Digital 9 Infrastructure PLC (DGI9) Earnings Call Transcript & Summary

So good afternoon, and welcome to the Digital 9 Infrastructure PLC Webinar. This is a follow up to the company's strategic review RNS that we published on the 29th of January. We very much appreciate your attendance and time today and the detailed questions that have been provided in advance by a number of shareholders. My name is Charlotte Valeur. I'm the Independent Interim Chair of the company and Chair of this committee. I'm joined by all 4 of my colleagues and the Board, Gailina Liew, Senior Independent Director and Chair of the Nominations Committee; Aaron le Cornu Chair of the Audit Committee; Richard Boleat, Chair of the Evaluation Committee; and Brett Miller, Chair of the Management Engagement Committee. As you are aware by now, the conclusion of the strategic review was announced on the 29th of January. And following careful consideration of the options available to the company and the feedback received from a large number of shareholders, the D9 Board has determined that it's in the best interest of shareholders as a whole to put forward a proposal for managed wind-down of the company. We currently expect to publish a circular containing further details of and seeking shareholder approval for the relevant changes to the company's investment policy by the end of February, with the associated extraordinary general meeting to then be scheduled for late March 2024. This would be the earliest date the meeting could be held under the company's constitutional documents and Jersey Company Law. So if notice of the meeting is given by the end of February, as is currently the aim to be that is the earliest date. We are deeply dissatisfied by the difficulties faced by the company, which have translated into a very unsatisfactory share price performance. Our total focus as a Board is now to maximize the value that can be achieved for shareholders through the managed wind-down process should shareholders approve it. As you will, of course, all know, there have been some recent changes to the Board with the addition of 2 highly experienced independent directors with relevant experience to support the company in implementing the managed wind-down. So I will now go over to Q&A and talk a bit about that.

We received 84 questions from 18 investors and equity research analysts covering a number of topics. Up to the very minute of this webinar, we received more, but we haven't been able to include. We apologize for that, but we were too close to the webinar to do that. In order to address all the questions comprehensively, we've grouped the questions into 5 themes. The announced managed wind-down, Arqiva, valuation of D9 assets, relationship with investment manager and general Board matters. Please be assured that we have not deliberately edited out multiple questions and that we will answer each question received as fully as we can, but noting that some questions couldn't be answered as they're commercially sensitive with respect to D9 or the underlying portfolio companies. Some questions specifically related to the performance of the company's underlying investments, they will be further addressed in a trading update, which is intended to be released by the end of February by Triple Point. We hope you will find this webinar helpful, but if you would like to follow up on certain topics or have additional questions, please email [email protected], and we will attend to them at [Indiscernible]. I would like to stress that the information and opinions expressed by us today, including any forward-looking statements do not purport to be comprehensive. They are provided as the date of this webinar and are subject to change without notice. Neither the company nor any other person is under any obligation to update [Indiscernible] this information, and no part of this webinar nor the fact of its subsequent propagation to form the basis of all be relied on in connection with any contract or commitment or investment decision whatsoever. This webinar contains certain forward-looking statements regarding the belief of current expectations of the company and members of the Board of the company about the company's financial condition, it's results of operations and business. Such forward-looking statements are not guarantees of future performance, rater they are based on current views and assumptions and involve known and unknown based uncertainties and other factors -- many of these are outside the control of the company and are difficult to predict that may cause the actual results, performance or achievements or developments of the company or the industries in which it operates to differ materially from any future results or performance, achievements or developments expressed or implied from the forward-looking statements. Firstly, for context, I would like to give a quick overview of the process and options that the D9 Board looked at during the strategic review, leading to the managed wind-down proposal announced last week. We are having a slide with very small letters on the screen right now, but that basically gives you an overview of the strategic review process. So we have now concluded the process. And a part of the process, we performed an extensive and index analysis of the available options for the groups and each assets. The Board has worked for over 2 months with its financial and legal advisers considering all options. We ensure that new directors were on the board in time to also be a significant part of the strategic review. During the strategic review period, the Board collected feedback from a large number of shareholders while our lead financial adviser had conversations with institutional investors to assess potential interest in each of the assets. After very careful consideration, the Board has determined a managed wind-down would be in the best interest of the shareholders. So instead of going through all the details on this page, I'll now focus on specific questions faced by you for the remainder of the webinar. So we received a couple of questions regarding the options considered by the Board during the strategic review. For example, whether the Board consider setting up a mechanism for shareholders with growth objectives to buy out those, the value objectives or merger of D9 with another company or investment trust, the Board looked at all various options possible and in front of us, with its advisers as part of the strategic review and decided that the proposed managed wind-down was most likely to lead to the best outcome for shareholders. I will now address the questions received relating to the managed wind-down, including the overall timing and process for the managed wind-down, sequencing of asset sales, distribution of D9 shareholders, the current status of the Verne Global transaction and the earn-outs from the Verne transaction. We understand the shareholders would like greater clarity on how quickly [Indiscernible] proceeds will be returned, the net amount that might be realized and the prioritization of returns of capital to shareholders versus addressing the VLN. In terms of the immediate next steps, the Board has been working on the draft of the new investment policy statement. This requires FCA approval and also requires the consent of the lenders under the company's revolving credit facility, both of which have already been solved. We expect to publish a circular before the end of February or as soon as possible thereafter once the necessary content has been received. D9 will remain listed and tradable during the managed wind-down. The company will stop any new investments, but could still deploy capital to existing investments if required to maximize or protect shareholder value. D9 Board is already working with external advisers to prepare the sale process for the fully owned assets in anticipation of a positive shareholder vote in favor of the managed wind-down. Those assets are Aqua Comms, EMIC-1, Elio Networks, and SeaEdge UK1. We haven't gone to the stage where we are seeking [Indiscernible] because we need the shareholders' consent before we can move to that stage. Once the investment policy change, has been approved by shareholders, we will endeavor to execute the sale process as quickly as possible, but in certain manner that seeks to maximize value for D9 shareholders. There will be timing constraints in relation to the sale of certain assets by regulatory and lender consent and other consents are required. At this stage, we can't give any estimated transaction values versus carrying values for the wholly owned assets. As we have not yet, as I just mentioned, carried out in the price discovery and can't meaningfully do so until the upcoming extraordinary general meeting to seek shareholder approval has been held. We have been asked a couple of questions of other related aspects in respect of these assets. So regarding whether we would consider selling assets as a package. In response to this, we will consider all options that will maximize value for shareholders. Regarding performance at the asset level and recent changes among the senior management at the operating companies, this is going to be covered in detail in the upcoming trading statements. Regarding Arqiva, the Board's current position is that for commercial reasons, value maximization, it's likely to take longer to realize than the other assets of the company. We will come back to this shortly. Regarding shareholders' distributions as it stands, the requirement of our RCF lenders is that they need to be repaid in priority to any shareholder distribution. Thus, the net proceeds from the sale of Verne will be fully deployed in repayment of the RCF and the first proceeds from the sale of the wholly owned assets will be dedicated to the repayment of the RCF. Once RCF has been fully repaid and subject to the use of solvency requirements of any company, the Board will consider the allocation of any remaining proceeds as between returns of capital to shareholders and the repayment of the company's indebtedness to the Arqiva vendors, which are characterized in the form of a vendor loan note, essentially at that instrument, which we refer to as a VLN. We received questions regarding future dividend policy. Given the foregoing, no further dividend distributions or plan in respect of the year ended 31st of December '23, and none are foreseen. There is no intention to reintroduce a normal-course dividend policy at the moment. To the extent possible, it is intended that any cash distributions to shareholders will take the form of returns of capital potentially in the form of share redemptions, any capital return form and pricing will be determined by legal and tax requirement to ensure we get the optimal outcome for that. Regarding the Verne sale to Ardian, with sale concluded our competitive process which involved multiple interest of parties. The transaction with Ardian was the best available to the Board at the end of the process in terms of price being for all of the business and speed of execution and in response to the company's need to delever its balance sheet. As announced last week, the Verne Global sale is progressing towards completion with all required approvals expected to be received by the end of Q1 '24. The unconditional Finnish merger control clearance from the Finnish Competition and Consumer Authority has been received. All other completion workstreams, including those related to financing are being advanced and on track within the expected timeline. The Verne Global sale is conditional on certain conditions, as highlighted in our announcement of the Verne sale on the 27th of November 2023. Regarding the deferred consideration payment of $25 million, the new power agreement is being progressed and on track to date with the expected time line. Following recent volcanic events in Iceland, no disruption to the sale of Verne is expected because the Verne Icelandic campus is located in an area that is not seismically active. And even if the client activity were to increase, it is located in an area that is highly unlikely to have any impact on our operations. Funding of Verne Global capital expenditure is still required while Verne remains in the company's ownership. D9 is not liable for any CapEx in Verne between now and closing and never was liable to pay the CapEx in Verne. Verne will continue to fund its own CapEx, including some contractual commitments from its own cash sources, but only Verne is liable for this, not D9. On CapEx, we also received the following questions. What are the effect of cash adjustments for capital expenditure or working capital upon closing of the Verne Global deal. And the Verne Global deal is based on the locked box date as of 21st of September '22, and between the date and completion Verne has the obligation to operate as a [Indiscernible] in the ordinary and usual cost of business consistent with past practice. Adjustments will not be made for capital expenditure or working capital, but only for any leakage amount, which may have been occurred. Leakage refers to items like dividends, bonus issue, shareholders loan payments, et cetera. The only leakage incurred so far would be in relation to a shareholder loan repayment and some small transaction related to fees. We have received a specific question as to whether there were any discussions in December with RCF lenders about extending the maturity date and therefore, the date for repayment under the RCF to facilitate a new sales process, lenders have made it clear to the Board of D9 and TP that they wish to receive full repayment of the RCF as early as possible, and there are, of course, ongoing discussions with lenders, as one would expect in this situation. Regarding the earnout agreed in respect of the Verne transaction, the terms of the sales agreement impose confidentiality obligations on the company, which prevented from making public disclosure about the terms of the sale agreement without Ardian's consent. As announced last week, as part of its supporting of the results for the year ended 31 December '23, the Board has mandated an independent valuer to guide and support the directors' assessment of the fair value of its assets, including the Verne Global earnout payment of about $135 million. Shareholders and analysts should be aware that the computation of the ultimate value of the earnout payment will not be known until early 2027. We received questions regarding risk of misalignment between Ardian and the company in relation to the operation of Verne during the earnout period. There are market standard protections for D9 in the agreement to rent purchaser from trying to frustrate the earn-out, along with an obligation on the purchaser to continue to run the business in good faith in the ordinary course of business and in line with the business plan. The Board's assessment of the position is that the interest of Ardian and the company are largely aligned in relation to the performance drivers, which will ultimately determine the achievements of any earnout payments. I'll now address the detailed questions raised in relation to Arqiva and the VLN in the context of the managed wind-down. The Board is clear that the disposal of Arqiva will likely be more difficult than selling other assets within the D9 portfolio, and hence, cannot provide a time frame for selling its share in Arqiva at this stage. This is largely due to the commercial position of Arqiva, its significant balance sheet indebtedness and the relative rights and interest of Arqiva other shareholders. As a reminder, the company owns approximately 52% of the Arqiva's equity, but only 48% of its voting rights, whilst the other major shareholders including Arqiva control the balance. In the meantime, D9 will continue to consider and be open to all options for its interest in Arqiva which are value accretive to shareholders. The decision around next steps for Arqiva will be made following discussions with other Arqiva shareholders and the receipt of [Indiscernible] from the industry and market advisers. Just to clarify, the decision to further assess process is not related to the performance of the business. More details on this performance is going to be provided in the upcoming trading update. We have also been asked as to how the various options for Arqiva will affect the listing status of the trust once any wholly owned assets are going to be sold. The Board may reconsider the listing status of the company following completion of the sales of the other assets depending on the actions chosen for Arqiva amongst other things, but we are not able to advise on this further at this time. It will have to be further down the line when we know better where we stand on Arqiva. Regarding the RCF debt gradually increasing -- [Indiscernible] the company's interest in Arqiva was purchased in 2022 for approximately GBP 463 million, comprised of GBP 300 million cash consideration with the remaining GBP 163 million being financed through a vendor loan note given by the Canadian pension plan Investment Board known as VLN. The Board has been asked if it could indicate how it may go about paying down the VLN given its needs in the first instance, to fully repay the amount outstanding under the RCF. The payment of the VLNs may consider to be achieved in a number of ways, including the use of the remaining proceeds from the sale of the wholly owned assets, utilization of distributable liquidity at Arqiva itself, proceeds from the sale of company's interest in Arqiva or possibly by transferring the VLN obligations to a buyer of the company's stake in Arqiva, also on combination of what we've just been saying. Given that the company does not intend to commence a sales process for its interest in Arqiva in the short term and without knowing the scale of company's free cash after the disposal of the wholly owned assets and the full repayment of the RCF lenders, it would be speculative to provide any meaningful guidance on this topic at this point. The Board is well aware that there are differences among shareholders and how the use of in surplus disposable proceeds ex-Arqiva should be deployed with consideration needing to be given to the possibility of any returns being made to shareholders. These views will, of course, receive full consideration at the appropriate time. We were asked what was the initial strategy for the VLN at the time of D9 acquisition of the stake in Arqiva. It was originally intended that the VLN would be repaid prior to its expiration in 2029, either from proceeds coming from the potential sale of part of our shares in Arqiva or through cash flows from Arqiva itself in the form of distribution to Arqiva shareholders, which could commence in 2 to 3 years depending on the execution of the company's business plan and market conditions. On Arqiva, we were also asked the maximum minimum cash outflow on the [Indiscernible] arrangement. Further details will be covered in the upcoming trading update on that. On Arqiva, we asked if Arqiva could sell the smart metering business, D9 owns 48% of Arqiva as we have mentioned earlier. So selling part of Arqiva, things would need to be agreed with other Arqiva shareholders. As announced at the start of January, the Board has established a valuation committee, which Richard Boleat chairs, the valuation committee is composed of all D9 directors and is fully independent from Triple Point. The role of the Valuation Committee is to ensure that assets and liabilities on D9's balance sheet are appropriately valued under IFRS. As a reminder, the fair value of the company's assets and liabilities is based on the underlying operating company's valuation models adjusted in accordance with the IPEV or international private equity and venture capital, valuation guidelines while appropriate complied with IFRS. For that purpose, the committee is focusing on modeling assumptions from the business plan submitted by the various controller companies with a view to ensuring that those assumptions are reasonable and realistic given the circumstances of the underlying investment and the extent to which the business plans are dependent on forward-looking assumptions. The company is working with a leading independent valuation business to support the discharge of assumptions. As soon as the report has received, the valuation committee we'll be making a recommendation to the Board of D9 as to the adoption of such valuations or not. The intention of the Board is to report to shareholders as soon as possible, thereafter, setting out in a smart detail if necessary, the basis on which valuations have been arrived at. Having said that, I want to be clearly understood by shareholders and analysts that the valuation determined on a foregoing basis should not be regarded as being necessarily indicative of the value that the company may be able to achieve in the disposal of its assets during the managed wind-down process. This is because IFRS fair value methodologies assume a willing buyer, willing seller basis and do not and cannot take account of the interest or opinions of individual parties to a potential transaction such as accelerated disposal needs, competitive tensions and the like. Further prospective buyers may take a very different view of underlying operation company, modeling assumptions from those of operating company management. The only way in which self-disposal valuation may be determined is in the price discovery process once assets are being marketed for sale to shareholders vote for the wind-down. Brett Miller has been appointed Chair of the Management Engagement Committee, which is the committee with direct responsibility for the company's service providers, including the investment manager. As announced last week, the Board has indicated to the investment manager that subject to any required content, it tends to issue a notice of termination for the investment management agreement with the notice to be issued on the latest of 31st of March 2024 for the closing of Verne transaction. As a reminder, the investment management agreement with Triple Point specifies that the IMA can be terminated by not less than 12 months prior with notice of termination, but such notice cannot expire before 31st of March 2025. The company is actively working with Triple Point and exploring whether we might agree revised commercial terms that would be in the best interest of the company and the shareholders in the context of the managed wind-down. We have been asked if we can provide any color on what sort of terms are under consideration and whether any element of the Triple Point management team will be retained. The Board is currently in active discussions with Triple Point as I mentioned, and we'll communicate with the market as soon as there is an agreement [Indiscernible]. The Board of D9 will communicate on a monthly basis going forward to update on the progress of the managed wind-down. Any trading update or the trading update with a deep dive on all portfolio assets and recent performance will be published in the second half of February. The Triple Point available at that point to answer any investor questions on the operating performance of the underlying operating companies. And as mentioned with the questions we've been asked and that belongs into the trading update, those will be addressed there as well. So before I conclude, we received some questions regarding the Board specifically that I wanted to address here as interim chair of D9. Regarding the experience of the Board to conduct the managed wind down, with the addition of Richard and Brett who has specific successful previous experience to conduct managed wind down, my own experience in managed wind downs of investment trust and complementary skillsets from Aaron and Gailina, we believe we're equipped to abide the company through the proposed management and process in the form we are now. Now questions regarding giving some Board members with wind down experience executive responsibility to conduct the wind-down, the Board in the context of its discussion with Trigger Point is looking at all options. There were questions whether some historic D9 directors have to resign as a result of the distressed share price, the [Board approved purchase during] 2023 and over '24 were voluntary, and we cannot comment on the motivations of the individual concern. With regards to future communications, a trading update is expected to be published in the second half of February. This will contain an update on performance at portfolio companies, details on swaps and other cash flows, including CapEx. We received some questions on those topics, and they will be better addressed at the time of the trading update. The 31st of December 2023 annual results with new NAV will be published towards the end of April 2024. Once again, many, many thanks for attending today and for your engagement with us. If you do have further questions, then please do not hesitate to contact me via [email protected] or via our joint brokers. This webinar has been recorded and will be available shortly on the D9 website. We recognize the value of increased communication to shareholders and will update the market every month on progress from here on. As noted earlier, we expect to publish a trading statement and a circular before the end of February. Thank you so much for being here.