Denis O’Brien’s Digicel Group, a leading provider of mobile services in the Caribbean and Papua New Guinea with 14 million subscribers, has pulled its planned sale of new shares on Wall Street.

The company was hoping to sell up to 143 million Digicel shares. Digicel's registration document signalled a maximum offering price per share of $16. At that level the company would have grossed $2.3 billion, though company filings suggest that the company's expectation was $1.7 billion net.

Investors weren’t prepared to pay $16 a share, with reports indicating that share purchasers thought $9 to $11 was a fair price for the stock. A $10 price point would have raised $1.4bn for Digicel, far short of expectations.

The issue would have been the year's largest IPO on Wall Street and J.P. Morgan, UBS Investment Bank, Citi, Barclays, Credit Suisse and Deutsche Bank were set to be the joint bookrunners on the deal.

Fair Value

Digicel chairman Denis O’Brien said that “despite significant support for the IPO from a high quality group of investors during the marketing period, current conditions, particularly in emerging markets, have impacted transaction momentum over recent days.”

In Association with

O’Brien added: “Given our growth outlook, an IPO for Digicel was optional and predicated on achieving fair value for the company. Recent volatility in equity markets has seen a number of IPOs listing at a discount to their signalled price range and this was a less attractive route for us.

“Digicel is now at a key juncture in our growth story following a $1.5 billion investment programme over the past three years; we generate strong and growing free cash flow and we have no material debt maturities until 2021.

“Our growth plans remain unchanged and we remain in a strong position to exploit areas of interest in data, business solutions, cable TV and broadband.”

Net Liabilities

Digicel’s total liabilities exceeded its total assets as at June 30, 2015 by $3.0 billion. The company booked a net loss of $158m for the year ended March 31, 2015 and a net loss of $31m for the three months ended June 30, 2015.

In the year to end March 2015, Digicel reported operating profit of $708m and net cash from operating activities of $433m. The group generated Adjusted EBITDA of $1.2 billion and adjusted operating free cash flow of $814m for the same period.

In the quarter to end June 2015, Adjusted EBITDA was $278m and adjusted operating free cash flow was $188m. Adjusted EBITDA, operating free cash flow and adjusted operating free cash flow are non-IFRS financial measures are not recognized measures of financial performance or liquidity under IFRS, as issued by the IASB.

Debt Burden

Digicel’s total debt is $6.45 billion and the aim of the IPO was to reduce the debt burden. In the P&L for the June 2015 quarter, the company had to pay interest costs of $130m from  operating profit of $165m. Operating profit in the June 2015 quarter was down 11% on the previous year.

Absent proceeds from the proposed IPO, Digicel may have to rein in its investment plans. In the three months period April to June 2015, Digicel's net cash provided by operating activities was $69m. In the period, the company splurged $258m on investing activities such as capital expenditure. Net cash at end June 2015 was $313m, down from $788m a year earlier.

Ex-Growth

The core business of mobile phone services has gone ex-growth, with revenue in the June 2015 quarter down 6% year-on-year. The company has been endeavouring to develop new revenue streams such as business solutions, cable TV and broadband. Turnover from these sources has doubled over the past year though they only account for 11% of group revenue.

Pre-IPO filings indicated that had the IPO been successful, Digicel Group's deficit would have been reduced from $3 billion to $1.3 billion. Going forward, the group now faces the challenge of refinancing existing bond debt with new bond debt that will likely carry higher interest rate coupons. And as the gap between operating profit and finance costs narrows, the higher those interest coupons will be.

Last weekend, Digicel sold its 75% stake in a mobile tower operation in Myanmar. The transaction valued the venture at $221m.

According to a Bloomberg report, Digicel was close to the limit of how much it can borrow under the terms of its bonds, after dividend payments to O’Brien and a slump in the Jamaican dollar hurt the company’s earnings.

Bloomberg's view is that the company is prevented issuing more debt if total debt climbs above six times its earnings before interest, tax, depreciation and amortization, according to company documents and interviews with analysts. The ratio was 5.4 times at the end of March. Yields on Digicel’s 2022 bonds have risen to 9.88 percent from 6.37 percent a year ago, Bloomberg reported.