Warburg Pincus tips Converge to sustain rapid growth

“As it comes to telecom infrastructure, the Philippines is really frozen in time,” said Saurabh Agarwal, a managing director at Warburg Pincus, which invested in Converge last year. “There is very strong demand for broadband, driven by the connectivity needs of a young population that spends a lot of time on the internet. But the supply side is extremely limited. It has largely been archaic copper infrastructure which has resulted in very poor access for fiber broadband.”

Converge has taken advantage of the incumbent telecom duopoly’s failure to act on the opportunity. Founded as recently as 2012, the company claims to run the country’s fastest-growing fiber network, having accumulated more than half of new residential subscriptions since 2018. It had 731,000 residential subscribers as of June, up from 381,000 12 months earlier.

Converge sold 1.5 billion shares in its IPO at PHP16.80 apiece. With a further 225.8 million shares earmarked for the overallotment option, the offering is expected to reach PHP29.1 billion ($601 million). Cornerstone investors accounted for 37.6% of the international portion. The company ended October 26, its first day of trading, down 9.4% at PHP15.22. As of mid-morning on October 27, it had fallen again to PHP13.90, which equates to a market capitalization of PHP105 billion.

Warburg Pincus and Converge’s parent company, Comclark Network & Technology Corporation, together sold approximately one billion shares in the offering. About three-quarters of these were held by the private equity firm, enabling it to take PHP12.9 billion off the table. Warburg Pincus, which invested $225 million in Converge in October 2019, has reportedly reduced its holding from 29% to 13.8%. It remains the largest external investor.

The size of the IPO – and consequently the amount of shares Warburg Pincus contributed to it – was driven by the need to make it large enough to appeal to blue-chip institutional investors, which accounted for 80% of the international portion. Meeting the 20% minimum free float requirement was another consideration.

Agarwal started scouting for investment opportunities in the Philippines in 2017 after Warburg Pincus decided the country would be a core part of its still nascent Southeast Asia strategy. “It has good demographics, rising affluence and unique characteristics in that there are a lot of remittances coming from foreign workers, which fuels domestic consumption. The BPO [busines process outsourcing] industry creates a lot of employment,” he observed.

A first meeting with Dennis Uy, Converge’s founder, came the following year. The company was in the early stages of a process to bring in a third-party investor to support its next phase of growth, so Agarwal moved quickly. A binding offer was made in 2018, though it took nearly a year for regulatory approvals to come through. At that point, an IPO was not on the agenda for 2020.

Converge’s network stretches to more than 35,000 kilometers and covers 4.1 million homes, though this represents only 9% of total households. Residential business represents three-quarters of revenue, with the rest coming from enterprise customers. Matthias Vukovich, the company’s chief financial advisor, told the IPO media briefing that the Philippines is at an inflection point similar to Thailand in 2015. Over the last five years, Thailand has seen a tenfold increase in fiber penetration.

Converge plans capital expenditure of PHP29 billion over the next 18 months, with a view to reaching 55% of households by 2025. Agarwal adds that the company built up its network from Luzon, not metropolitan Manilla, so it has already demonstrated an ability to secure users in less affluent as well as affluent areas – and the take-up rate is about the same.

“In some of the poorest provinces, the take-up rate was 50% within 12 months. Typically, you get to those levels in 18-24 months. The need for connectivity is so large, wherever Converge is growing customers are lining up to get that connectivity,” he said. “And 90% of customers today are first-time broadband users. The infrastructure hasn’t previously been available for them to access fixed broadband.”

Converge generated PHP6.5 billion in revenue for the first six months of 2020, up 67% year-on-year. Over the same period, EBITDA increased by 67% to PHP3.3 billion. Average revenue per user is PHP1,300 on the residential side and PHP25,000 on the enterprise side. The company serves more than 10,000 business users.

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• Topics
• Southeast Asia
• IPO
• Infrastructure
• Technology
• Philippines
• TMT
• Warburg Pincus Asia