Global Voice - Issuance of 32 Million Euro Convertible Bonds

I read with some amazement and trepidation the latest announcement by GV relating to their business expansion. They are issuing 32 million Euro worth of convertible bonds (CB) to "accelerate rollout of metro networks and associated services in London, Berlin and Munich". The interest rate on the bonds is 3%. They also need the funds to complete the commissioning of a datacentre in Amsterdam and another next-generation long-haul network in Germany. The conversion price for the bonds is S$0.191 (19.1 Singapore Cents). Recall that in April 2006, GV had issued about 35 million Euro worth of convertible bonds as well, with an interest rate of 3% payable semi-annually.

The question which begs asking is: why does GV need to raise so much cash in order to operate ? Recall that in the RTO of Horizon.com, GV had already purchased the entire metropolitan fibre network at a fraction of the original cost. In fact, one can say that GV had ownership of these assets, which they can subsequently deploy to generate recurring revenues. Back then, utilization rate was very low at 1-2% and it was touted that if utilization increased, then shareholders would see a dramatic jump in revenues, and the company would turnaround from the red. There was intensive coverage of GV during FY 2005 by CIMB and DBSV which promoted the company and said that the metropolitan fibre was about to "take off". Apparently, nothing much came out of it eventually as the company managed to report a loss during each half-year reoprting season. This is despite the fact that it was snaring more and more contracts on a regular basis and building up their customer base. I had highlighted this point before in my review on GV some months back when I analyzed their 1H 2007 financial statements.

So if one glances at the income statement for 1H 2007, it is glaringly obvious that finance costs have increased significantly, up a whopping 630% from 1H FY 2006 ! The announcement of another 32 million Euro worth of convertible bonds only serves to exacerbate the problem of high interest expenses as the interest paid in future years will almost double as compared with FY 2007. Don't forget that being convertible bonds, they also carry the potential to be extremely dilutive once exercised, and the conversion price is not all that far away from the current market price of around 17 to 17.5 singapore cents. A discerning shareholder should then wonder: why does the company need to raise so much cash if it has secured enough contracts over the last 12 months to sustain its operational cash flows ?

The amount raised is not small by any standards and would further raise their interest-bearing borrowings under long-term liabilities in the Balance Sheet to about 61 million Euro. Take a quick glance at the Cash Flow Statement from 1H Fy 2007 and one can see that the operations are not generating sufficient operating cash flows to enable the business to sustain itself, which is probably why they are doing a "fund-raising exercise" every now and then. They already have a 35 million Euro cash outflow for 1H FY 2006; now they are going to have another 32 million Euro outflow for 2H FY 2007 ? When will it end ?

Assuming that even if GV DOES have the means to sustain its operations through the generation of recurring cash flows from their key customers, remember that they still need to service the interest payments, and try to gradually reduce borrowings as well. This all seems like an uphill task for the company as they struggle valiantly to return to the black.

Finally, why are GV undertaking to invest in more assets to bolster their current network ? As I recall, GV already has their fibre network in the regions indicated in the press release, so why are they purchasing another datacentre and another network ? There is insufficient information given to shareholders as to what are the nature of the assets to be purchased, and how these will contribute to improving their value proposition and competitive advantage. This factor, coupled with the opaque reporting for each of their contracts, means that shareholders have no inkling on whether the company is managing to improve revenues significantly or slightly.

The announcement of the new convertible bond issue was the proverbial straw that broke the camel's back. I divested myself of Global Voice once and for all, and incurred a loss of 4.2% (excluding brokerage) on this "long-term" investment. Suffice to say that if I had done my proper due diligence initially when I considered this company, I would probably not have bought it at all. This is my worst investment mistake thus far as I have incurred a huge opportunity cost in locking up my funds in a stagnant company. I will be providing details of this mistake in a future posting under "Investment Mistakes".

Thus, my portfolio now contains only 5 companies; Suntec REIT, Ezra, Boustead, Pacific Andes and Swiber.