WINNING MARKETS, NOT FRIENDS
Singapore's dominant telco has spent more millions buying more shares in another regional mobile operator. Jasper Moiseiwitsch asks why.
By Jasper Moiseiwitsch

Conventional wisdom has a way of standing on its head. Singapore Telecom was seen, during the go-go years of the late 1990s, as the stodgiest of companies, unable to compete in an industry known for daring and innovation. My how that story has changed. Today SingTel trolls Asia for deals, while the other major telcos find their way in the dark.

Pacific Century CyberWorks (PCCW) has shamed itself with layoffs and losses. Hutchison has bet the company on 3G, and found detractors. DoCoMo is in quiet retreat following slowing demand for its marquee i-Mode technology. Telstra is locked in lugubrious embrace with PCCW. China Mobile is bogged down in the mainland's regulatory morass.

Of all Asia's former telecom stars, only SingTel maintains some momentum and a semblance of a growth strategy. The company continues to spin cash in its home market, and has used these dollars to take stakes in the region's dominant cellcos. SingTel has major shareholdings in Globe Telecom (the Philippines' number one cellular operator), Bharti Group (big in India), AIS (dominant in Thailand), Optus (Australia's number two mobile outfit) and Telkomsel (Indonesia's biggest cellco).

Telco of the Archipelago

But what SingTel also has is a withered, and withering, share price. Investors complained that it spent too much on Optus last summer. And now, as it continues on its regional acquisition drive, many wonder if there is any purpose to SingTel's spending other than to bloat itself to bigness. Shrugs Greg Mazur, co-head of Salomon Smith Barney's (SSB) telecoms investment banking practice: "What else is SingTel going to do with its money?"

What else, indeed. In the past 12 months SingTel spent US$10 billion on Optus, US$200 million on Bharti and US$1 billion on PT Telekomunikasi Selular (Telkomsel).

Its most recent deal, the Telkomsel purchase, was done in two parts, with the second transaction completed last month. SingTel originally bought 22.3 percent of Telkomsel from Dutch operator KPN in November for US$602 million. In the second round, in early April, SingTel agreed to expand this stake to 35 percent for an extra US$429 million. It bought this portion from Telkomsel's parent: PT Telekomunikasi Indonesia (PT Telkom).

A quick comparison with the November deal suggests SingTel overpaid in the second round. In November, SingTel spent about US$26.9 million for each percentage point share it took in Telkomsel. In April, that figure rose to US$33.7 million - a 25 percent increase.

But that does not do justice to the magical, mystical process of pricing a cellular company. Mobile properties are usually valued according to their number of subscribers, with extra considerations given to a firm's churn rate (the degree to which people come in and out of a service in a given month) and the number of customers signed to pre-paid packages versus monthly subscriber (post-paid) offers. Pre-paid is higher margin and, therefore, better.

Telkomsel had a great year in 2001 - its best. The firm reported a 78 percent growth in subscribers, 73 percent of these belonging to the high-margin, pre-paid category. The company also claimed a declining churn rate for its pre-paid subscribers. So it was clearly with attention to these facts that SingTel chose to pay more for Telkomsel in April than in November. Telkomsel is a proven growth company with momentum.

There is more to the deal. SingTel CFO Chua Sock Koong says they paid more for their Telkomsel shares in April because the purchase includes a 35 percent stake in Telkom Mobile, another Indonesian cellco owned by PT Telkom. The deal specifies that PT Telkom transfer its Telkom Mobile business to Telkomsel, which includes a license to operate in the 1800 band. Telkom Mobile owns 15 mhz of 1800 spectrum. Telkomsel previously operated only in the 900 band and, in major metro areas, that frequency was close to capacity. The addition of 1800 spectrum has given the company room to grow. "We did pay a higher valuation the second time around. But we were paying for the company's increased growth, and the rest of the money was for the additional spectrum," says Chua. "The value assigned to Telkom Mobile and the spectrum appears low compared to precedent transactions," she says.

Chua adds that SingTel improved its governance rights with the deal, picking up an extra board member at Telksomsel. And there is another, perhaps more important, matter. Telkomsel is preparing for an IPO and, in order to include its share of earnings from Telkomsel under equity accounting, SingTel needs to hold at least 20 percent of Telkomsel post-IPO.

A Question of Value

But if SingTel's deal is good, one wonders why the recent Telkomsel announcement took SingTel's share price down 2 percent to an all-time low of S$1.56 (US$0.86). By comparison, PT Telkom's shares rose about 9 percent on the news.

Investors criticized SingTel for paying too much for its 100 percent acquisition of Cable & Wireless Optus, and there just seems to be a view that SingTel can't do a good deal. Paul Budde, an Australia-based independent telecoms analyst, thinks SingTel overpaid for Telkomsel in the latest round, and he makes cutting comments about the SingTel management in general. "It's a matter of the maturity that you need to be an effective dealmaker," says Budde, noting that the Singapore telecoms market only deregulated in 2001.

Budde questions the wisdom of SingTel's ambition to build regional networks, noting the political nature of the telecoms beast. Specifically, telcos are so heavily regulated and are such an essential public utility, that operators need a large, on-the-ground presence in each market to address all the political and regulatory matters that arise. That commitment becomes rather large if you want to be present in a meaningful way in multiple markets.

For these and other reasons, investors have punished SingTel for its Asian ambitions. SingTel's largest international asset, Optus, increased the company's non-Singapore revenue from 10 percent of its total to more than half. But SingTel's share price fell about 42 percent since the company announced its intention to buy Optus, in February 2001. Investors have voted on the deal, putting their thumbs uniformly down - and this is despite the fact that the SingTel-Optus integration has been remarkably smooth. SingTel's subsequent additions of Bharti and Telkomsel took the firm's share price down even further.

Out of Kilter?

Investors may not like SingTel's direction but the company has limited options. Unlike its regional peers, there is little room for growth in its home market: tiny Singapore (population 4 million) already has an 80-plus percent mobile penetration rate. Compare that with Indonesia with a population north of 200 million and only 5 million cellular subscribers. SSB's Mazur - who advised PT Telkom in its SingTel deal - estimates, conservatively, that this subscriber base will grow to 20 million in the near future. If SingTel's timing seems a little off kilter, so be it. Now that Asia's telcos are in defensive mode, SingTel has chosen to spend billions on Asian acquisitions. The best investors often take contrarian strategies. Perhaps SingTel knows more than its competitors.

Jasper Moiseiwitsch is a contributing editor at CFO Asia based in Hong Kong.