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Three-way battle for SingTel, M1 and StarHub

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It’s going to be a three-way battle for SingTel, M1 and StarHub as competition intensified with the entry of a new player in the telco industry. Against this backdrop, will SingTel acquire M1 or StarHub? Recent developments in Singapore’s telecommunication industry suggest that such consolidation is only a matter of time for the incumbent players.

With Australia’s TPG winning the fourth telco license in both Australia and Singapore, it is imperative that SingTel take decisive actions to defend market shares. It is now or never for SingTel.

The battle of the giants

With a gigantic market capitalization of $63 billion, SingTel is obviously the leader of the pack and is in pole position to gobble up either of the two smaller players. Among the three existing players, M1 has the smallest market capitalization – $1.75 billion. Since 2015, M1’ share price crashed from a high of $3.96 to $1.88 level. With the current form, M1 could easily fell prey to a hostile takeover.

Singtel

Incidentally, M1’s substantial shareholders, Keppel Corp and Singapore Press Holding (SPH) are going through hard times as well and they may be tempted to offload their shares in M1 to SingTel. Keppel Corp may want to sell its stakes in M1 and raise capital to focus its fight against the slump in the oil-rig industry.

On the other hand, media conglomerate SPH is facing a disruption in the media industry brought forth by digital technologies. In light of the disruption, SPH may want to dispose its stake in non-core assets like M1 to invest in digital media companies for revenue growth.

Temasek Holdings’s game

Sovereign wealth fund Temasek Holdings owns shares in all the above-mentioned Singapore companies and thus could be instrumental in kick-starting the game of musical chairs among the companies. Together, both Keppel Corp and SPH own a combined stake of 32.6% in M1. Assuming that Keppel Corp and SPH agreed to sell their stakes to SingTel at current price, the telco would only need to cough up about $1.18 billion of cash to acquire all the remaining shares. For SingTel, this sum is actually not considered a huge sum of money.

According to SingTel’s Q4FY17 results, the free cash flow for FY2017 was a whopping $3 billion. In addition to that, the recent divestment of NetLink NBN Trust has raised $1.095 billion of cash for SingTel. With so much war-chest, SingTel has more than sufficient fund to launch an all-out hostile takeover of M1.

For StarHub, things are slightly more complicated. Through Singapore Technologies Telemedia, Temasek Holdings owns 75% of Asia Mobile Holdings, which owns 55.86% of StarHub. Last year, Qatar’s Ooredoo was reported to be considering the sale of its stake of 25% in Asia Mobile. If Singapore Technologies Telemedia is to acquire Ooredoo’s shares in Asia Mobile Holdings, then Temasek Holdings would have an indirect interest of 55.86% in StarHub. This could pave the way for SingTel to acquire more than half of StarHub’s shares.

However, being the number 2 player, StarHub shares do not come cheap. Currently trading at $2.70 level, StarHub shares is traded at Price/Book value of 18.87. SingTel would have to cough up at least $4.7 billion to acquire all the shares of StarHub. In doing so, SingTel would have used up all its free cash flow. In my opinion, I would favour the acquisition of StarHub to M1 because the former runs a HFC network that delivers multi-channel pay TV services, including HDTV, Internet TV, and on-demand services. Henceforth, StarHub’s paid TV business could complement SingTel’s pay TV segment.

SingTel’s overseas adventure

For the last two decades, SingTel’s focus had been expanding its overseas market with focus in Asia. This has resulted SingTel in becoming a regional force with 600 million mobile customers. However, it’s overseas adventure came at a price. Over the years, there were numerous commercial disputes, taxes and significant law suits amounting to billions of dollars. In some cases, SingTel is defending the claims while there are those that required it to set aside large sum of funds for contingent liabilities.

In addition, being the largest telco company in South East Asia, SingTel is facing more resistances in its bid to penetrate new markets in Asia. Its failed Myanmar license bid in 2013 was an example. However, in view of the risks arising from potential lawsuits and currency exchange movement, this may turn out to be a blessing in disguise for SingTel.

Although Singapore market is already saturated, SingTel may turn its head on consolidating its local market share instead of embarking on another overseas investment adventure. Acquiring either StarHub or M1 is one way to bolster market share, increase revenue and profits. Personally, I would prefer StarHub being acquired but I doubt SingTel has sufficient funds to do so. M1 seems like a more viable target.

Financial performance

For fourth quarter 2017, SingTel delivered a set of robust financial report. Profit after tax was $955.6 million compared to $940.4 million last year. Full year profit after tax was $3.831 billion, a negligible decline from last year’s $3.858 billion. The return on equity (ROE) has been hovering around 14 to 15 for the past 5 years. To ignite growth, SingTel may look into how to deploy the $1.095 billion cash from the divestment of NetLink NBN Trust.

Of course, from the perspective of shareholders, they would want SingTel to distribute the cash in the form of special dividends. However, shareholders should think long-term and aim for capital appreciation in SingTel’ share price instead. A more sustainable approach should be to use part of the cash proceeds to pare down debts and then deploy the rest of the funds to make one mega acquisition that would stimulate significant growth.

For SingTel, the big money to be made is still in mobile telecommunications. Its crown jewel, Optus in Australia, raked in $1.741 billion of revenue in FY17 while its Singapore counterpart only achieved $589 million. Its Group Enterprise division is also doing well, with revenue of $1.723 billion in FY17 while the Group Digital Life continued to bleed. Given the patchy track record in digital investments, it is likely that SingTel would focus acquisition in either the mobile or enterprise ICT sector.

Conclusion

Since March 2017, SingTel’ share price suffered some loss of form but started to pick up in recent weeks with the divestment of NetLink NBN Trust. I am not vested in the shares but is monitoring the telco’s next move. If the management made the sensible approach of acquiring the right company, it would provide me the impetus to buy into this blue chip. Till then, enjoy the ride.

Read my other articles on SingTel:

  1. SingTel’s NetLink Trust IPO application approved
  2. SingTel at a cross road
  3. Short selling on SingTel shares
  4. SingTel shares to rocket on NetLink Trust IPO?
  5. SingTel share in supreme form
  6. SingTel increased investment moat aggressively

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