Should Axiata stay or GO?
Malaysian telecom operator in dilemma after general offer for Singapore’s M1
AXIATA Group Bhd has, in over a decade, invested about RM1.29bil to own a 28.7% stake in Singapore wireless operator M1 Ltd. Should it then just accept the general offer (GO) made a day ago at S$2.06 a share, or just stay put as an investor in M1 until something better comes along?
That is Axiata’s dilemma currently, but analysts are quick to suggest that perhaps Axiata should engage in a bidding war and launch a counter offer at a higher price to gain control over M1.
Such a move could set it back by a whopping RM4.5bil.
Assuming that Axiata accepts the offer of S$2.06 a share, it could net a gain of about S$550mil or RM1.6bil.
However, going by Axiata’s latest statement, the pricing must reflect the accurate future value of M1, inclusive of an acceptable control premium, consistent with market standards. From the statement it is a clear signal that a new offer should be made, says an industry source.
This week Keppel Corporation Ltd (Keppel) and Singapore Press Holdings (SPH) made a cash GO to buy out M1 at S$2.06 a share in a deal worth S$1.28bil. The offer price represents a premium of 26% to the stock’s last trading price.
The offer is made by Konnectivity, in which Keppel has majority stake but the offer will not be extended to Keppel T&T (KTT) as it is a related company. The deals are subject to Singapore’s Infocommunications Media Development Authority (IMDA) approvals.
Separately, Keppel made an offer to also acquire the remaining shares in KTT. Axiata is the single largest shareholder in M1 currently with 28.7% stake, followed by Keppel with 19.33% stake held through KTT, and SPH holds 13.45%. The remaining shares in M1 are held by retail and intuitional investors. Jointly Keppel and SPH hold 32.78% stake in M1, which is the third largest telecoms player in the Singapore mobile and fixed market place.
Kenaga Investment Bank says the GO deal values M1 at S$1.9bil and M1 has a market capitalisation of S$1.51bil based on Thursday’s closing.
The whole idea of the GO according to those in the know is about control of M1 given the pace of technological advances and the potential synergies and benefits of controlling a telecoms company, besides escalating competition in the sector.
In terms of board representation, Axiata, SPH and Keppel has one board seat each, but none of the three shareholders have board control even though Axiata has more stake then the rest.
Keppel representative is the chairman of M1 and there are six independent directors, of which one is the CEO of M1.
The Singapore telecoms market is also in for its biggest shake up as Australia’s TPG Telecom makes its entry later this year. TPG will become the island’s fourth telecoms operator and competition is expected to heighten. It is expected to disrupt the way the three incumbents Singtel, Starhub and M1 do their business.
“Apart from the challenges M1 faces from the fourth telco player, technology is also disrupting the business. Driving the transformation considering these factors requires bold changes, so Keppel saw the need for control to execute it. Benefits wise, the biggest is probably the acquisition of consumer data from M1, in our view,’’ says UOB Kay Hian Research.
An industry source says “it is in Keppel and SPH’s interest to gain control of M1, that is why they have come out with the GO. If they are so keen for control of M1, then they should at least make the offer more palatable for Axiata and other retail investors so that they can execute their plans.’’
“Regardless of how much stake Keppel and SPH jointly hold, Axiata still holds the largest chunk of M1 stake and both Keppel and SPH must recognise that fact,” says the industry source.
He adds that Axiata has been an investor in M1 for 13 years and that is a longterm investor.
Axiata is a result of a demerger of Telekom Malaysia Bhd which had initially bought the M1 stake in 2005.
Too small a premium
The whole issue hinges on pricing, is the GO pricing good enough at S$2.06 a share for shareholders to accept While some analysts felt it is fair, others felt it should be revised upwards.
“Keppel and SPH are substantial shareholders in M1 and they are fully aware of the true value and potential of M1, so their offer should reflect the true value.
Instead, Keppel and SPH choose a 52week low at S$1.63 a share to price its offer, which really does not reflect M1’s true potential value,’’ says the industry source. “The price selected at S$1.63 a share is an alltime low of M1’s share price in the last 5 years. Any premium from such a low base is not really considered a premium even though Keppel and SPH says it is a 26% premium. At S$1.63, it is only a 18% premium over the last one year and 8% premium over the last 18 months,’’ says the industry source.
In comparisons, the premiums for some past transactions in Singapore was about 2540% over the last 312 months for some specific companies.
No doubt if Axiata takes up the offer it will get a cash pile of RM1.6bil, which it could potentially use to pare debts, declare a special dividend to investors and even invest elsewhere. If it sells out, then it will not get any more income from M1.
Nomura Group says M1’s profit contribution to Axiata is steady and substantial at about RM100mil+ per annum (6% of PBT in 2017) and more importantly dividends of about RM90mil annually. But it expects Celcom’s EBITDA to improve, XL to see strong turnaround with data led growth as competition improves in Indonesia, losses at Robi to moderate significantly next year and Dialog to see decent trends.
“Stripping out the contribution from M1 of around RM100mil, we estimate Axiata could still see doubledigit earnings growth,’’ Nomura says.
To get the GO going, Keppel needs 50% of M1’s share to be in control and with its current shareholding, UOBKayHian Research believes it just needs an 1718% stake to achieve its objective. “Axiata’s likely rejection of the offer does little to impede Keppel from their goal,’’ says UOBKayHian.
The intention is not to take M1 private, unless acceptances exceed 90%, but if that happens, the potential of Axiata becoming a monitory shareholder is there. But that does not mean that Axiata does not have other options or is trapped to exit. “Granted that the company has been enjoying steady dividends from M1 over the years and still believes the outlook for the industry in Singapore is promising despite the challenges, and there are still growth opportunities.
“But it is certainly not trapped to accept the offer. In fact, it is evaluating its options for now and the Axiata board will decide its next move soon,’’ claims an industry source.
Public Investment Bank believes that Axiata should divest its stake in M1 as the Singapore player is the third largest player in a market where competition is intensifying but Axiata’s global footprint objective is to be leader or a strong No. 2 telco player in the markets it operates in.
“Although the premium may not be attractive to Axiata given that it holds the controlling stake as the single largest shareholder, we think the offer is fair considering an eroding valuation for the telco sector,’’ Public Investment says.
But Maybank Investment Bank has a differing view saying that Axiata was in no dire need of cash and the “offer price potentially falls short of Axiata’s perceived fair value.’’
“Axiata and two other significant shareholders of M1 had called off a strategic review for the disposal of their M1 stakes back when share price was above S$2.
“We think Axiata is open to holding on for the long term just like what it is doing for its Idea stake in India.
The worst case scenario would be Axiata making a counter bid for M1,’’ Maybank says. Nomura Group however believes that if Axiata stays put on the underlying assumption that there could be better returns/monetisation opportunity in the future and M1 could see a recovery and growth in other sectors, it will have to be contend with the fact that Keppel and SPH could be the largest shareholders with more than 50% stake post GO, and they would drive the strategic direction including management, M&A, capex and importantly dividends.