Gov't warned: 'Don't renegotiate' BTC deal

Tuesday, May 15, 2012

By NEIL HARTNELL

Tribune Business Editor

THE newly-elected Progressive Liberal Party (PLP) government was yesterday warned not to renegotiate the Bahamas Telecommunications Company's (BTC) privatisation, London-based financial analysts telling Tribune Business such a move would be "pretty negative" and a potentially chilling signal to other foreign investors.

Numerous analysts, who all cover BTC's 51 per cent majority shareholder, Cable & Wireless Communications (CWC), suggested it was not in the interests of the Bahamas - and its economy - for the Government to attempt to renegotiate the terms of a deal for an asset that generated 28 per cent of the company's 2012 first half Caribbean operating income.

Nick Brown, a telecommunications analyst with Execution, part of Espirito Santo Investment Bank, said it would "be pretty negative" if the Perry Christie-led administration made good on its pre-election pledge to renegotiate the privatisation deal's terms with CWC, a move laced with "risk" for investor sentiment.

BTC, Mr Brown said, represented about 11 per cent of CWC's total 'enterprise value' using a "sum of the parts" calculation, meaning it accounts for just over one-tenth of the London-headquartered telecommunications operator's value.

He added that the BTC acquisition had given CWC's Caribbean regional operation, LIME, "scale" that had enabled it to withstand its heavy losses in Jamaica, and without the Bahamas the company's regional strategy would be open to question.'

Describing BTC, and the Bahamas, as "one of the things that was positive for CWC", given the progress made in restructuring the company, Mr Brown told Tribune Business: "It would be pretty negative if those terms were to be renegotiated. Our first take was that it would be pretty difficult to renegotiate those terms....

"I think that in terms of sentiment, it would not be viewed very positively to have that reversed - the terms of the deal."

But the PLP, which heavily opposed the BTC privatisation, while in Opposition made strong noises about renegotiating the privatisation agreement with CWC, also pledging to recover the 51 per cent majority shareholding in the company.

The Government currently holds the minority 49 per cent stake, and the Ingraham administration pre-election had announced plans to sell a 9 per cent stake, worth $37 million, to Bahamian investors via an initial public offering (IPO).

Tribune Business previously revealed that RoyalFidelity and CFAL had been appointed as financial advisers/placement agents for the potential IPO, and a June launch date was being eyed.

But the general election result has thrown these plans into confusion, with the new government's thinking on the issue yet to be stated publicly. The betting in the Bahamian financial community, from those spoken to by Tribune Business, is that the IPO will at best be delayed, at worst, cancelled.

The PLP, though, has also committed to sell BTC shares to Bahamians, even though the details are again lacking. It has also talked about developing BTC into an entity that can compete in the Caribbean, a likely reference to Haiti and its cable links there, as expansion elsewhere would conflict with CWC's other LIME affiliates.

These, and the deal renegotiation theme, were contained in the PLP's pre-election Charter for Governance, which said: "There has been loss of control of an essential centerpiece of national development and sovereignty by the sale of BTC to a foreign entity."

As a result, the PLP pledged, somewhat vaguely, to: "Review and take all necessary steps with a view to renegotiating the contract with Cable & Wireless Communications."

Precisely what that means, and what the party will do in office, is uncertain. Regaining 51 per cent majority control, and indeed, overturning the original privatisation deal will likely be expensive (at a time when the Public Treasury is facing high fiscal deficits and a $4.356 billion national debt) and extremely challenging legally.

Tribune Business also understands that CWC was fully aware of the so-called political risks stemming from a change in government at May 7's general election when it did due diligence in the run-up to concluding its $206 million purchase of a 51 per cent BTC stake last April.

Sources suggested to this newspaper that CWC, and LIME, management believe the privatisation contract gives them sufficient legal protection against any moves that might be made to change or renegotiate the deal.

And besides, as Mr Brown told Tribune Business: 'I don't think the Government would be too willing to give an impression that discourages foreign investors. That's the risk."

Still, the new government's pre-election pronouncements could well have a negative impact on CWC's share price when they are digested by investors and the markets, given BTC's value to the LIME business. And, if the Christie administration attempts to make good on its promises, the effect is likely to be similar to the impact former prime minister, Hubert Ingraham's, 'no oil drilling' remarks had on the Bahamas Petroleum Company's stock last month.

Highlighting BTC's importance to LIME, given its continued multi-million dollar losses in Jamaica, Mr Brown told Tribune Business: "The Bahamas, doing that acquisition gave them the scale to continue operations there [the Caribbean].

"Otherwise, they would not have as much scale in the Caribbean, and there would be questions of the company's strategy. With the Bahamas, they have substantial scale even if they do not get the regulatory changes they'd like in Jamaica. It's [BTC] kind of insulated them from that."

Robert Grindle, Deutsche Bank's London-based managing director for European telecommunications research, also told Tribune Business it would be "worrying" for CWC and its shareholders, as well as foreign investors, if the new government sought to reinvent "what was already agreed".

He pointed out that CWC and LIME, for more than a year now, had proceeded under the original privatisation agreement, getting BTC ready for market liberalisation and increased competition by reducing the company's over-staffing, investing in and modernising it.

Based on BTC's $37 million in Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) during the first half of CWC's financial year that closed at end-March 2012, Mr Grindle said the company accounted for "a very material" 28 per cent share of LIME's total Caribbean EBITDA over that period. BTC also accounted for 8.4 per cent of CWC's group-wide $443m EBITDA.

"The relationship between a government and the expert owners of a telco is symbiotic," Mr Grindle told Tribune Business. "Typically, it's a mutually beneficial relationship.

"CWC has made a lot of effort at restructuring and modernising it [BTC] for the future benefit of the economy of the Bahamas."

Pointing out that the ongoing liberalisation of the Bahamian communications market meant BTC's operations had to become more efficient and effective, he added: "The Government, both economically and financially, benefits with having a good, efficient telco. I don't necessarily see it as being in the new government's interests to renegotiate the terms, especially as a functioning telco is in the best interests of everyone."

Shareholders in European-based telecoms operators such as CWC preferred that their investments have majority control over their assets, Mr Grindle said. He pointed to Vodafone's decision to divest assets in which it held minority stakes as one such example, as the market did not give companies "credit" for such holdings.

The Deutsche Bank analyst also noted the link between economic growth and telecommunications industry development, which the likes of the World Bank had highlighted through previous research. Renegotiating, or reversing, the BTC privatisation could delay or hamper such growth, he implied, and the delivery of long-term benefits for Bahamian consumers.

"The Government has taken a pro-liberalisation approach, and that has been good for consumers, but some sort of renegotiation or delay is not terribly helpful for anyone," Mr Grindle told Tribune Business.

"Overall, no one likes to see agreements made and acted upon in good faith changed...... Now CWC is making efficiency gains, that's the right step forward for the people of the Bahamas, and to throw that ball up in the air might not be good for anybody. If it's all up in the air again, it's very difficult."

CWC, though, has extensive experience in working with governments, and is equity partners with them throughout its worldwide operations.

A CWC spokesman last night told Tribune Business: "CWC has passed their congratulations on to Prime Minister Christie and his new government.

"We look forward to a continuing positive relationship with the new government, and working with them as our partner to develop BTC. Since the privatisation last year, BTC has been on a path to improving the service and value it provides to customers. We look forward to working with the new government to continue delivering that."

Comments

concernedcitizen says...

before the PLP followers start yelling ,the FNM did it ,thats not so .The FNM only stopped local contracts ,many that werent even fully signed ,just election promises .Baha Mar deal with the Chinese was not done and PGC signed the airport deal days before leaving office in 2007 ..The I Group project was a stalled project that needed redoing for both sides .It would send a horrible message to future investors if we use strong arm tactics to redo BTC...also i like 4g lol

Posted 15 May 2012, 3:31 p.m. Suggest removal

Philosopher_King says...

This comment was removed by the site staff for violation of the usage agreement.

Posted 15 May 2012, 4 p.m.

p.king you make some valid points although i differ on some . What is your view on oil drilling ??

Posted 15 May 2012, 4:42 p.m. Suggest removal

TalRussell says...

When PIndling gave his 'break or bend' speech to the Grand Bahama Port Authority, similar voices were heard warning the then PLP government. In the end it was Hubert and his FNM regime that would break the economy of Freeport and the rest of Grand Bahama. And, he broke it out of spite.

Posted 15 May 2012, 9:13 p.m. Suggest removal

even Galanis in the guardian said it was good to get rid of Hanes Babak,it surprised me also because he very RARELY agreed with Ingraham

Posted 15 May 2012, 11:31 p.m. Suggest removal

effectsandcause says...

“Foreign” Analysts warning the Bahamian Government?!?!? Pure foolishness!!! Where were these analysts when the former government gave away a profitable national asset in a fire sale to CWC??? These foreign analysts and investors can care less about the Bahamian people as long as their pockets are lined; they make 150% return on their investment; and they can continue to deal with a “clueless” and “spineless” government. They fool no one. Indeed, it would be shocking if this new administration did grow a backbone to confidently and firmly re-negotiate this sale on behalf of the Bahamian people. We watch.

Posted 15 May 2012, 9:26 p.m. Suggest removal

Arob says...

Bahamians do not rate the Bahamian economy for FDI. Financial analysts do --Moody's, Standard and Poors etc. Of course, the analysis is based of the information that the Government releases. In our case the FNM government was pretty open. The Greek government falsified its information and caused the fall of their economy and threatened the stability of the Euro and the European Union.
Money in the Pocket:
The money in the pocket is not the foreign analyst but the monies (not salaries) 'greedy' or 'unscrupulous' citizens are willing to accept to pave the way for foreign investors to plunder (invest) in their country -- under the table, grafts, greasing the palms, etc.
Some FDI are attracted to countries where the environmental laws are weak; where public servants' allegiance are to themselves, and where cronyism etc. rules the day, and the population is 'ignorant' not illiterate but lacking the skills to critically analyze the propaganda.

Posted 16 May 2012, 10:38 a.m. Suggest removal

Gadfly says...

The timeless Bahamian saying “talking fool is a very serious ting” aptly describes both the PLP’s position on the BTC sale and that of some of the bloggers suggesting that the PLP re-negotiate the CWC BTC deal. When one examines some anecdotal facts about the deal the PLP had in place with Bluewater it becomes instantly clear that the PLP indeed lacks credibility on this issue.

Let’s look at the facts. Persons with a rudimentary understanding of PE deals would know that the two most important terms in any PE deal are the terms around the economics and those around control. Starting with the economics, the Bluewater deal called for the purchase of 49% of BTC for a total face value price of $260 million. However, to properly understand the economics of this deal we must drill behind the face value price. At the end of May 2007 BTC had over $70 million in cash in the bank, therefore, theoretically this amount should be deducted from the purchase price. Also, the Bluewater deal called the payment of $40 million to be deferred, interest free, for at least five years or longer to be paid out of the operating profits of BTC. Therefore, the net cash flow or price that would have been paid by Bluewater would have been $150 million plus the PV of $40 million. This round out to about a total price of about $177 million Bluewater would have paid for 49% of the equity of BTC. It is also very important to note that the PLP negotiated this deal in 2006/2007, at the height of the economic boom which would have conservatively added about 15 to 20% to the value of the deal compared to the CWC deal which was done in the midst of the recession in 2010.

With respect to control, even though Bluewater was purchasing only 49% of the equity of BTC, the agreement Bluewater had in place with the PLP gave them the power to appoint the majority of the BODs, appoint the CEO and the management team and contained favorable protective provisions that allowed Bluewater to have unfettered strategic oversight, decision making and managerial control over the operations of BTC, without having to pay for it.

A first year law student would know that control trumps ownership in these deals every day of the week. In fact, a popular ploy in negotiating these deals is to take the “purported discount” for purchasing the minority interest but insisting on favorable control terms and protective provisions thereby gaining decision making and operational control of the company without having to pay for it. Also, Bluewater had no operating history, no financials, no background in the Telecomm industry and even today we still do not know who were the principals behind Bluewater, therefore, calling for the PLP to re-negotiate the CWC deal is like asking the wolf to guard the chicken coop. In any event CWC would probably be happy to take the deal that the PLP had on the table for Bluewater, as the government would owe them a refund and CWC would have the same control.

Posted 16 May 2012, 12:05 a.m. Suggest removal

vinceP says...

Posted 16 May 2012, 8:01 a.m.

Reality Check: No company offers perfect service. Service is based on human beings. Human beings are imperfect.

Posted 16 May 2012, 10:46 a.m. Suggest removal

thats called strong arm tactics and thats what dictators do vince,,,,has anyone stopped to think CWC bought something and paid for it ..as far as they are concerned they don,t have to renegotiate anything ...or maybe our people want another bend or break ,yeh yeah lets satisfy the blood lust of our gullible public and put the nails to those bad foriegners ....lets march down to the cruise ships, those foriegn gay people are bad ,but ours are anointed and in parliment ..its called xenephobia and its what shrewed politians use to keep an uneducated and arrogant public duped..

Posted 16 May 2012, 10:03 a.m. Suggest removal

The Progressive Liberal Party is no longer campaigning. What may have 'sounded good' during the campaign may be a very bitter pill for the economic stability of the country. The PLP must tell the Bahamian people the possisble reprecussions (based of expert unbiased opinion). Real experts! Not politicall pundits and wan-ta-be economists.

Posted 16 May 2012, 10:45 a.m. Suggest removal

yeah the plp going to tell us the truth ,wait wait PGC just got a call from his wife ,she telling him "watch yourself baby theres alot of pretty gals at the rally in abaco "" somehow i don,t think those gals had anything to worry about ..lmao at how truly gullible we still are as a public ,,aii you have to do is yell foriegners are bad and that gets you at least 40,ooo votes ..mind you we produce nothing ,with out foriegners we would be eating one another ..and don,t blab on about farming ,we graduate 5000 kids a year ,i bet you couldn,t get 100 to work on farms and 90 would quit the first week

Posted 16 May 2012, 11:18 a.m. Suggest removal

John says...

The PLP may not need to touch theBTC contract but they sure enuff need to find out from Cable and Wireless why they paying Bahamians 25 cents to stand in the HOT sun and WET, COLD rain to sell phone cards, and why store owners making 8 cents to sell top up minutes. Card vendors must sell $2,500.00 worth of cards just to make minimum wage($150.00) and this is not taking into consideration their costs or the long hours they have to put in to make this amount.
STORE OWNERS know they are selling Top Up and phone cards at a loss (they make more on a Tribune than they make on a $5.00 card or top up), but they continue to sell cards because of the demand..and because they have hope that the margins will change...and some go out of business because of it.
CABLE and WIRELESS brag about how good BTC and the Bahamas market has been to them in terms of profits, so why are they enslaving Bahamian people? They claim they are readying for competition, but when it comes BTC will have no phone card or top up vendors...if you don't believe me, ask the FNM how they (Bahamians) do it...

Posted 16 May 2012, 11:15 a.m. Suggest removal

my how intelligent ,any time we don,t like something we return to the old stand by words ,enslaving ,slave etc etc ,,check it out under majority rule there are more people enslaved in africa at this present time than any time in history ,,today in africa and the sub sahara there are 20 million people enslaved ,so lets lose the catch words ...the bahamas is an independant ,majority ruled country and no one is enslaved here ..we have the freedom to do what we want ,and that includes sell phone cards or not to sell phone cards

Posted 16 May 2012, 12:09 p.m. Suggest removal

When you are working on a job or in a profession and you cannot make enough to meet the costs of your basic living needs, food, clothing shelter, then that is enslavement

Posted 16 May 2012, 1:34 p.m. Suggest removal

notsogullible says...

If so, it is an enslavement chosen by the individual doing it. Check out the definition of enslavement. You have the definition wrong n your comment "John".

Posted 16 May 2012, 6:08 p.m. Suggest removal

well than get another job ,my dad worked three jobs when we were young ..i just get so tired of catch words ,enslavement would be someone forcing people to sell phone cards through threats of violence or death ..were the people from btc that took the buyouts enslaved ,if so i wish i was one of them ..in a capatolist country people are rewarded for effort and smarts ..not everyone can be ceo,s .i am just a worker bee and its been hard during the recession so i cut back and watch my small disposible income very closely ....but i prefer it to Cuba at least i have a chance to better my life ..once again sorry for my spelling its been a long time since school ..reading the blogs is helping me to see things i spell wrong ..thanks guys/gals

Posted 16 May 2012, 1:51 p.m. Suggest removal

B_I_D___ says...

...laughing at John...you obviously have NO grasp of Slavery and Enslavement...and therein lies the problem.

Enslavement...
Definition #1...The State of being a slave
Definition #2...The act of making slaves your captives.
Definition #3...To make into, or as if, into a slave.

The fact that whatever job you are doing is currently not paying your bills, is in NO WAY enslavement...chose your words more carefully next time...enslavement should not even be in your vocabulary. But hey...it sounds good to keep that racial tension brewing...hey man, I'm still a slave...more like an uneducated fool.
B.I.D...

Posted 16 May 2012, 2:16 p.m. Suggest removal

clarken says...

There are more egeregious elemenst in this deal than I can go into here. A full investigation and revellation of the facts of the deal is necessary. If there is nothing wrong, there's nothing to fear.

Posted 16 May 2012, 2:40 p.m. Suggest removal

come on please go into the egregiuos elements ,please please give us your revellations ,lots of big words you must be very smart ,please please enlighten the masses ......basically your saying nothing

Posted 16 May 2012, 2:46 p.m. Suggest removal

Censorship!!!!!!!

Posted 16 May 2012, 4:26 p.m. Suggest removal

yeh yeah censorship , thats what we need ,,i can,t even get any work done ,this is just too funny ,my belly hurts from laughing so much ,,,,now we need censorship ,for what pray tell...censorship ,silence the rebel rausers ,thats what we need,,,geez lousie my belly hurts

Posted 16 May 2012, 4:44 p.m. Suggest removal

Yeah like in the ole days of the Pindling PLP era which the PGC admin is now trying to take us back to. HAI introduced us to "freedom of speech" in 1992 and we ARE KEEPING IT! So dream on with the cries for censorship

Posted 16 May 2012, 6:11 p.m. Suggest removal

i was amazed that someone would suggest it in 2013

Posted 16 May 2012, 6:18 p.m. Suggest removal