Stifel downgrades Digital 9 Infrastructure following ‘forced’ Verne Global sale

On Monday (27 November), the DGI9 board said it had entered into a definitive agreement for its stake in the company for approximately £465m, representing a 5% discount to end-June carrying value.

The $575m purchase price is comprised of a $440m cash sum split between $415m on closure of the Verne transaction and $25m deferred consideration, with an up to $135m potential earn-out, payable subject to Verne Global achieving run-rate EBIDTA targets for the 2026 financial year. 

DGI9 said the sale enables the trust to deleverage its balance sheet by paying down approximately £300m of its revolving credit facility. 

In a research note, Stifel analyst Sachin Saggar said that given the trust’s stretched balance sheet, it was important that “some form of deal took place”, but argued the pricing and structure is not “as good as expected”.

Digital 9 Infrastructure launches strategic review following £456m Verne Global sale

He noted that an equity consideration of up to £456m is below the indicated price of £500m and below the value of £480m at the end of June. 

“Perhaps we could call this a volcano discount, but nevertheless the seller could not walk away and so the buyer held the strongest hand in negotiations,” he said. 

According to Saggar, the “disappointing aspect” of the deal is the performance related deferred consideration of up to £107m, which will not be assessed until December 2026 and potentially not paid earlier than 2027.

“No details of how strict this performance target is has been provided, which means it is not possible to assess the probability of this being paid,” he added.

“The deferred consideration also likely means the fund cannot be wound up until 2027 at the earliest, as investors wait to see if the performance target has been met – quite helpful for a manager under pressure on all its listed products.”

Digital 9 Infrastructure shares plummet by 40% as turnaround hopes slump

As the deal is not expected to close until the first quarter of 2024, Saggar said there remains execution risk and there is no mention of a termination fee. Moreover, he noted DGI9 will need to take on more leverage before the deal is closed and before proceeds are received.

Following the closing of the sale, the DGI9 board said that it had decided to initiate a strategic review to “develop and assess the options for the company’s portfolio companies with a view to maximising shareholder value going forward”.

The review may include further portfolio sales, and will also look into the management arrangements, including performance and the fee structure, of its investment manager, Triple Point Investment Management.

“We believe investors prefer the fund to be wound up in an orderly manner but also view the sale of Verne Global as a forced sale. If your best asset in a structurally attractive sector is sold below prior valuation, what does that mean for the rest of the portfolio?,” he said. 

Digital 9 Infrastructure weighs divestment from crown jewel Verne Global

According to Saggar, Arqiva, one of DGI9’s other portfolio holdings, represents “little other than option value given it is a mortgaged asset”, raising expectations that a wind down could take years to maximise value. 

“If the share price rallies on the back of the Verne Global sale, we suggest investors reduce positions as the risk reward from this point forwards is no longer appealing. In our view, the damage was done when the dividend was suspended,” he added. 

Digital 9 Infrastructure’s share price fell more than 14% over the course of the day, and was trading at 9.6% in the red at the time of publication, according to data from Morningstar Direct. DGI9 declined to comment.

Other sell-side analysts and shareholders have been more positive about the deal, with Liberum describing the valuation achieved as a “satisfactory outcome”, while shareholder RM Funds welcomed the terms of the sale.