TM-P1 deal: Analysts cautious of tie-up

  • Analysts neutral on the TM-P1 acquisition, but share prices fall
  • No clear strategies on how TM can take advantage of deal, analysts say

TM-P1 deal: Analysts cautious of tie-upNEWS ANALYSIS AS news of Telekom Malaysia Bhd (TM) expanding its presence into the wireless broadband segment via the majority acquisition of Packet One Networks (Malaysia) Sdn Bhd begins to sink in, industry analysts remain unconvinced if the buy-out is a good deal for TM and its investors.
 
On March 27, TM announced that it had agreed to buy a 57% stake in wireless broadband provider P1 for RM350 million. The deal specifies that TM will invest up to RM210 million into Green Packet Bhd, P1’s parent company, via newly issued redeemable exchangeable bonds.

The investment is expected to be completed by the third quarter of this year. Following that, Green Packet and South Korean mobile operator SK Telecom’s stake in P1 will be reduced to 30% and 13% respectively. This would also help TM to “fill up the gap” to transform itself into a full-suite service provider, company officials said.
 
Analysts contacted by Digital News Asia (DNA) were mixed in their views, with many taking a neutral stance on the proposed buy-out. Some also believe that TM will have its work cut out for it in terms of how it will integrate its infrastructure with P1’s, and market its services.
 
“We are neutral on this investment as TM would have to absorb P1’s losses,” said Hwang DBS Vickers analyst Chin Jin Han in a report.

Chin said that assuming P1’s losses in 2014 are the same as in 2013 [at RM116 million], it would imply that there would be a RM66-million in exposure and 7% earnings downside in the near term, which would impact its existing Key Performance Indicators (KPIs).
 
The research house has placed a target price of RM4.75 on TM shares – which ended the week at RM5.93 per share.
 
[RM1 = US$0.30]
 
TM-P1 deal: Analysts cautious of tie-upPublic Investment Bank Bhd analyst Lee Wee Sieng also viewed the deal as neutral, with a target price of RM5.70.
 
“Previously, we were concerned with the impact of 4G-LTE {Fourth Generation Long-Term Evolution) on TM’s fixed-line Internet and data business, but now TM is taking on the competition in the mobile space,” said Lee.

"TM may also face short-term headwinds from [the] integration of loss-making P1 and implementation risks with [a] nationwide LTE roll-out,” he said.
 
Analysts and investors are naturally concerned about the TM-P1 deal, as a dip in earnings may affect the dividends it gets from TM. The incumbent telco has a dividend policy of paying RM700 million or 90% of normalised net profit, whichever is higher.
 
JF Apex Securities Bhd analyst Lee Cherng Wee said his firm was keeping its 2014 profit forecast at the moment until the deal is finalised, and plans for new products and services are revealed.
 
“The consolidation of P1 into TM could result in some losses as we do not foresee a quick turnaround,” said Lee, who downgraded his recommendation for TM to “Hold” with a maintained target price of RM6.15.
 
Despite the analysts’ neutral stance, investors were a little more antsy about the deal as exemplifed in TM's share prices on Bursa Malaysia falling by as much as 6.1% to RM5.82 per share on March 28. Green Packet shares meanwhile fell by as much as 9.6% to 47 sen per share. Both TM and Green Packet shares were among the top 20 most actively traded counters that day.
 
“On Green Packet’s side, I think there were punters betting that TM would be buying the entire P1 stake from the existing shareholders – which could ultimately result in some form of special dividend,” said Edmund Tham, head of research of Mercury Securities. “For TM, the decline may be partly driven by earning dilution concerns.”
 
Other challenges facing TM
 
The value of the deal for P1 will be increased financial security, and this could comprise both a direct injection of capital and support for the development of infrastructure, according to Analysys Mason.
 
“For TM, which is already the fixed broadband leader in Malaysia, it is an opportunity to become a converged [wireless and fixed-line] provider, said Tom Mowat, principal analyst at Analysys Mason. “The combined portfolio of both entities stands a chance of addressing much of Malaysia’s mobile data traffic at a comparatively low cost base.”
 
That said, Mowat believes the combined entity of TM and P1 would have a heterogeneous network that will require significant software investment to make sure it functions at a competitive standard.
 
“Other operators in other markets have not had an easy time running a combined FD- and TD-LTE network,” he said, adding that the likelihood of TM making an even stronger play in the WiFi space could add more complexity.
 
TM-P1 deal: Analysts cautious of tie-upAlso adding to this complexity is that fact that P1 only brings to the table a little over 500,000 WiMax subscribers, which means that TM is re-entering the mobile market a long way behind the big four players – Maxis, Celcom, DiGi and U Mobile – and around the same level as rival WiMax player YTL, according Tony Brown (pic) of Informa Telecoms & Media.

With the mobile market fully penetrated this means that TM must persuade subscribers to churn from other operators to its new TD-LTE services – a very difficult task which TM will most likely attempt to achieve in two ways, said the senior analyst with the London-based research firm.
 
“Firstly, TM will very likely bundle its mobile services as part of a heavily discounted quad-play bundle alongside its fibre-broadband, fixed-voice and IPTV services – a strategy which is paying rich dividends for operators such as KDDI in Japan,” he said in a research note.
 
“Secondly, TM might seek to take advantage of the fact that P1’s networks are relatively unpopulated and launch highly publicised ‘All You Can Eat’ mobile broadband services into the marketplace – although P1 has already been trying this tactic – thereby differentiating itself from the other big four mobile operators, which typically cap mobile data usage [at] between 1GB and 5GB.”
 
Brown also believes that instead of buying into P1, TM could have possibly investigated the popularity of quad-play services and how HyppTV – TM's IPTV service – could be delivered over mobile by launching as an mobile virtual network operator (MVNO) in the same way that BT has in the United Kingdom, rather than going out and buying a whole new and not fully developed operator.
 
“Still, TM has taken the plunge and taken on the task of breathing new life into P1 – and it certainly can’t be accused of taking the easy way out," he argued. "But one has to wonder if it has not bought a high maintenance mansion when renting a two-bedroom apartment would have been a smarter bet.”
 
Related Stories:

TM agrees to buy controlling stake in P1

TM open to talks with any party to ‘fill up gap’
 
Green Packet bets its future on LTE
 
P1 lays off nearly 100 workers to ‘streamline operations’
 
 
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