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Three major Asian telecom deals in as many months and a strong bull run in Asian stocks have caused telecom companies’ valuations to soar. Industry insiders said regional telecom companies like Shin Corp, Telstra and Hanaro Telecom are prime candidates for takeover by private equity and cash rich trade players. In recent months, Hong Kong-based Hutchison Telecommunications sold its stake in India-based Hutchison Essar to Vodafone with the UK telco paying a whopping 35% or so premium on the stock price.
In Malaysia, Maxis Telecommunications is the subject of a take private bid by major shareholder and billionaire T.Ananda Krishnan. Krishnan is offering 20% premium on the traded stock price. And finally, in New Zealand, Telecom New Zealand sold its Yellow Pages operation to a consortium consisting of Teachers’ Private and CCMP for NZD 2.24bn (USD 1.6bn), a healthy 20% premium.
And the party has only just begun, according to industry insiders. Cash-rich trade players like Singapore Telecommunciations, China Mobile and Telecom New Zealand; private equity players CCMP, KKR, CVC Capital, TPG Newbridge and others like them are scouting for telecom targets.
All of these private equity firms declined to comment on their investment strategy in the telecom sector.
“There are more deals to come, it’s just the beginning,” a source close to Maxis said. The prime reason for Krishnan to take Maxis private is saturation of the Malaysian market and slim chances of growth, the source said.
Aircel, Maxis’ Indian unit, has done exceedingly well in the past year and intends to add over a million customers in the next couple of years. Maxis sees its future in markets like India.
“We see tremendous growth in the Indian market, also an emerging market like Indonesia is a potential area for growth,” the Maxis source said.
A source at a Hong Kong-based private equity firm said the telecom and retail sectors were the hot sectors for private equity firm flush with cash. “Major markets that interest us are Australia, Southeast and South Asia,” the private equity source said. He said private equity did not mind paying high premiums for a controlling stake in these markets as the high premium justified the return on capital possible in a short time.
The private equity source said government restrictions and tough regulations mean private equity players are wary of Chinese telecom companies, for the time being. The retail sector is another area where private equity players are swarming like bees to a honeypot. “Just look at deals in Australia, especially Coles [in retail sector],” he said.
The Maxis source said that the premiums demanded by regional telecom firms means that investment funds in Maxis feel that the premium offered by Krishnan does not justify the valuation of the Kuala-Lumpur-listed telecom company and may hold out for more.
Private equity players aside, trade players like the cash rich Singapore Telecommunications and Telecom New Zealand are also on the prowl. A source close to SingTel told this newswire earlier this month that the Singapore-based telco was always looking for opportunities in the region, when asked about SingTel’s interest in Korean telco Hanaro Telecom. Likewise, Telecom New Zealand, which is flush with cash after the sale of its Yellow Pages unit, has told this newswire before that part of the cash raised would be given back to shareholders, while the rest would be used for acquisitions.
Telstra, the Australian-listed telco giant, is another telecom company which has been eyed by private equity, news reports in Australia have suggested. Telstra refused to comment, but a Sydney-based sector analyst said Telstra’s low debt levels and strong cash flow were two attributes which could attract potential bidders.
The major shareholder of Hong Kong based PCCW, Richard Li, has already made his intention to sell his stake in the teleco clear. Last year, the auction of media and telecom assets attracted bids from Macquarie and TPG Newbridge, but PCCW’s shareholder China Netcom refusal to agree to a sale shot down the bid. A Macquarie source told this newswire that the investment bank was keeping all its options open on PCCW, if it was put in the sale block again. Li meanwhile is focusing on consolidating his stake in PCCW by buying shares on the open market. A source close to Li said the sale of the media and telecom assets has been put on hold for the time being.
Thailand-based Shin Corp is another teleco attracting attention both in Thailand and from overseas bidders. Temasek Holdings, the investment arm of the Singapore Government, holds a 96.12% stake in Shin through its Thai subsidiaries, Cedar Holdings and Aspen Holdings. A source close to Temasek said previously that the Singapore holding company intends to reduce its stake by the third or fourth quarter of this year.
A recent report by ratings agency Moody’s said that many telecom carriers in Asia face maturing revenue profiles and prospective pressure on their abilities to increase net income, while at the same time, cashflow generation stays strong and debt profiles conservative. “Historically, in most industries, such situations generate M&A activity as shareholder pressure for greater returns and, to a lesser extent, management’s desire for expansion outweigh the desire to sustain a given credit profile,” the Moody’s report said.
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