by Richard Coulson
Cable Bahamas’ deal to sell their Florida subsidiary Summit Broadband is a truly extraordinary event—both for Cable itself, and also for the entire Bahamian capital markets. On Friday August 16th an agreement was signed that will pay Cable about $332 million cash. This was not a woolly “Heads of Agreement” with weeks of advance publicity and further negotiating, but a firm legally binding contract that had been kept tightly under wraps by Cable’s Chief Executive Franklyn A. Butler. Even his god-father Sir Franklyn Wilson had zero notice, and expressed pleased astonishment at the news.
Here’s how Summit was sold , discreetly and professionally.
For over a year, rumblings had been heard from Cable’s shareholders (including Sir Franklyn himself) about Cable building up too much bank debt and preferential share claims on its balance sheet. The BISX ordinary share price was dropping, and no dividends were being paid, as cash flow was being sucked into financing the hungry growth needs of Summit and later ALIV. While Butler did not believe Cable was in serious trouble, he unhappily watched more and more pref. share issues being snapped up. When a $30 million rights offering of ordinary shares in 2016 was only 70% subscribed , he felt that Bahamian investors “ just don’t understand equity”, instead demanding a fixed yield.
After he became CEO in 2018 he did not want any dissatisfaction to fester. He was already a Cable Director and an experienced businessman with the Milo Butler Group, the wholesaling giant founded by his late grandfather Governor- General Sir Milo Butler. Consulting the new Cable Chairman Ross McDonald, former head of Royal Bank’s Bahamian operations, in early 2019 he took decisive action with the Cable Board to de-leverage the financial structure.
RBC’s corporate advisory team was retained to find a solution. They produced thirty letters of interest to buy Summit, who were given a “war room” for confidential analysis. This was narrowed to seven serious candidates, and finally to the Washington DC private investment company named Grain Management LLC, which specializes in communication technology and knows the Florida market well from its Sarasota office. Intensive negotiations were held with owner Robert Grain, together with usual lawyers, accountants and assorted advisors, resulting in news release after BISX Friday close. The usual regulatory requirements must be met, but Grain expects to pay the $332 million by year- end to acquire all four companies in the Summit group, with financing committed by Deutsche Bank.
How this helps Cable
This is a huge figure by Bahamas standards, that Cable will happily digest. As pointed out by CEO Butler, nothing of this size could have been achieved by investing locally. Based on Summit’s original cost of $100 million when purchased in 2013, plus another $100 million in later investment, Cable should be able to record a capital gain of over $100 million. Although the exact use of proceeds has not been determined, it’s certain that big portions will reduce long-term bank debt of $135 million and redeem preference shares totaling $286 million. Beyond that, management has many ideas to improve operating efficiencies.
Net income will doubtless increase as bank interest and pref share dividends decline. Earnings per share (EPS) showing a probable loss of ($0.50) in fiscal 2 019 (to June 30), may well jump to a substantial profit next year.
We can hope that our capital markets operate efficiently so that the BISX share price will rise along with EPS. We are seeing some signs of this already, as the recent $2.80 price is sharply up from the low near $2.00 just a few months ago. Future increase should be expected, but that will only happen if the 3,000 Cable shareholders (including major pension funds) awake to the potential of equity investment, and if our broker- dealers like Royal Fidelity and CFAL begin to publicize earnings growth, as happens every day with brokers in the US capital markets.
How will ALIV contribute?
With Summit Broadband sold, ALIV remains as Cable’s sole earnings driver in addition to the core REV business.
Although larger than Summit, ALIV was cheaper for Cable since Government covered over half the initial cost by subscribing to 61.75% of the original equity in 2016, paying over $60 million. ALIV has been well run and now is on the edge of profitability, but it’s hard to judge its worth since its accounts are consolidated with Cable. Government has always made clear that it’s a “temporary” investment held for sale. Attorney-General Carl bethel indicated over a year ago that a public offering would be launched on BISX as soon as ALIV can show a reliable profit and meet Securities Commission rules. So let’s assume that some time in 2000-2001 Government can unload its ALIV stake for $70-$80 million, showing a welcome profit for the Treasury.
Of course, none of the proceeds will go to Cable, but the value of the ALIV shares carried on Cable’s balance sheet will have to rise to match the market price of the ALIV shares newly trading on BISX, giving a nice book profit for Cable – another reason to start buying Cable share.
Where now for our capital Markets?
Cable’s Summit sale should kill the myth that it’s too difficult, or too risky, for any Bahamian company to undertake a major acquisition, particularly a cross-border one. Before it can be developed or sold, any attractive venture must first be bought, and thus will always look risky. In 2013 Cable’s then Board of Directors, long before ALIV, with no certainty of getting a domestic mobile license, judged the Summit companies a good long term investment, and six years later a totally different Board decided it was a good moment to sell. The sell decision would have yielded no profit without the gutsy buy.
Don’t we have many similar possibilities, relying on the energy of our entrepreneurs and our well-trained middle-managers? Could AML Foods (also chaired by Franklyn Butler) expand its market by acquiring one of the many products canned or packaged for world-wide sale by Jamaica’s Grace-Kennedy conglomerate? Could our highly profitable Marathon Mall find a run-down shopping center elsewhere in the Caribbean and restore it to profitability? Could an established department store like Kelly’s or A.I.D. find similar operations elsewhere and create a Caribbean mini-chain?
It’s crystal-clear that in the next twenty years more and more commerce will be done digitally, among networks of buyers and sellers. Bricks-and-mortar locations will still be needed, but must be inter-linked and spread more widely, without restriction by national boundaries. Any ambitious enterprise that remains limited to a single market will eventually fade away —Walmart didn’t remain locked in its birthplace Bentonville, Arkansas (2017 pop. 50,000).
The Bahamas can become the perfect hub for Caribbean growth, capitalizing on nearness to the USA, ever-growing sophisticated telecommunications, and an education system that needs much improvement but already spews educated graduates trained at our own University or abroad. A local technology firm called Cloud Carib is already using its Sandy Port headquarters to set up regional offices. We don’t need vast geography or population. Minuscule island-nation Singapore thrives, amidst the surrounding masses in China, Indonesia, Vietnam, Thailand and Philippines.
Cable Bahamas has set the template for successful foreign acquisition, operation and sale. It would not be surprising to see them repeat the exercise when the time is ripe. END.
First published in The Tribune, August 29, 2019.
Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant. He has recently released his autobiography, A Corkscrew Life: Adventures of a Travelling Financier.
