Questions about InTouch deal

Gulf offer casts doubts on AIS shareholding structure. By Fitch Ratings

‘‘ A debt-funded acquisition structure is likely to put additional pressure on Gulf’s stretched balance sheet.

The takeover bid by the SET-listed power producer Gulf Energy Development (GULF) for InTouch Holdings Plc (INTUCH) casts uncertainty over the shareholding structure of the country’s largest mobile operator, Advanced Info Service Plc (AIS), which is rated AA+(tha)/stable by Fitch Ratings.

Fitch is likely to place the ratings of AIS on watch should the transaction lead to an eventual buyout of the mobile operator. The tender offer for all shares in AIS will depend on Gulf acquiring at least 50% of InTouch; it holds 19% currently.

InTouch has a 41% stake in AIS, while Singapore Telecommunications Ltd (Singtel) holds 21% in InTouch and 23% in AIS.

The transaction announced this week by Gulf is still in the early stages, pending various approvals from the shareholders of Gulf and regulatory authorities. It remains unclear how Gulf intends to fund the substantial deal, and the ultimate equity interest it will obtain in both Thai companies.

Fitch is likely to apply its parent and subsidiary rating linkage criteria to assess AIS’s ratings, based on its link with Gulf, should Gulf obtain majority control of AIS. Fitch currently rates AIS based on its standalone credit profile.

Gulf has a leading position in the domestic power sector and enjoys predictable cash flow from a long-term power purchase agreement with the state-owned utility Electricity Generating Authority of Thailand.

The acquisition of InTouch and AIS would provide more diversified cash flow and a larger income base for the power company, although a debt-funded structure is likely to put additional pressure on Gulf’s stretched balance sheet.

Gulf generated earnings before interest, tax, depreciation and amortisation (Ebitda) of 13.5 billion baht in 2020, a fraction of the 76.6 billion reported by AIS. The power producer had a net debt-to-Ebitda ratio of 8.8 times compared with 1.0 times for AIS.

Meanwhile, the InTouch and AIS investments hold long-term strategic value to Singtel, although the tender offer would provide the Singaporean company with the financial flexibility to fund its 5G investment priorities and ease pressure on free cash flow.

InTouch and AIS contribute 20% of total dividends received by Singtel and 5-6% of adjusted group Ebitda (including associate dividends). These investments offer a stable source of cash flow for Singtel, in light of AIS’s entrenched position and stabilising competition in Thailand.

Singtel faces intense rivalries in other key markets such as Singapore, Australia, Indonesia, the Philippines and India, contributing to slow recovery prospects over the next 12-18 months amid Covid-19 restrictions and structural challenges in the Australian fixed-line business.

Singtel’s other capital-raising options include a potential tower sale by Singtel Optus Pty Ltd, minority stakes in Singapore Post and Netlink Trust, and longer-term plans to monetise digital assets. However, we have not taken these into consideration in our ratings because of the uncertainty over the timing and transaction value.

A disciplined financial policy remains a key driver of the stable outlook that Fitch assigned to Singtel’s ratings, due to the low rating headroom.