The Bluewater Deal to Buy the Bahamas Telecommunications Company

by Larry Smith

"There is no circumstance under which BTC could be sold on credit, and what you are going to do after you get it must be clearly stated - you must have the money, the means and the technology to do it, otherwise no deal. And I say that for the benefit of all those who believe they got a deal." -- Prime Minister Hubert Ingraham

Just before the election, the Christie government made a secret $260 million deal to sell 49 per cent of BTC to a little-known entity called Bluewater Ventures - 'secret' in the sense that the public wasn't aware that a deal had been struck and didn't know the terms, although talks had been ongoing for two years.

Bluewater describes itself as "a private equity firm specializing in turnarounds and investments in the media and telecommunications sectors". It was founded in 2003 by John Gregg, an American who has helped run several European cable companies.

Online reports say Gregg has executed over $25 billion of acquisitions during his career. For nine years he was a top executive at the British cable operator, NTL, where he helped found a pioneering internet service, called Virgin.Net, with Sir Richard Branson in 1996.

After Gregg set up Bluewater, NTL went on to merge with Branson's popular Virgin Mobile cell phone service to become one of the first "quadruple-play" media companies in the world - offering television, Internet, cell and fixed-line voice services to over 10 million customers.

In telecoms, the triple play refers to a service provider's ability to provide voice, data, and video services to customers as a single package. Quad play refers to the delivery of voice, video, data, AND mobility. It is all about convergence - experts say - merging different media into one operating platform.

And that is apparently what Bluewater has in mind for BTC. It is also something that Cable Bahamas has been longing to do for years.

Ex-finance minister James Smith has urged the new FNM government to close the Bluewater deal, arguing that there will never be a better one. In fact, the agreed price is double what Tom Bain's BahamaTel group was prepared to pay for the same stake five years ago.

According to a confidential Bluewater document relating to the sale, BTCs own business plan for 2007-2009 values the company at $333 million, which means a 49 per cent stake should be worth about $163 million.

And, as Bluewater points out, BTCs value as a mobile monopoly is being eroded by poor management and new technologies as we speak. For example, it took just a few years for voice over internet services like Vonage to turn BTCs long-distance calling into a losing business. Vonage and other foreign providers now control 60 per cent of the local VoIP market - despite the face-saving introduction last year of BTCs competing Vibe service.

And experts have long predicted that WiFi phones connected to a computer with Internet access will disrupt BTCs still-lucrative mobile business over time. These services will be especially appealing to post-paid customers who are currently BTCs single largest source of revenue.

According to the Bluewater document, other factors affecting BTCs value include exorbitant rates that would be impossible to maintain in a competitive market; the likelihood that hurricanes will cripple the network; a costly obligation to provide service to every isolated settlement in the Bahamas; and capital spending that is much higher than earnings.

BTC president Leon Williams recently boasted that the corporation had spent $353 million on capital development over the past five years, and Bluewater says BTCs business plan calls for another $530 million spend over the next three years. That compares to $429 million in earnings projected over the same period.

Of course, BTC refused to make its business plan available and declined to answer any questions about it. Zhivago Laing - Smith's replacement as state finance minister - said the government had not scheduled any meetings with Bluewater and had nothing to add beyond what the prime minister has already said: "We are focusing on the budget right now," he told Tough Call.

So, after almost a decade of on-again, off-again privatisation, it is still unclear what will happen to BTC. And the question on everyone's lips is: why would Bluewater pay such a high price for a minority stake in a poorly-run state enterprise?

The answer is that the deal will extend BTCs cellular monopoly for up to seven years, and let it provide highly profitable quad-play services. According to one industry analyst we spoke to, "BahamaTel would have had a one-year monopoly on mobile and no video. These guys are getting a minimum five-year monopoly plus video, so of course they are willing to pay more.

"Even the 'man in the street' can deduce that the PLP planned to sell much more than what was previously on offer. It seems clear that BTC will continue as a monopolist for a very long time. These arrangements are a smoke-screen trying to hide that fact."

According to James Smith, the deal was that Bluewater would pay $220 million up front, a further $35 million at the end of the five-year cellular monopoly, and a final $5 million in the sixth year - for a total of $260 million. This was what Prime Minister Ingraham referred to shortly after taking office as "selling BTC on credit".

"The government will probably embrace this deal," one analyst said. "They'll have Bluewater and BTC telling them how wonderful it is, and pointing to Virgin Mobile as the text-book example. There will be no-one impartially pointing out the regulatory realities here, and even if there was, nobody would be listening."

The five-to-seven year exclusive on mobile service is necessary, according to Bluewater, because a shorter time frame would force BTC to undergo significant cost-cutting and staff reductions to prepare the company for competition.

Bluewater insists that under the terms it has negotiated it will not cut any of BTCs 1276 employees - a plus for any government. And after two years of protracted talks at considerable cost, it is clear that Gregg and his partners are confident that with the right guarantees they can make the company work and take it to the next level.

"I just don't believe the 'no layoffs' promise," said another industry expert. "A deal like this is never done without them. Layoffs will come in the form of 'voluntary' redundancy and 'attrition'. I wonder if the previous agreement with the government continues to apply: anyone made redundant gets the same package as the one wrung out of Hubert Ingraham by Shane Gibson and co. back then? It averaged $100,000 per person, and would be ruinously expensive now."

Gregg says he wants to partner with the government to develop BTC into the leading telecoms company in the region, and to upgrade its services to world class standards: "We believe (our) proposal will give the people of the Bahamas what they want most - competition and choice - while giving the government the highest possible price, which is significantly higher than would be justified by the BTC business plan."

But, you may ask, how can there be competition with an extended monopoly? Well, the answer is, with something called a Mobile Virtual Network.

Bluewater says that after three years it will open BTCs cellular network to third parties, giving "a choice without various islands having to wait for new service providers to roll out their network (a roll-out that might never occur)...Bahamians will benefit from having a competitor that is focused on offering customers a compelling service rather than on building a complex and expensive network."

In other words, Bluewater/BTC would build and own a nationwide network infrastructure which other companies would lease. This is similar to what happened recently with both BTC and Cable Bahamas in terms of their Internet pipes. BTC allowed others to resell its DSL Internet service at a price set by BTC. Other operators bought at a slight discount but could neither compete on price nor add value for the customer, as they were entirely dependent on BTCs service.

Cable Bahamas had a similar dispute over the reselling of its broadband service at a price which analysts say was not commercially viable: "The regulator wasn’t prepared to stand up to CBL and the resultant business dynamics didn’t work. That’s the problem. If the regulator (meaning the Public Utilities Commission) can’t make something as simple as Internet access work for competitive purposes, how will they ever make a telecoms structure work?"

The theory is that BTC will own the wireless spectrum and the network infrastructure, allowing others to use it as Mobile Virtual Network operators for a fee. But at the same time, BTC will be competing with these other operators.

"That is not competition," argued one analyst. "It is BTC calling the shots, and setting the price. It is simply a slick way of bolstering profits whilst creating the illusion of competition. The alternative is to do what everyone else in the region has done and have true competition."

The problem is that most other places in the Caribbean had Cable & Wireless as the incumbent telecoms operator, not the government, so there was not the huge conflict of interest between liberalising the market for the good of the economy on the one hand, and selling what is politically seen as a national treasure on the other.

"It is absurd that we are talking about holding the country back for another five years for short-sighted gain. That's the real issue here. The losers will be the consumer, the economy and the competitiveness of The Bahamas, because what will happen on the ground is that BTC will retain a de facto monopoly, with competition in name only, not in substance."

In spelling out the rationale for its proposed acquisition, the Bluewater document paints a dismal picture of BTC. It says the corporation's business plan is inconsistent, lacks detail and offers nothing to its three main stakeholders: consumers, the government and employees.

Specifically, Bluewater says the BTC plan makes no mention of improving poor service, offers no initiatives to cut high prices and fails to justify the introduction of new products and services on which it is spending hundreds of millions of dollars.

"One of the priorities of any BTC plan should be to address these key issues," Bluewater says. "Hence this looks a particularly poor business plan for Bahamians...Implementing it would be extremely costly for the government, without any clear payback."

Bluewater says the BTC plan "generates little value for the government, and in fact could cost the government $100 million to implement...(but) since the plan does not extend beyond 2009 there is no way to tell if investments will ever be recovered...(and) the plan assumes no dividends at all (for the government)."

Bluewater also points out that just two years ago BTCs cash flow for the year was wiped out by hurricane damage to the network. Although almost $50 million in insurance claims were submitted, " It is our understanding that insurers refused to honour many of these claims."

And Bluewater notes that while BTC talks about introducing a raft of new products (such as Blackberry, Vibe, WiFi and WiMax, there is no discussion as to whether these products are appropriate for the Bahamian market: "Given BTCs record (in terms of) cost overruns, significant delays and poor pricing, there have to be serious questions about the implementation of new products."

The fact is that competition in the Internet market has given the Bahamas a hemispheric lead in terms of broadband penetration (as a percentage of total households - 45,000 out of 93,000). And competition in the mobile phone market in Jamaica has led to $750 million of investment and 100 per cent penetration - meaning every man woman and child has a cell phone.

Cable Bahamas' exclusivity ends in 2009. And analysts say that going forward there should be open competition for everyone in all services - fixed line, mobile, cable TV and Internet access. The government should issue two or three class licenses that allow the delivery of any service with no constraints. And then auction off the wireless spectrum.

"This is the model that has been adopted in Trinidad, and Jamaica is going in the same direction," one analyst said. "Continuing the exclusivity for BTC is absurd and will put the Bahamas significantly behind the global trend and hinder the country’s international competitiveness."

Telecoms liberalisation remains a touchstone issue for any Bahamian government. Although privatisation has been the talk of the town since the mid-90s, no government has been able to walk the walk. So BTC remains a ball and chain around our necks - our critical communications infrastructure held hostage by political patronage, lack of vision and faintness of heart.

And waiting in the wings are other useless and loss-making state enterprises like Bahamasair and ZNS, which continue to suck up our tax dollars while contributing little of value to the economy. It is time we made a decision to get rid of them all.

Comments

[EB Christen]

Fantastic article... nothing more to add... Bahamians need to be fully aware of this situation. I hope Ingraham does for television/internet/cell phones this time around what he did for radio last time around. I hope he also takes the historic step of reducing funding for ZNS and having it operate as a private entity in a competitive work place - sink or swim... It is time for this country to choose 1st world or 3rd world...

[Banker who knows the truth]

Does anyone actually know what John Gregg really did at NTL and VirginNet? This guy worked out of a corner office in NYC while his operations were based in Europe. He set foot in the operating offices of NTL/Virgin just 2 times in 3 years, instead preferring a cushy office in London. The managers he appointed were overspending and he did absolutely nothing about it, since he did not understand the numbers. He made countless promises to investors, all of which he failed to deliver. He sells the street a good story about everything that could go right once a bunch of businesses they bought were integrated, but in reality they still have not integrated those businesses 10 years later. To offset the operating mess he created, he simply piles more and more debt on the company until it eventually goes bankrupt in 2003 and then gets fired by the bondholders in the process. Within 6 months of him being ousted, the company cut expenses by $2 billion a year and became profitable. VirginNet was a raging failure, other than for the money that Gregg took out of the company personally by selling it to the parent company for a silly valuation (self-dealing). Be careful what you wish for with Mr. Gregg. The only skill in his book is how to tell a good story, put politicians on his bankroll and then leverage the company up to the point it collapses. In the meantime, he will get his management fees and perhaps unload his stake while the going is good, leaving the Bahamas with the mess to clean up afterwards.