Home' Trinidad and Tobago Guardian : November 13th 2014 Contents NOVEMBER 2014 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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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
Some of the financial rationale that would
have driven the acquisition include the fol-
For the six-month period ending September
30, 2014, CWC declared earnings before inter-
est, 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
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 expec-
tation that the combined and enlarged CWC
would generate substantial incremental EBIT-
DA.And that is not even considering the as-yet
unquantified revenue synergies that the new
CWC would derive from being able to sell bun-
dled 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
And it is clear that most of the revenues
and profits that CWC generates come from
During the six-month period ending Sep-
tember 30, 2014, CWC generated US$848 mil-
lion 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 Net-
works---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 com-
petitor, 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 telecommu-
nications, but the profits from those invest-
ments are enjoyed by people outside of the
Caribbean people benefit from these invest-
ments 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 lucra-
So Caribbean people generate the profits,
but non-Caribbean people enjoy those prof-
its.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 lever-
aging its majority ownership of TSTT to gain
an ownership stake in CWC.
Here are some future ownership options:
• 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 insti-
tutions 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
• 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
• 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
• 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-con-
tent-to-mobile-devices and other endeavours.
This has the disadvantage of a 100 per cent
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.
Can Caribbean investors
benefit from mega merger?
Phil Bentley, CEO Cable & Wireless
Denis O'Brien, Executive Director of Digicel
Group of Companies
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