Digital 9 Infrastructure (DGI9) has signed a binding agreement with EXA Infrastructure to sell its Atlantic and Irish Sea subsea fibre business, Aqua Comms for US$48m (around £40m). The transaction, which follows DGI9’s recent divestment of EMIC-1 announced on 31 December 2024, is subject to the receipt regulatory approvals in a number of jurisdictions, including competition & merger clearance, which are expected to take approximately 12 months. DGI9 says that it will continue to manage Aqua Comms and will benefit from any interim distributions that occur between signing and completion, with the final transaction price dependent on the balance sheet at completion.

Commenting on the transaction, Eric Sanderson, chairman of DGI9 said “While the pricing outcome for Aqua Comms is extremely disappointing and less than might have been expected for the Company, a complete and far-reaching auction process has been run over a period of nine months, to fully market test the value of this business. Given the current market conditions and business specific factors, we are confident this Transaction represents the best option for shareholders in the context of the orderly wind-down.”

[QD comment: unfortunately, things seem to have gone from bad to worse to even-worse for DGI9. As we explore below, the 36% discount achieved after costs relative to the end June 2024 comes after a previous massive write down of US$208m and so longer-term shareholders that held DGI9 prior to end June 2024 are left nursing a loss on this holding of US$235m or 83% of the pre-June 2024 valuation. In this context, the c 80% discounts that DGI9 has previously traded at suggest that the market got this about right.]

Aqua Comms sold at a 36% discount to end June valuation after costs

DGI9 says that the equity value of the transaction is US$54m, which represents a 28% discount to the valuation of US$75m as at 30 June 2024. But that, after deduction of US$5.4m transaction costs, the net proceeds, based on the current balance sheet, would be US$48m, which is a 36% discount (equating to c. 2.6p per share) to the valuation incorporated in the NAV as at 30 June 2024.  The Aqua Comms valuation reported to the market as at 31 December 2023 was US$283m. As noted below, this already comes after a massive write down as at end June 2024.

Previous US$208m write reflected inability to fund Asian growth projects

DGI9 says that the US$208m write down of the Aqua Comms valuation to US$75m as at 30 June 2024 principally reflected the inability to fund the Asian growth projects as well as the other factors (see below). It adds that it also reflected the indicative interest received pursuant to the sales process for Aqua Comms at the time of 30 June 2024 NAV publication and, since then, the market backdrop for selling Aqua Comms has softened as further reflected in the sale price that has been achieved.

DGI9 says that, taking into account the combined subsea business (i.e. including EMIC-1 at US$49.6m), the discount to the Company’s 30 June 2024 valuation of these investments, would be 21% (c. 2.6p per share) pre-transaction costs and 28% (c. 3.3p per share) post-transaction costs.

Delaying the sale unlikely to result in a materially higher price

DGI9’s board says that it recognises that the equity value of the Aqua Coms transaction represents a material discount to the 30 June 2024 valuation and has been advised that delaying a sale is unlikely to result in a materially higher price within the timescale of the wind-down and carries significant uncertainty. It adds that the sale is the product of a thorough 9-month competitive auction process, initiated by the previous Board but conducted by Goldman Sachs International.

It is the board’s view that the Aqua Comms business has been severely impacted by numerous factors since the Company’s initial investment, including an inability to deliver on its intended global growth strategy and ongoing price compression across the global subsea fibre market, especially in the Atlantic. Key contributing factors include:

• Asian growth projects: Inability to capitalise on accretive expansion plans into Asia, and to restrictions under the Group’s RCF covenants resulting in these projects not being capable of being funded (meaning pipeline projects historically valued by the Company could not be delivered);
• Margin compression: Overbuild of subsea cable capacity in all markets, including the Atlantic market, where despite rapidly growing demand, build-out is outpacing demand growth and increasingly compressing margins.  This has been driven by hyper-scalers and technological improvements that have led to a consistent c. 15% per annum decline in pricing over the past 5 years. This decline is expected to persist meaning that any extended hold period by the Company would have presented a high risk of further value erosion for shareholders;
• EMIC-1: The indefinite delay to the project due to ongoing conflicts in the Red Sea (meaning no foreseeable opportunity for capital appreciation or earnings growth from EMIC-1 which could be realised as part of combined sale with Aqua Comms); and
• M&A market conditions: The shift in the rate environment, coupled with macro-economic and geopolitical volatility, has led to a reduction in transaction activity across infrastructure and private equity.  This has contributed to a reduction in the buyer universe for this asset and impacted the pricing secured.

Independent valuation by InfraRed Capital Partners

InfraRed Capital Partners has independently performed a bottom-up evaluation of the Aqua Comms business to validate the terms offered by EXA. The evaluation considered the points detailed above by: removing Asian growth projects from the pipeline; acknowledging margin compression in the Atlantic market (and consequent revision of terminal value assumptions); removing any capital appreciation or earnings growth on EMIC-1; and revising the discount rate to reflect current market conditions. The conclusion reached by InfraRed was that the transaction represents fair value for Aqua Comms (post-divestment of EMIC-1), with the alternative of holding the business over the medium-term being a higher risk option for DGI9 and its shareholders.

As reported on the recent EMIC-1 disposal, the transaction costs are predominantly an allocation of fees payable on the completion of the Company’s Subsea cable assets, which were committed to by the previous Board at the commencement of the sales process in early 2024. These fees are contingent on the completion of the transaction.

Proceeds to be used to pay down RCF

DGI9 says that, once received, the proceeds (net of transaction costs) of the Aqua Comms and EMIC-1 transactions will be used to repay any balance remaining on its revolving credit facility (RCF). As announced on 31 December 2024, DGI9 is discussing options with the RCF lenders, to extend the remaining balance of the RCF beyond the current maturity date in March 2025. Incremental proceeds over and above the RCF balance will be returned to shareholders in due course, along with proceeds from other potential value realisations and optimisations DGi9 is progressing in tandem.