Digital 9 Infrastructure Share Discussion Threads

[keith95] 22/3/2024 19:04

"Well done the pension fund for stitching them up I say."

I don't see any stitching up - Arqiva is an excellent asset. The problem is/was getting Arqiva annual revenues into DGI9 - that I presume DGI9 thought a simple issue as a stakeholder but as it turned out they could not achieve for reasons that remain unclear outside of issuing shareholder loans being Arqiva's normal practice.

Arqiva squirrels them away in its subsiduaries - bear in mind the £2 bn Arqiva sale to Cellent paid off shareholder loans.

I've e-mailed DGI9 to request clarity on the status of DGI9's current shareholder loans and what exactly the £163 Million of VLN bought when doing the Arquiva transaction - preferably to be stated in the special meeting on Monday.

The issue with Arqiva itself lies with the future of broadcasting versus streaming.


As it stands one argument for taking down broadcasting in the UK follows the reduction of broadcasting use in favour of streaming in the USA in preference for podcasts etc.

Anyone who has switched on TV in the USA - with adverts before the movie, adverts after the credits, and every 5 minutes knows precisely why people moved from broadcasting in the USA .... it's a pain the rear ...

... the UK doesn't have the same problems. Broadcasting is cheaper, "green" compared with streaming and so more readily available.


It would be a mistake in my view to kill it.

[rambutan2] 21/3/2024 14:40

Remember, the swap has been there for more than a decade, so no excuses if somehow unaccounted for, or misunderstood.

The other shareholders are "sophisticated" infra investors. Not mugs. I assume there would have been plenty of communications with them pre sale. They may have even had some sort of a veto on the sale/buy.

The only certainty currently is that the rate on the swap will be set for the next 12mths based on March RPI, which comes out next month. So, the lower the better on the cashflow front.

[williamcooper104] 21/3/2024 14:33

Yes hence what they were happy to provide vendor finance on relatively attractive terms

[loglorry1] 21/3/2024 14:14

My view is that the pension fund that sold to them was well aware of the swaps and their impact as it's just the sort of thing well run pension funds care a lot about. DGI9 being run but a bunch of kids who think tech is cool and tech infrastructure is the future either didn't understand them or even notice them. Well done the pension fund for stitching them up I say.

[chucko1] 21/3/2024 14:08

They would not be the first to underestimate the degree of liquidity required for swaps, especially inflation-linked swaps.

[williamcooper104] 21/3/2024 11:52

From all we've seen I can say that they likely just didn't realise the cashflow impact of the swaps You're right in that it was no black swan

[alan pt] 21/3/2024 11:44

UK CPI was 9.4% in Jun 22 when DGI9 agreed the purchase of Arqiva

I honestly think they just failed to do proper due diligence and either didn't notice the accretion payments or didn't realise the impact.

The alternative would be that they did notice, but decided to lie to shareholders about the cashflow impact of the acquisition

[williamcooper104] 21/3/2024 11:38

Those US numbers are CPI so need to look at UK CPI not RPI to compare Liz Truss was a disaster but her damage to gilts/inflaion expectations wasn't long lasting fortunately The capex needs and minority interest in acquivia meant it was always going to struggle as a reliable cash cow

[invisage] 21/3/2024 11:29

"Don't forget, these are the investment managers who seemingly failed to notice the accretion payments on Arqiva when buying and who happily kept on paying the divi until suddenly going "oops, we seem to have run out of cash!"


Who expected RPI to hit 14% in November 22?


Between 6th September 2022 and 25 October 2022 Liz Truss was appointed PM. No one knew she was going to wreck the UK economy and send inflation sky rocketing.

In comparison inflation was 7.1% in November in the US and trending lower.

So I think a large part of the problems with Arqiva accretion was due to the anomaly of Liz Truss inflation.

The management could be better of course but there are factors out of their control and the market has discounted too much on the management......

[williamcooper104] 21/3/2024 11:09

It's the great irony that Acquivia was meant to be the cash cow that would give them divi coverage

[loglorry1] 21/3/2024 11:05

The income side of the P&L at Arqiva has also gone up with inflation so not all bad news. Costs have gone up too unfortunately. The interest rate hedge was in hindsight a terrible idea but it has to be viewed against all the contracted income at Arquiva much of which is also inflation linked. IF they can get a handle on costs it could be very valuable.

Yes the managers seemed to be totally useless here. I think they thought they would just keep raising equity to fund it all.

[williamcooper104] 21/3/2024 11:01

Indeed Remember We can cover the dividend by 2025 so we will not cut it Ooops - no cash and a potential going concern issue

[alan pt] 21/3/2024 10:59

"I suspect the company would have set achievable targets to get most of the earn out"

Don't forget, these are the investment managers who seemingly failed to notice the accretion payments on Arqiva when buying and who happily kept on paying the divi until suddenly going "oops, we seem to have run out of cash!"

[invisage] 21/3/2024 10:55

I only have information as per the public domain.

I just don't know why people think Arqiva can't be monetised when the company have said several times the purpose of Arqiva was to fund the dividend and distributions can happen once VLN interest is paid off. Arqiva was supposed to cover 40% of the annual 6p dividend.......


Maybe use a Dividend calculation at 2.4p/year to work out value of Arqiva? Ben Beaton did say the valuation of Arqiva went up by £55m the past year due to inflation in the presentation above.


Arqiva generated £137m cash flow in 2023 pro-rated to D9 economic interest of 51.76% see:

A business that generates £137m cash flow a year is worth more than £137m. The market cap of DGI9 is £186m which is simply too low IMO.

In terms of the earn out - I suspect the company would have set achievable targets to get most of the earn out, so it does not make sense to value the earn out as 0.


The company said "This target is as set in the business plan provided to all potential purchasers at the time of the sale process."



A potential earn-out payment of up to US$135 million (approximately £106 million*), which is payable subject to Verne Global achieving run-rate EBITDA targets for the financial year ending December 2026 (the "Performance Target"). The total earn-out will be payable if 100% of the Performance Target is met and will be reduced on a sliding scale with no earn-out being payable if Verne Global does not achieve 80% of the Performance Target. This target is as set in the business plan provided to all potential purchasers at the time of the sale process.



The Company believes that Ardian's own value creation objectives are aligned with deploying the requisite capital expenditures to enable Verne Global to deliver in line with or close to the Performance Target. The Company has no capital expenditure obligations to Verne Global going forward. The Company also benefits from customary protections to ensure Verne Global continues operating and reporting substantially in line with existing practices, including quarterly updates on its run-rate EBITDA achievements.




We need to wait for the results announcement maybe for further details, results expected before end of April.

[williamcooper104] 21/3/2024 10:50

With Acquivia it's growth capex to long term stand still (hopefully) The Verne earn out as you say is impossible to access given the info we've been given They should really have released a value on it or given some guidance

[williamcooper104] 21/3/2024 10:45

Either way nobody now is holding this for a divi So if OCF goes into redeeming the VLN it's still NAV accretive

[williamcooper104] 21/3/2024 10:43

The other investors will also want dividends

[cc2014] 21/3/2024 10:18

"The reason the share price is 21p is because most investors don't understand the business"


I think we can agree on the beginning part which everything except Arqiva is probably worth say 75-80% of NAV after selling fees. One can debate whether 75-80% should be higher or lower but it's not going to change the thrust of the analysis.

The we can add/deduct cash and the debt.

I suggest almost all institutions and private investors are going to come up with a similar number for that part.


This leaves the Verne earn out and Arqiva.
It's impossible to value the Verne earn out as there are so few disclosed details so unless you know something which is not in the public domain it's difficult to give that any value above zero (maybe you might take a quarter?). Opinions may differ.


The we have Arqiva. How do you value a business in which you don't have a controlling interest, with a large customer the BBC which does not provide value for money to the taxpayer with contracts that have a limited time left? It's not easy.

[invisage] 21/3/2024 09:21

The reason the share price is 21p is because most investors don't understand the business and private investors selling into spikes and institutions not buying as they don't know how long it will take to realise capital and D9 does not pay a dividend.

Watch for yourself 6 mins into the presentation from Ben Beaton, Triplepoint Fund manager



Arqiva was suppose to cover part of the Dividend payout for D9. They clearly don't need an IPO to extract cash from Arqiva, they need to pay down the RCF and VLN Interest.

So the catalyst here is selling Aqua Comms and EMIC-1 which both are worth around £247.5m according to Liberium. That would pay off the RCF and VLN interest.

1 more trading day until the EGM to get approval to sell these assets.


Having sold Verne DGI9 are in a position of strength and why would they need to sell Aqua Comms at a significant discount to NAV? The below is highly demanded asset.

Aqua Comms, a leading owner and operator of 20,000 km of the most modern subsea fibre systems - the backbone of the internet - with a customer base comprising global tech and global telecommunications carriers (April 2021);


Aqua Comms had a successful year in 2023 in its core transatlantic market, achieving approximately double the growth rate of the overall market, demonstrating Aqua Comms' ability to capture market share and testament to the strength of the sales team.

Aqua Comms' 2023 Cash Flow from Operations of £8m will allow the transatlantic business to be self-funded in 2024.

Compared to the same 6-month period in 2022, revenue increased by 9% in the second half of 2023 mainly driven by increased sales in Aqua Comms' lease business.

Aqua Comms is a leading carrier-neutral owner and operator of subsea fibre, providing essential connectivity through 20,000 km of transatlantic, North Sea and Atlantic, and Irish sea routes. Aqua Comms serves mainly hyperscalers and global carriers who have an exponential data demand.


EMIC-1, a partnership with Meta on a 10,000 km fibre system from Europe to India (July 2021);

[invisage] 21/3/2024 08:32

No it really is that simple - they need to sell Aqua Comms and pay off RCF and VLN interest to get the distributions.

Read the Interim results - Clearly they can get access to cash


"Additionally, the Arqiva Group vendor loan note ("VLN"), and the Company's share of the Arqiva Group accretion payment on its inflation-linked swaps, which expire in 2027, continue to restrict the Company's access to OCF to support the Company's dividend policy in the medium-term."


"Additionally, the Arqiva VLN, and the Company's share of the Arqiva Group accretion payment on its inflation-linked swaps, which expire in 2027, continue to restrict the Company's access to OCF to support the Company's dividend policy in the medium-term."

"Interest on the VLN is due annually in arrears on 30 June, and D9 has the choice either to settle each payment in cash or to accrue it. For the period ending 30 June 2023, the Company elected to accrue the interest, increasing the VLN's outstanding balance from £163m to £170m.



Accrued interest must be repaid in full before distributions can be made to the Group. After the fourth anniversary of the VLN, the Group can only receive distributions if the entirety of the VLN principal and any rolled up interest has been repaid in full. The Company expects Arqiva's future cashflows to cover D9's VLN interest payments. The Investment Manager expects that the VLN will be refinanced prior to its fourth anniversary in October 2026, as was anticipated at acquisition."

[duncansawalker] 21/3/2024 07:55

I can't imgagine it's that simple.
Sales of assets highly likely to pay off RCF & VLN & Share price trading at massive discount would lead me to believe investors won't be getting distributions from Arquiva, probably until it floats.
DG9 have 48% of the shares, unless other investors want to cease the accruing profits in sharegolder funds and taking them as dividends, we can't push it through.
So: for my money, this looks like a waiting game. Investors will get back a bit of chnage - maybe 10-20p depending on the performmance of Aquacomms in the last year and the profitability of the third undersea cable, but will have their Arquiva stake. The question will then be: can we run the trust as a low cost shell company & when can we monetise Arquiva. My tuppence, anyway.

[invisage] 20/3/2024 23:04

There is £80m left on the RCF. And £7m accrued interest on the VLN for Arqiva. The RCF needs to be paid off first given the order of debt repayments.

The upside here is paying of the balance of the RCF, paying of the accrued interest on VLN for Arqiva which unlocks distributions. As per the interims

"Accrued interest must be repaid in full before
distributions can be made to the Group. After the
fourth anniversary of the VLN, the Group can only
receive distributions if the entirety of the VLN principal
and any rolled up interest has been repaid in full"



Aqua Comms and EMIC is a big asset once sold should pay off the RCF and accrued interest on the VLN. The sale of these assets should re-rate the share price as it unlocks Arqiva distributions.


I guess this is why Arqiva is the last asset to be sold and the board advised:


" After careful consideration of Arqiva's plans and current market conditions, the Board believes that the maximisation of the value of D9's stake in Arqiva is likely to take longer to realise than the other investments held by the Company. The Board aims to realise the Company's assets in an orderly manner to maximise shareholder value whilst also being aware of the ongoing costs of managing the Company's portfolio."






All this means is one has to be patient and let the sale process playout to unlock the value in the meantime the share price will drift sideways pending news......

[invisage] 20/3/2024 21:58

Just read Oak Blokes piece on Arqiva to better understand what is going on

hxxps://theoakbloke.substack.com/p/deep-deep-into-arqiva-part-of-dgi



Operating Profit is £238m (of which £114.3m accrues to DGI9). Obviously operating profit removes the concern that using EBITDA for an infrastructure player (where D or Depreciation is significant). In fact good news here. The fall in depreciation you see above, year on year is permanent - where in 2022 some one-off charges were made for legacy equipment being written off, via a Group IT transformation programme.

£114m well affords a £20m dividend. It could afford a £50m dividend. (which was the cost of the previous dividend which would be a 20% yield at today’s prices). It could afford a 44% yield dividend theoretically.


The magic trick is the bit I’ve highlighted. “Accrued interest on shareholder loan notes” refers to the fact that DGI9 and one other shareholder are accruing profits in Arqiva. So this is a form of shareholder funds (by another name). They also award themselves a 13-14% interest so that’s why this “interest̶1; is colossal.

If you strip out that noise, the business owes £1,566.3m (inc. lease liabilities). Still a large amount. The repayment profile means some further refinancing is needed or paid down. So the fact dividends aren’t being paid to DGI9 is no bad thing. Debt costs 7.2% (£130.1m a year) so it’s worth doing. There are, too, hedges to complicate the world but we know from DGI9 the effect of these disappears in 4 years.

Valuation
The deep dive has confirmed a couple of things.

Arqiva is as exciting a holding as I thought. In fact more so.

Let’s consider the recent news about fellow smart meter provider Smart Meter Systems (SMS) being acquired. Let’s consider what that means for Arqiva. For a start Arqiva’s smart metering is almost double the size of SMS. (£110m vs £189m of ILARR - I’m being generous and including traditional meters in SMS’s £110m… Smart Meters are £70m actually). Arqiva have 25% market share of UK Smart Meters versus SMS who have 14%. SMS was bought at an EV / EBITDA multiple of 20.0x (calculated based on LTM Pre-exceptional EBITDA of £71 million as of June 2023).

By comparison Arqiva has an EV/EBITDA of 11 (£3,714.2m/£337m) - again stripping out all the shareholder loan note stuff, so that implies that Arqiva could be worth £6.74bn (£337m x 20). If it were to occur, that would equate to a £1.45bn gain to DGI9….. or £1.68 per DGI9 share.

(Note SMS have a EV car charger, a BESS and energy services business whereas Arqiva have a Media & Broadcasting business so you may disagree the same valuation methodology should apply…… in my opinion Arqiva’s other business is at least as valuable as asset as its Smart Meter business)

The growth plans and the tailwinds it address along with the stability of utility like RPI linked income make this attractive indeed.

You could buy the whole of DGI9 currently for £255m and own 48.02% of what looks to have £855m of net assets - so a near 50% discount to NAV. With a takeover potential which would take it to 90% discount to NAV…… And that’s ignoring all of DGI9’s other assets.

On Arqiva alone, DGI9’s current share price makes no sense.

The fact DGI9 has fallen in price maybe its people simply not understanding the assets and holdings. Or maybe the world have grown desensitised to “Discount to NAV” and assume such numbers are hocus pocus. Just snares to entrap the unwary.

[keith95] 20/3/2024 10:59

The point is this ... Arqiva does not pay an annual cash dividend to owners ... so DGI9 not only used its RCF with interest payments to buy Arqiva, but was obliged to pay interest on the RCF with nothing coming back from Arqiva itself but a loan note - so where was DGI9 going to get the cash to pay off the RCF and DGI9 shareholder dividends?

Stupid decision to buy Arqiva without raising the funds first ... that might have been the original plan .. but too late now.

[invisage] 20/3/2024 10:53

Page 144 shows the breakdown of the shareholder loan note

Accrued Shareholder loan note interest due to D9 is £1578.9 million as at 30 June 2023

hxxps://www.arqiva.com/group-financial-results/2023/Arqiva-Group-Limited/AGL%20FY23%20Financial%20Statements.pdf




Most of the value is in Arqiva that is why the sale here has been deferred.....Also value in earn out payment but I guess most people want their cake now.......