Malaysian telecom on road to consolidate

By SONIA KOLESNIKOV, UPI Business Correpondent  |  Feb. 6, 2002 at 11:09 AM
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SINGAPORE, Feb. 6 (UPI) -- The overcrowded Malaysian mobile telecom sector is headed for a consolidation ahead of a launch of third generation mobile technology. Or so wishes the government.

But the five mobile companies involved appear to be reluctant to move in that direction, with potential buyers arguing pricing expectations are just not right.

Last week, Prime Minister Mahathir Mohamed said, "The government wants to see the industry consolidate because there are far too many (telecommunication) licenses."

The government will award three third generation mobile phone spectrum licenses in July, and is hoping the process will speed up the consolidation of the sector as it is only expected to award three licenses. But as the latest development with Technology Resources Industries show, this will be a bumpy ride.

The local mobile telecom market has five telecom companies: dominant Maxis Communications, Celcom Malaysia, a subsidiary of debt-laden TRI, Digi.Com, 61 percent owned by Norwegian telecom Telenor, state-owned Telekom Malaysia and Time dotCom, owned by Time Engineering Bhd.

Telecom analysts believe the main reason behind any consolidation is the need for those companies to join forces and stop running separate and expensive infrastructure networks.

"When the government talks about consolidation, I think that's what it really means. Not so much that there should be three operators, but that the current operators should share their networks, to become more cost-efficient," said one telecom analyst, who requested anonymity.

Kevin Wong, head of ING investment banking in Malaysia, added, "Ultimately the driver of consolidation will be the infrastructure cost."

Wong argued it makes "commercial sense" for those companies to have shared facilities, whether it is done through a merger or some kind of agreements.

But analysts believe if there are mergers and acquisitions in the Malaysian sector, then Celcom likely is to be taken over by Telekom Malaysia and Time dotCom by Maxis.

"In our opinion, 2002 is likely to be the year of consolidation in the Malaysian telco industry. We expect to see the debt restructuring of TRI, the sale of Time Engineering and the award of 3G spectrum coverage. However, it is probably too early to pick the possible winners and losers," said UBS Warburg analyst Fee-Yee Leong.

Telkom Malaysia has confirmed it was "seriously considering its consolidation opportunities to enhance its mobile business," and indicated it could consider acquiring an interest in TRI "if commercially viable." TRI also has said Telekom had expressed some interest to buy major shareholder and Chairman Tajudin Ramli's 24.3 percent stake in the company.

"Commercially viable" is a key word, analysts said.

"Basically, they are interested, but the price is not right. Plus it quite clear Tajudin doesn't want to sell right now," one added.

Celcom is the second largest operator, with 2.12 million customers at the end of last year, and would fit nicely with Telekom Malaysia, which has a near monopoly on fixed lines, but a weak cellular business. Telekom also has a 1,800-megahertz network with good coverage in urban areas, while Celcom has a 900-megahertz network, which is stronger in rural areas.

Last Thursday, TRI announced it finally had secured some new investors for the group, as part of a $1 billion recapitalization plan that involves a revised restricted 724 million shares offer, a $221 million one-on-one rights issue and transfer its listing status to its mobile network unit Celcom. The company has to repay in April a $375-million eurobond it defaulted on in 1999.

The company is expected to announce by the end of the week the name of its new investors under the restricted share issue.

But despite this later development, some analysts still expect Telekom Malaysia to prevail in the end, because of expected government's pressure for the Malaysian businessman to relish control of his remaining empire.

Tajudin, former chairman of Malaysian Airline System, had strong links to former finance minister Daim Zainuddin. He sold his airline shares to the government at twice the prevailing market price just over a year, creating a controversy that angered investors. Amid calls of cronyism, the government subsequently ordered an audit of the loss-making carrier during Tajudin's tenure.

A Telekom-Celcom merger would give the company a 43.95 percent share of the cellular market, well above Maxis's 30 percent share.

This might explain why Maxis is believed to be in the process of renewing talks with Time dotCom, analysts said.

"In our opinion, the best acquisition for Maxis would be Time dotCom. Maxis, with over 2 million subscribers, is running out of bandwidth and a merger with Time dotCom would relieve congestion during peak hours and in heavy usage areas by turning into a dual band GSM 900/1800 operator," Leong said.

Analysts said the company is believed to have previously offered more than $526 million for TimedotCom, which was rejected as too low.

But analysts said Time dotCom's expectations were too high. "I know that on the basis of the market capitalization the company is valued at $1.58 billion, but I believe the true valuation is closed to $526 million," one analyst said.

Time dotCom's parent Time Engineering Bhd likely is to sell part of its shares to meet a $162.5 million debt payment. Time has pledged 15 percent of its stake in Time dotCom as collateral for the bonds, for which the bondholders had requested full payment after it defaulted on the second and third payments.

TimedotCom also has to find a strategic partner by April to take up the 30 percent currently held by Khazanah Nasional Bhd, the government's investment arm that bought the stake on condition that a strategic partner is found, after the company's initial public offering flopped with investors.

Analysts also note Time dotCom is financially attractive as it is currently debt free and has a cash hoard of about $236.8 million.

Meanwhile, Maxis itself is planning an estimated $658 million Initial Public Offering by May or June 2002. Analysts believe this will be a local listing in the Kuala Lumpur Stock Exchange, with no foreign partner involved

The government will issue tender documents for the 3G licenses this month, which will address the criteria to be used for the beauty contest. According to the Malaysian Communications and Multimedia Commission, the 3G spectrum will be allocated by July.

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