RCS - Aqua Ventures Ltd - Aqua Ventures Ltd seeks strategic review of DGI9

Peel HuntAnnouncement

30/10/2023 08:15

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RNS Number : 6264R  Aqua Ventures Limited  30 October 2023

30 October 2023

 

Aqua Ventures Limited

 

Aqua Ventures Limited seeks strategic review of Digital 9 Infrastructure

 

Aqua Ventures Limited announces it has written to the chairman of Digital 9
Infrastructure, in which Aqua Ventures Limited holds a 3.47 per cent
shareholding, seeking an immediate independent strategic review of the
business. Aqua Ventures Limited closely engaged, and discussed the letter,
with shareholders representing in excess of 20 per cent of the ordinary shares
of Digital 9 Infrastructure, who have expressed their support for Aqua
Ventures Limited making the recommendations outlined in this letter. It asks
that, given the continuing very poor relative and absolute share price
performance of the business, the board of Digital 9 Infrastructure provides
its assurance by 3 November 2023 that it will undertake such a strategic
review, or Aqua Ventures Limited reserves the right to requisition an
Extraordinary General Meeting. A copy of the letter is set out below.

 

Ends

 

 

Phil Jordan, Chair

Digital 9 Infrastructure plc

Dear Phil,

Aqua Ventures Limited is a shareholder of Digital 9 Infrastructure plc ("DGI9"
or the "Company") with an interest of 3.47% of the outstanding shares in DGI9.
We write to you, in your capacity as Chair of the Company's board of directors
(the "Board"), to express our dissatisfaction about the way the Company has
been managed and governed. Over the past several days we have closely engaged,
and discussed this letter, with shareholders representing in excess of 20% of
the ordinary shares, in addition to ourselves, who have expressed their
support for us making the recommendations outlined in this letter.

Notwithstanding the announcements released on 17 and 27 October 2023, we are
not convinced that the Board is taking seriously the feedback given by
shareholders during the recent consultation process, in the light of its
fiduciary and other duties. In particular, it is concerning to us that the
Board appears to have decided, notwithstanding this feedback, that it is in
shareholders' best interests to progress the sale of a majority or
co-controlling interest in Verne Global in circumstances where that sale, if
completed, would be likely to foreclose a sale of DGI9 and risk value
destruction by stranding the Company's other assets.

At the date of this letter, the share price has declined 53% year-to-date and
is overall down 60% since the IPO on 31 March 2021. This is a dismal
performance both in absolute and relative terms: the Company's closest direct
peer, Cordiant Digital Infrastructure, has declined 26% (38% since 31 March
2021) whilst the FTSE 250 index has declined 12% (22% since 31 March 2021).
Indeed, the market reaction suggests investors have not accepted the 27
October announcement as value accretive. Despite the 10% increase during the
day amidst low liquidity, it still ended with no gains for the week.

Shareholders have yet to see a commensurate response or any resolute actions
being taken in response to their feedback in order to mitigate ongoing value
destruction. We understand following our discussions with other shareholders
that many have already insisted on a strategic review.  Instead, we observe
that the Board's actions have only exacerbated the situation:

·    13 June 2023: the Board announced a new management team, concluding
its prolonged search - the share price was down 18% one month later.

·    19 July 2023: the Board released a company update reaffirming its
position on recent recruitment, capital, and dividend cover - the share price
was down 9% down one month later.

·    28 September 2023: the Board released H1 results and cancelled the Q2
dividend, directly contradicting the dividend target it reaffirmed only two
months prior - this had a devastating effect on the share price, which closed
40% down on the day.

The repeated failure of the Board to take actions to remediate issues in a
timely and transparent manner is of serious concern. Contradictory statements
and a lack of communication with investors amidst, and indeed further
contributing to, an ongoing destruction of value, raise serious questions as
to the competence of the Board.

We question whether the course of action pursued by the Board to date is in
our best interests as shareholders, or whether the Board is allowing itself to
be led into strategic mistakes by advice and information provided by Triple
Point, which is self-evidently in a conflicted position with respect to these
critical decisions. We also question the Board's judgement in engaging Goldman
Sachs as adviser to the Board in circumstances where that firm has, to date,
been advising Triple Point, which would seem to breach the fundamental
principle that the Board must be able to act independently of its investment
manager.

The strategic decisions, and non-decisions, taken recently appear to
demonstrate the Board's failures:

1)Retaining Triple Point as the investment manager for DGI9 portfolio has been
detrimental to shareholder value.

·    Each of the public funds managed by Triple Point has been trading at
a significant discount to NAV, raising serious concerns about the investment
manager's track record. This is the case not only at DGI9, which trades 64%
below NAV, but also at the other public funds managed by Triple Point, with
Social Housing REIT (SOHO) and Energy Transition plc (TENT) trading 59% and
43% below NAV, respectively.

·    The fee structure in place with Triple Point for the DGI9 portfolio
does not align the shareholder and investment manager's interests. Triple
Point's management fees are based on DGI9's NAV, which means that the Company
must continue to pay fees to the manager notwithstanding the value destruction
and sustained share price underperformance we have witnessed over the past
year. This position is no longer acceptable to us, especially as DGI9's close
peer Cordiant's fee structure is based on market value and share price
performance, which in our view is a better way to align shareholder and
investment manager interests and reward the investment manager for delivering
value growth.

 

2)    The management of the Company's investment in Verne Global raises
serious concerns about the Company's growth prospects and could result in a
significant destruction of value.

·   In March-April 2023 the Board reported "significant progress" on a
minority stake syndication with terms "expected to be announced in August
2023", which was revealed to be for Verne Global on 5 June 2023, with proceeds
to be used to "partly pay down the RCF at the Company level and fund growth
capex in Investee Companies".

·   No update on the syndication was provided by the Board in August 2023,
contrary to previous communication. Instead, on 28 September 2023, the Board
communicated that the syndication is now for a co-controlling or majority
stake, again, contrary to prior communication. The Verne Global growth capex
pipeline increased from £493m to £610m during this period - reflecting the
considerable growth opportunities Verne Global is able to capture. At a time
when a supportive investor should be investing to help the business grow, the
Board continue to pursue solutions detrimental to shareholders.

·   It is a widely held view that Verne Global is a "crown jewel" of the
DGI9 portfolio, operating in the fast-growing data centre segment with
sustained and accelerated customer demand. The Board has failed to realise the
inherent value of Verne Global and has not accurately evaluated the prospects
of the syndication and growth capex requirements. This has not only starved
Verne Global of capital, but has also put DGI9 as a whole in a disadvantageous
position of having to consider a forced co-control or majority sale. In our
view this course of action risks destroying the value that would otherwise
could be realised for DGI9 shareholders from continuing to own Verne Global.

 

3)  The repeated failures of the Board and Investment Manager to change
course and communicate effectively with investors during this period of
underperformance call into question whether the Board is acting in the best
interests of shareholders.

·    Delayed permanent management replacement in critical period. After
the departure of the previous management team, the Board announced on 1
December 2022 that it had commenced a search for a permanent replacement.
However, it ultimately took the Board over 6 months to announce the
replacement and a further c. 3 months for the new head of digital
infrastructure to assume their role. The Board's failure to act with
appropriate urgency, while fees continued to be paid to an interim manager for
c. 9 months, suggests that the Board had not grasped the urgency of the
situation.

·    Acquiring Arqiva was mishandled. It was publicly stated that the
acquisition was intended to "support the Company's total return and yield
target". In practice, the acquisition has become a drag on Company cash flows
due to accretion payments, resulting in the Company's inability to cover the
whole dividend for Q2.

·   Unsustainability of the dividend policy. The uncovered dividend and
capital expenditure requirements of the portfolio were arithmetically
implausible and in our view demonstrate that the Board has failed to
effectively monitor and manage the performance of the investment manager. The
fact that the Board re-affirmed the dividend in, only to cut it less than 3
months later, suggests that the Board did not have a clear grasp of the risks
of continuing with an unsustainable dividend until it was too late.

We are obliged to now re-insist that the Board announces the initiation of a
proper strategic review of the Company that includes a review of the ongoing
Verne process and is supported by a financial adviser independent of Triple
Point. A failure to evaluate options for the Company could result in a serious
breach of fiduciary duty that will cause irreparable harm to the Company and
its shareholders. In such circumstances there will inevitably be cause to
investigate.

As you will be aware, a group of shareholders representing an aggregate
interest of greater than 10% in DGI 9 has the ability to requisition an
extraordinary general meeting. With the support of shareholders with whom we
have discussed this letter, we intend to initiate the actions to exercise this
right for the purpose of removing and replacing directors unless, before 3
November 2023, we receive the Board's written assurance that the Company will:

(a)  Initiate a proper strategic review supported by an independent financial
adviser acceptable to us, and a stock exchange announcement is made to this
effect;

(b)  Elect a new independent board member with M&A experience to oversee
the execution of the strategic review.

We look forward to your formal response.

Yours faithfully,

on behalf of

Aqua Ventures Limited

cc:           Board of Directors

                Triple Point Investment Management LLP

                J.P. Morgan Cazenove

                Peel Hunt

 

 

********

 

For further information, please contact:

 

Patrick d'Ancona, Vigo
Consulting
                020 7390 0240

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