Assessing the wealth of any individual is a notoriously difficult operation. Many of the monied classes hold their businesses through offshore corporate structures, a move that limits the amount of publicly available information. Many relocate abroad – some to sunny islands in the Caribbean, others to jurisdictions such as Malta, Gibraltar or Switzerland.

It is easy to assess someone’s holdings in a publicly traded company, but much less so to value a privately owned business or investment portfolios.

Nonetheless, regardless of the metric, Denis O’Brien, the telecoms and media tycoon, has long been regarded as one of country’s richest men. Forbes placed his net wealth at $6.8 billion in 2016, although this has since dropped to $2.9 billion in January of this year.

O’Brien, like many entrepreneurs, has a vast array of interests, straddling different sectors of the economy in different countries. There is no one holding entity gluing it all together. Instead, to get a sense of O’Brien’s wealth and the performance of his businesses, you must look at each on its own merit.

Over the course of a two-part series beginning today, that is what we are attempting to do. We begin with an assessment of his media, telecoms and utilities businesses. All publish financial statements of some sort – some publicly, others to bondholders. Tomorrow, we will assess his property interests, focusing on his sprawling Quinta de Lago resort in Portugal.

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The world has changed radically in recent weeks as a result of Covid-19, and it has had massive implications for many businesses. O’Brien’s businesses have not been immune. His Communicorp media organisation, which owns Newstalk, Today FM, Spin 1038, Spin Southwest and 98FM, has announced pay cuts for staff of up to 25 per cent due to the Covid-19 emergency.

It is understood the pay cuts are intended to be in place for the next three months, with the intention of reinstating pay levels when revenues return. His Carribbean teleco Digicel, meanwhile, will not have to pay interest for a 30-day period on some $2.9 billion of its debt, having elected to “take advantage” of the 30-day grace period permitted under agreements with debt holders – the company will defer making the interest payments on three tranches of its bonds. With borrowings of more than $6.7bn, it is now engaged with some debtholders about possible debt write-downs.

These are not issues confined to just O’Brien. All over the world, companies are pivoting, cost cutting and renegotiating deals as a response to Covid-19.

But as one of the country’s most prominent individuals – both a generous philanthropist and a serial litigant – O’Brien businesses will be watched more closely than most.

So, how is O’Brien’s empire faring in a time of global crisis?

Debt, Denis and Digicel

Digicel, the Caribbean telecoms company, is O’Brien’s trophy asset.

Digicel is one of two companies that control telecoms in the Caribbean. It operates in 31 markets, with the number one position in 25 of them.

He founded Digicel in 2001. With his experience in Irish telecoms, he could see that incumbents in the Caribbean region were overpriced and slow-moving. He quickly established Digicel as a major player there. Now, after 18 years of investment, Digicel’s brand and infrastructure puts it in a dominant position.

Digicel is richly profitable. Last year it made $1.9 billion in revenue and $777 million in Ebitda, a measure of profit, for a 40 per cent Ebitda margin. The average Ebitda margin among listed telecoms companies in the US is 30 per cent. Digicel is so profitable because competition is lax in the Caribbean. There are only two big operators in most markets.

Ebitda stands for earnings before interest, tax, depreciation and amortisation. The idea is that Ebitda shows how much money the core business makes, without taking into account how it’s financed or how much investment goes into it. On an Ebitda basis, on the basis of its underlying business, Digicel is doing fine. But it has problems. Finance and investment costs are dragging it down.

You’ve heard by now that Digicel has been engaged with its lenders. For three years there’s been a queue of stories about credit downgrades, payment deadlines and renegotiations.

It’s a difficult story to follow. The gist is that Digicel owes money to lots of people and it’s trying to juggle those debts in such a way that O’Brien keeps control of the company.

Digicel’s debts have been shifted around, extended, rearranged, and renegotiated. O’Brien has battled back the creditors year after year. Now the coronavirus crisis is putting Digicel under even greater stress, and there are signs that the day of reckoning with creditors may be approaching.

I’ll come to the latest news shortly. But first it’s worth explaining how Digicel got into this position.

Digicel has too much debt. It owes $6.7 billion, which is 7.5 times Ebitda. By comparison its main rival in the Caribbean, Liberty Latin America, owes 4.2 times Ebitda.

As Liberty Latin America demonstrates, it’s normal for telcos to owe a lot of money. Borrowing money is a great way to increase returns to shareholders, particularly when a company has stable cashflows.

Between the decline of phone calls and the currency movements, Digicel’s operating cashflows shrunk from $873 million in 2016 to $736 million in 2019.

The difference is that much of the money borrowed by Digicel was used to fund dividends for Denis O’Brien. According to Bank of America Merrill Lynch, “cash dividends to owner Denis O’Brien, [have] left the company over-levered. Key concerns include the company’s limited liquidity position and its ability to refinance maturities as they come due. In recent years, O’Brien has stopped those hefty dividend payments.

Digicel’s debt’s started out manageable. But in the past three or four years, Digicel encountered two problems.

The first was that customers shifted away from old-fashioned phone calls to data services, which are less profitable. “The company has gotten walloped by the decline in mobile voice”, says Sul Ahmad of Fitch.

The second problem is to do with currency movements. Digicel borrows in dollars but it earns in Caribbean and Pacific currencies. In the last few years the dollar has strengthened against Digicel’s most important currencies, like the Haitian gourde and the Papua New Guinean Kina.

Between the decline of phone calls and the currency movements, Digicel’s operating cashflows shrunk from $873 million in 2016 to $736 million in 2019.

The next issue is capital spending. The telecoms industry is capital intensive, meaning it needs to constantly invest in infrastructure. Since 2016, Digicel has had to spend around $500 million per year on capital expenditure (capex).

Then there’s the debt. As operating cash flow has fallen, and capex has stayed relatively stable, interest payments on the debt haven’t much changed. Digicel paid $465 million in interest in 2019.

The upshot of all this is that operating cash flow has fallen, but investment and debts haven’t much changed. So free cash flow to equity, the money left over after everyone’s been paid, was negative $164 million last year. It’s been negative in five of the previous six years.

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So Digicel has too much debt. Interest payments are impacting the company and it is putting a drain on cash. And $1.3 billion in capital repayments are due in a year’s time, in April 2021.

It’s questionable that Digicel will be able to refinance those loans, since it’s clearly struggling with its debt burden.

Digicel’s strategy has been to create a complex corporate structure in order to push some bondholders “down the queue”, further away from the assets. This means that in the event of a restructuring, they’d be unlikely to receive anything. This in turn weakens their negotiating position and allows Digicel to strong-arm them into accepting better terms.

All of this happened before the coronavirus, the worst cash crunch in 11 years, one which is hitting strong and weak companies alike.

This is what happened for example in December of 2018, when it convinced some bondholders to swap their $2 billion of unsecured (ie, back of the queue) debt which was to mature in 2020 for secured (ie, front of the queue) debt which would mature in 2022. 

This strategy has bought Digicel some time. But in the absence of more cash flowing through the business, it can’t solve the problem.

Money has been leaking out of Digicel, year after year. Now attention is turning to cash. In December it reported it had $126 million — down from $180 million three months earlier. Reorg, a consultancy, has said “investors said they are skeptical Digicel can remain above its minimum cash level… the broader question, they said, is whether the company can raise financing since it is running out of cash.”

All of this happened before the coronavirus, the worst cash crunch in 11 years, one which is hitting strong and weak companies alike.

On Monday, we learned Digicel has invoked a 30-day grace period whereby it won’t pay any interest on $2.9 billion of its debt. Yesterday, Fitch downgraded its debt to C, which means “in or near default, with possibility of recovery”.

And today, we had the moment bond markets have been expecting for years: O’Brien offered 49 per cent of his ownership in the company and $50 million in exchange for a debt write down. If creditors take the deal – a big if – it would knock $1.7 billion off Digicel’s debt.

After years of negotiations, things are coming to a head.

From Siteserv, Actavo emerged

There’s a family resemblance between Digicel and O’Brien’s Irish engineering company, Actavo.

Both companies are financed with a lot of debt. Both companies are having to reorganise. Both have sold off non-core assets in the last two years.

O’Brien led a conglomerate to buy Actavo (then called Siteserv) for €45 million from the Irish Bank Resolution Corporation (formerly Anglo Irish) in 2012. It’s an engineering conglomerate, with business lines in power, telecoms, energy, water, and construction. O’Brien owns 75 per cent of the business.

From 2012 to 2016 Actavo expanded internationally and into new product lines. Its workforce peaked at 6,200 in 2016. But things started to go wrong in 2017, when it took heavy losses on contracts in the UK. At the end of last year it sold its American business, Atlantic Engineering Services (AES), which was bought for €20m in 2017. And by 2018, the most recent accounts available, the number of employees had shrunk to 2,744.

Like Digicel, Actavo is heavily indebted. Debt puts a company in a vulnerable position in the event of a slowdown in the economy. Now we’re facing a serious slowdown — and an idiosyncratic one. This slowdown particularly tests balance sheet strength. The companies with cash will be hoping to wait it out; those without access to cash will be nervous; those without access to cash and heavy debt repayments might not survive.

In a cash crunch a company’s first line of defence is operating cash flows — how much cash comes in the door? In Actavo’s 2018 accounts, the most recent available, Actavo’s operating cash flow ratio was .13, meaning its operating cash flow was 13 per cent of short term liabilities. That’s low. And it’ll get worse when the lockdown causes cash flows to dry up.

So unless things have changed since the end of 2018, it won’t be able to cover bills out of operating cash flow. How much cash did it have in 2018? Cash and other liquid assets are companies’ best buffer through the covid-19 crisis. The quick ratio is a good test here, it shows short term assets over short term liabilities.

Actavo’s cash and accounts receivable summed to 52 per cent of its current liabilities. A number around 1 would be considered safe. A ratio of 1 means short term debts can be paid off using cash and short-term monies owed.

As an engineering company, Actavo owes and is owed a lot by subcontractors. The numbers are roughly even on the debit and credit side. And in a cash crunch, receivables aren’t necessarily reliable debtors. Removing accounts receivable and payable entirely, to just look at cash over debt due within a year, gets a value of 0.29.

So Actavo’s cash flows, pre crisis, were 13 per cent of short term debts, and its cash came to 29 per cent of short term debt. Companies usually try to match their short term assets to short term liabilities to protect themselves from just this situation.

Aside from shoring up its balance sheet, there’s little Actavo can do about the crisis but hunker down and reduce costs as much as possible.

In normal times the hope would be that a lender would cover any short term cash flow problems. To know whether lenders would be likely to help, a longer view of Actavo’s solvency is required.

Ordinarily you’d look at net debt over profits, or interest payments over profits. But those ratios don’t tell the story because Actavo is losing money. In 2018 it had an operating loss of €32.2 million. On top of that, it had €3 million in interest payments. Its net debt to Ebitda ratio is 3.9.

So the company’s cash flow is small relative to its short term debts, its cash pile is small relative to its short term debts, and it can’t cover interest payments out of operating profits.

What’s more, its 2018 accounts it stated that its bank facilities expire in June 2020. The situation was serious enough that its auditors, Mazars, said “In relation to an uncertainty in respect of the groups banking facilities… a material uncertainty exists that may cast doubt on the group’s ability to continue as going concern.” The company did not comment on whether it had secured new lending facilities beyond June.

Aside from shoring up its balance sheet, there’s little Actavo can do about the crisis but hunker down and reduce costs as much as possible. It says it “initiated a programme of temporary lay-offs, reduced working time and at management level, pay cuts of up to 40%.”

Communinicorp and media

The decision by O’Brien’s Irish radio group to implement wage cuts was not unexpected. The Irish media industry has been strained for some time now, and the fallout of Covid-19 has had an immediate impact on the cashflows of most media houses. Companies have been pulling back on campaigns and retrenching from unnecessary spending. As Alan Cox, the chief executive of Core Media told The Currency in recent weeks: “It is so hard to comprehend,” he said. “It just seems like one of those movies – a disaster film you’ve seen over the years that has somehow become a reality.”

It is difficult to assess just how big an impact the crisis has had on individual radio stations. Media Central, a media selling house owned by O’Brien that sits outside of the Communicorp Group, has been briefing that it achieved 89 per cent of its March target, but that this will drop in April. If this is the case, then Media Central has certainly outperformed the rest of the market by some distance.

The issue, for both Communicorp and the wider industry, is the lack of planning and certainty. Corporates normally prefer to book in media campaigns months in advance. Now, they are making decisions on an hour by hour basis. Some print titles have seen their advertising revenues fall by between 50 per cent and 80 per cent. Sources point to an expected 40 per cent drop in radio revenue this month.

As such, the decision by Communicorp to rein in costs was expected by many. Communicorp made no official statement about the cuts and has declined to comment on what it said were staff matters.

There will be no redundancies but it is understood a pay cut of 10 per cent will be imposed on the first €30,000 of income of all staff, rising to 12.5 per cent for the income band between €30,000 and €60,000. Salaries of between €60,000 and €120,000 are to be reduced by 15 per cent, with any income above €120,000 subject to a cut of 25 per cent. The changes are to be implemented across the board on all employees in all stations.

The move will help deal with some of the problems facing the group – but not all of them.

The group has, after all, been historically loss making. Its most recent accounts, for the year ending 2018, show retained losses of €93.5 million, up from €88.7 million for the year before. Revenues increased by 6 per cent during the year and it managed to slightly decrease its operational expenses, but it still struggled to make a profit.

Let’s look at revenues first. Communicorp had revenues of €37 million in 2017, jumping to €40 million in 2018. Of this, some €30 million came from advertising , while more than €9 million came from sponsorship and promotion. This latter figure includes live events from the likes of Off the Ball, its well regarded sports radio outlet, as well as deals on competitions and programme sponsorships.

The revenue figure is net of agency commission of €5.1 million – essentially the cut taken by ad houses for booking and managing ads with clients. Given his ownership of Media Central, it is likely that some of that will have flowed back to O’Brien anyway.

O’Brien has largely plugged the losses from his own resources. The group has director’s loans of €101 million at the end of 2108.

The group made an operating loss of €696,000 for 2018. However, the group also had interest payments of €2.7 million (offset by gains in foreign currency movements of €925,000) and losses of €3.3 million from discontinued operations in Bulgarian radio and in Irish sales.

All told, Communicorp made a loss of €7 million for the year factoring in currency translation from foreign operations.

The decision to exit Bulgaria fitted within a broader strategy of selling down or exiting others markets in eastern Europe over a number of years previous to focus on Ireland.

Just how do you value the group? Well, according to the accounts for 2018, it placed a value of €103 million on its radio licences, down from €167 million at the start of 2017 as a result of amortisation, disposals and other financial mechanics.

The group has a number of strong brands, with Today FM regarded as the crown jewel. Newstalk has struggled to make money, but its Off the Ball sub brand is regarded well within the market.

O’Brien has largely plugged the losses from his own resources. The group has director’s loans of €101 million at the end of 2108.

O’Brien has shed some of his media interests in recent years, selling out of his position in Independent News and Media – at a significant loss. He has toyed with the idea of selling Newstalk before – to INM – but there is no suggestion in the current climate he will reconsider the position.

Instead, the company is bedding down for the economic storm. It is hoping to avoid redundancies by implementing pay cuts. Like most in the media sector, it will be hoping the crisis abates quickly and business returns to normal.

Tomorrow: O’Brien’s property interests