Once a darling of the infrastructure sector, the Digital 9 Infrastructure investment trust now faces an uncertain future.
The stock has fallen 40 per cent in January alone as investors have abandoned the business.
That has left the trust trading at a staggering 82.8 per cent discount to its last reported net asset value, the lowest of any investment trust.
This means despite its £890m net asset value (NAV), the market values the trust at less than a fifth of that.
Over the last year, its share price has dropped 78.7 per cent, compared to an average 14.2 per cent drop for its peers in the infrastructure investment trust sector. The trust’s NAV per share has only dropped 4.2 per cent in that time.
However, less than 18 months ago, the trust was trading on a premium to its net asset value and sat in the FTSE 250, having steadily grown in value since it launched in March 2021.
So what happened?
Problems first started emerging at the end of 2022, when the trust’s lead managers, Thor Johnsen and Andre Kerihaloo, unexpectedly quit, raising concerns over corporate governance.
Throughout 2023, the trust then saw its shares sink as funding problems became clear, but hopes were buoyed when it announced in June that it was looking to syndicate a minority stake in Verne Global – a leading data centre platform – to provide the cash it needed.
Despite this, hope for Digital 9 has slowly dwindled, with analysts describing the Verne deal as a “forced sale” that was not “as good as expected” after greater details of the plan with private equity firm Ardian were revealed in November.
“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,” said Stifel analyst Sachin Saggar at the time.
In September 2023, it decided not to declare a second-quarter dividend and withdrew its annual dividend target of 6p per share as management looked to conserve cash. The market reacted badly to this decision with the shares slumping 40 per cent in one day.
Following the announced deal with Ardian, Digital 9 initiated a strategic review to “develop and assess the options for the company’s portfolio companies with a view to maximising shareholder value going forward.”
Last week, the review concluded and the board said it had decided to wind down the trust, arguing that its best route to providing value to shareholders was selling off the assets due to the large discount.
To add insult to injury, yesterday it was revealed that the Icelandic Regulatory Approval body had blocked the Verne Global sale for up to 125 working days due to anti-trust concerns, putting further pressure on the share price.
Digital 9 is now down 39 per cent over the last five days, or 86.9 per cent since September 2022 when troubles began.
Winterflood analyst James Wallace noted that the Icelandic anti-trust authority had previously approved Ardian’s 2022 takeover of the largest telecoms infrastructure service provider in Iceland, and is therefore taking additional time to consider the anti-trust implications of the business’ ownership of Verne Global.
“Whilst any potential rejection of the deal would not necessary be final, as remedies can be proposed such as the exiting of a portion of existing holdings or joint ventures, it certainly would complicate the managed wind-down that was envisioned by the DGI9 board,” Wallace added.
A circular to convene a general meeting to vote on the wind-up is expected in the coming weeks, and the board said that if it is not approved, it will continue to comply with the current investment policy, and look to identify alternative options for its future. However, it is widely expected that the vote will pass.
Investec analysts Ben Newell and Alan Brierley warned that “it remains to be seen what appetite there is” for most of the trust’s portfolio assets.
After the sale of Verne, telecoms firm Arqiva will represent 70 per cent of the trust’s total assets, but the trust has delayed a sales process for the stake in Arqiva “for the time being” due to the upcoming wind-down vote.
Newell and Brierley said the decision to delay the sale “confirms our concerns over the company’s
ability to sell its stake in the business, an asset that seemingly no one else in the infrastructure world wanted to own, during numerous sales processes prior to D9 buying a stake.”
A sale of Aqua Comms, the trust’s third largest holding worth around £250m, “will be the likely determinant of capital returns to shareholders in the near term”, they added.