles. Of that amount, some 74 per cent of CWC's revenues came from its Caribbean operations: US$344 million from LIME; US$171 million from the Bahamas and US$112 million from CWC's 49 per cent stake in TSTT.CWC generated US$152 million in operating profit before joint ventures and exceptional items (which excludes TSTT) for the first six months of its 2015 financial year, of which 63 per cent came from the Caribbean.
Most of Columbus' revenue and profits come from the Caribbean.
Some 57 per cent of its EBITDA for the period January to June 2014, came from Flow with the balance coming from Columbus Networks–which is a wholesale provider of advanced� high�speed bandwidth capacity, IP services, data centre facilities and business solutions mostly corporate clients–some of which would be derived from Caribbean clients.It seems clear to me that, if the transaction is successful, the enlarged CWC will continue to generate a majority of its revenue and profits from the Caribbean.A significant percentage of any after-tax profits generated by the enlarged CWC will be distributed to the company's shareholders, especially to the three principal shareholders of Columbus–John Risley, an entity owned by cable tycoon John Malone and Brendan Paddick–who will own 36 per cent of CWC if the transaction is consummated.
Very few of the shareholders who will benefit from the profits to be generated by the enlarged CWC in the future are Caribbean individuals or institutions. Those shareholders mostly reside in England, Canada and the US.Similarly, with regard to CWC's main competitor, most of Digicel's profits from its operations in the Caribbean go mainly to Denis O'Brien, that company's dominant shareholder.In other words, for both CWC/Columbus and Digicel, the Caribbean is a place to derive profits from their investments in telecommunications, but the profits from those investments are enjoyed by people outside of the Caribbean.
Caribbean people benefit from these investments by having mobile phones that work and access to broadband Internet, either in their homes and offices or on their mobile devices. Caribbean people also benefit by being able to work for Mr Digicel or Mr CWC.But, in terms of participating in ownership in–and thereby receiving dividends and capital gains from–these telecom companies, very few Caribbean investors are beneficiaries.And this is potentially an existential threat to the Caribbean as it will mean the repatriation of billions of US dollars to pay dividends to the shareholders of CWC and Digicel in the future as the sector becomes even more lucrative.So Caribbean people generate the profits, but non-Caribbean people enjoy those profits.
Fortunately for T&T, the Government has a unique opportunity to flip the script–on this centuries-old scenario of non-Caribbean people enjoying Caribbean-derived profits–by leveraging its majority ownership of TSTT to gain an ownership stake in CWC.
Here are some future ownership options
�2 Cabinet could approve the swap of NEL's 51 per cent stake in TSTT for a stake in CWC. By my calculation, the majority stake in TSTT should be worth at least 15 per cent of CWC. CWC lists on the T&T Stock Exchange (either the holding company or the T&T subsidiary), which would allow T&T individuals and institutions to participate directly in the future profits of the company. The listing of CWC on the T&T Stock Market could easily be made a condition precedent of Cabinet approving the transaction
�2 Cabinet could approve an initial public offering (IPO) in which both NEL and CWC are encouraged to sell down their respective stakes. CWC would be encouraged to sell nine per cent and NEL 51 per cent into the IPO so that the individuals and institutions of T&T would own 60 per cent of the new company and the enlarged CWC 40 per cent. This would allow T&T's individual and institutional investors to participate in the future profits of the T&T subsidiary
�2 The more obvious option would be for NEL to buy the 49 per cent stake in TSTT that CWC would be obliged to sell to ensure that the transaction is not postponed by an anti-competition injunction filed by Digicel. This has the disadvantage of making TSTT 100 per cent owned by NEL and therefore subject to unadulterated political interference in the operations of the local telecom provider. Such a scenario would reduce TSTT's flexibility and ensure that the local company is hamstrung in competing head-to-head with both Digicel and CWC
�2 Another possible option would be for the NEL to buy the 49 per cent of TSTT and for the local company to become a partner with CWC in the roll-out of LTE and cable-content-to-mobile-devices and other endeavours. This has the disadvantage of a 100 per cent state-owned TSTT
My preferred option would be number 1 as that would align the future interests of CWC with the financial interests of T&T's individual and institutional investors, thereby, perhaps, encouraging Digicel's Denis O'Brien to consider a divestment of his own.On March 22, 2012, and April 12, 2012, in this space, I wrote two commentaries headlined Will Cable & Wireless sell its stake in TSTT and Should NEL buy Cable & Wireless both of which reflected on the possibility of T&T's individual and institutional investors owning a stake in CWC.