Acquisition of Pakistan’s only listed pure-play cable company falls through after Dunya gets a look at WTL’s books
Note to potential acquirers: whenever a company fails to disclose their financial statements on time, it is not because they have a really nice surprise in there.
Rumours that WorldCall Telecom’s majority shareholder Oman Telecommunications Company is looking to sell its stake in the company have been swirling since at least the beginning of the year, and reached such a cacophony on Twitter and Facebook that on February 22, WorldCall actually had to make a (now clearly misleading) announcement that the takeover rumours were false.
On June 24, however, WorldCall acknowledged that Dunya Technologies and Allied Supplies and Services were seeking to buy out 58.6% of the company’s shares.
But in a note sent to the Pakistan Stock Exchange on Wednesday morning, Arif Habib Ltd, the investment bank handling the transaction on behalf of the Dunya Group, said that the transaction had fallen through, stating only that the “negotiations to acquire [WorldCall’s] shares could not be concluded favorably.” Arif Habib Ltd did not elaborate further, but one look at WorldCall’s financial statements reveals the kind of sorry picture that most likely caused the Dunya Group to balk and run away as fast as they could.
Here is perhaps the most startling number from WorldCall’s financials to consider: for the last 12 months for which financial data is available, WorldCall’s revenues were 28.4% lower than the company’s very first full year of operations in 2005. That’s right: during a period in which inflation alone has gone up by approximately 166% (total, not annual average), WorldCall’s revenues have actually gone down by more than a quarter.
And it is not as though the business is smaller, but still profitable. For the twelve months ending September 30, 2014 – the latest available – had a net loss of Rs3.9 billion, nearly twice the amount of its measly Rs2 billion in revenues during that same period.
And the losses are just the beginning of WorldCall’s woes. As of its last financial statements, the company still had Rs7.6 billion in outstanding long-term loans, well beyond its ability to service with just interest payments, let alone actually begin paying back.
So what happened? When it launched in 2003, WorldCall was seen as a game-changer: offering broadband internet and cable television in one package, the first company of its kind in Pakistan. Its brand name allowed it to attract some of the most talented graduates from Pakistan’s best engineering schools at the time. A GIK graduate in 2003 would have been quite happy to accept a job offer at WorldCall. Where did it all go wrong?
Well, for starters, while WorldCall became famous for its consumer-facing broadband business, the core of its business was always wireless local loop (WLL) phones and long-distance calling.
The WLL business yielded significant revenues to the company for a while, but then effectively died because Pakistanis thought to themselves: why should I use WLL phones when I can just use a cellphone. It did not help that by 2006, there were six cellphone operators in Pakistan, and their fierce competition caused cellular prices to plummet, eviscerating the last remaining advantage of using WLL.
WorldCall revenues kept growing, though, peaking in 2009 at Rs8.4 billion, a little over $100 million at the time. That, however, is when the game began to change, with cellular penetration in Pakistan passing more than 50% of the population, and the state-owned Pakistan Telecommunications Company Ltd (PTCL) launching its own broadband internet services, coupled with cable television capabilities.
There was literally no technological or economic advantage left in using virtually any service offered by WorldCall. That is when the company’s inexorable slide downwards began.
Of course, it did not help that it did not occur to either the management or the majority shareholder to invest in improving the company’s infrastructure.
Meanwhile, the company, which financed much of its expansion by issuing bonds and long term loans from banks effectively faces default, with no ability left to service its debts. Needless to say, its stock is not exactly a great investment, languishing at 61% below the price at which issued its initial public offering (IPO) in August 2005.
The situation at WorldCall is so bad that they have not issued financial statements since September 2015, missing the deadline to issue at least one annual and one quarterly report, and will likely miss the deadline to issue a second quarterly report as well. Which brings us to the point with which we started this discussion: never trust a company that cannot release its financial statements on time.
One suspects that Dunya Group was shown the most recent – unreleased – WorldCall accounts and decided that it was not worth the effort to try to resuscitate the business.
Another point that astute readers may have noticed by now: if WorldCall really went up for sale in June, then why did they deny in February that they were up for sale?
Technically, WorldCall management was careful in their language when they denied that OmanTel had found a buyer for their shares. Securities law in Pakistan dictates that any offers for acquisition of a significant block of shares be made to all existing shareholders, not just the majority shareholder.
Yet, it is abundantly clear that it is OmanTel was going to be the selling entity, given the fact that the Dunya Group entities were bidding for a suspiciously precise 56.8% of WorldCall’s shares, the exact percentage held by OmanTel.
So how would OmanTel ensure that it would be their shares sold, and not any of the smaller investors? By accepting an offer lower than the market, a common technique used by majority shareholders of many Pakistani companies looking to get around the law. The most recent example: the sale by Engro Corporation of a majority of their shares in Engro Foods to FrieslandCampina International Holding BV.
Dunya, for their part, appear to have been smart enough to walk away from the WorldCall transaction. So what will become of WorldCall?
It can be difficult to say, but the company’s fate should be bankruptcy. It offers no compelling technology to either consumers or business customers that they cannot get cheaper and more efficiently from other sources. And it does not have significant market share in any business line that would be valuable to any strategic investor. WorldCall is a dinosaur that needs to die. The sooner it is euthanized by its owners and lenders, the less pain there will be for everyone involved.