3G Is Catalyst for Shake-Up In Asia's Telecom Industry
By H. ASHER BOLANDE
Staff Reporter of THE WALL STREET JOURNAL
Asia's cellular sector has kicked off 2001 with a round of deal negotiations that has the rumor mill buzzing. First, No. 2 Australian carrier Cable & Wireless Optus Ltd. officially went on the selling block, prompting a host of suitors including Vodafone PLC and Singapore Telecommunications Ltd. to begin circling.
Then the parent of Korean mobile market leader SK Telecom Co. moved to bring in an outside strategic partner -- likely NTT DoCoMo Inc. of Japan -- through a 14.5% share sale. Rumors and unconfirmed reports also have swirled around a 30% slice of MobileOne (Asia) Ltd. of Singapore that will soon be up for grabs.
The availability of so many significant stakes has created a juicy opportunity in Asia for big international operators, and according to analysts it may be just the beginning. British Telecommunications PLC's decision to reassess its extensive Asian holdings outside of Japan could soon unload sizeable chunks of seven carriers in seven different countries.
Whether these deals will lead to a deeper restructuring of Asia's telecom industry -- in which alliances change the ways local companies operate rather than being mere investments -- is the subject of debate. Deutsche Telekom AG, for example, which has been sidelined by some of its Asian investment targets, has been criticized for buying into these companies without first developing relationships with them.
These acquisition talks come at a time of growing pressure for consolidation and alliance building, prompted by the arrival of third-generation network technology, known as 3G. Because the 3G networks will have much greater capacity to carry data, mobile devices will have services like high-speed Internet. But it takes billions of dollars to build these networks from scratch, and only carriers with massive subscriber numbers will be able to justify the cost, says Ravi Vijayaraghavan, a Singapore telecom consultant with Bain & Co.
"If you're not the No. 1, two or possibly three player in your market, you're going to have a hard time ever making money," he says. While a carrier needs just a 20% market share to prosper in today's cell-phone business, it will need 30%-35% in 3G, he estimates.
The case for consolidation is most obvious in very competitive markets like Hong Kong, where six mobile operators vie for a population of about 6.5 million. For that reason, Credit Suisse First Boston last week put a "buy" rating on smaller Hong Kong carriers SmarTone Mobile Communications Ltd. and Sunday Communications Ltd.
The advent of 3G also creates scale incentives. A carrier that stretches across several countries has greater leverage in negotiating deals with vendors of infrastructure and handsets. And with wireless applications, they only need to develop them once to roll them out in multiple markets.
For operators who can pay in cash, now is a great time to go shopping, says Credit Suisse's director of Asian telecom research, Ni Quiaque Lai. Valuations have shrunk and bank capital is scarcer, he points out. Shares in SmarTone, for example, are now trading at around 13 Hong Kong dollars (US$1.67), compared with HK$38 at the start of 2000. A slate of companies with substantial war chests -- including SingTel, Vodafone, DoCoMo, Australian incumbent Telstra Corp. and France Telecom SA -- have said they are ready to start spending to build their names around the region.
Despite continuing liberalization, outright acquisition still isn't an option in many Asian markets, analysts caution. But both SingTel and France Telecom's giant mobile subsidiary Orange PLC say they could enter new Asian markets as a virtual mobile network operator. As so-called VMNOs, they would rent network capacity from a licensed local operator, but still get access to a new consumer base.
Orange, for its part, will be freshly armed with the US$9 billion it is expected to raise in its listings in Paris and London within a month. The company has said it wants to offer service in 50 countries by 2005, compared with 19 countries now.
Priming the pump for the predicted wave of stake purchases is Cable & Wireless PLC, which is divesting from mobile to focus on corporate customers. That means selling Optus and a 30% stake in MobileOne that is co-owned with Pacific Century CyberWorks Ltd. of Hong Kong.
Vodafone, SingTel and Telecom Corp. of New Zealand have begun due diligence at Optus's headquarters in Sydney, but outside parties could still form consortia with one of these three. Sources say DoCoMo might step in to support a winning Telecom bid, and Vodafone could link up with Hong Kong's Hutchison Whampoa Ltd.
DoCoMo's tie-up with SK Telecom in Korea has been under discussion for some time, but got renewed impetus late last month when the latter won a 3G spectrum license for wideband code- division multiple access, or WCDMA, the 3G technology that the Japanese operator has backed with all its weight. Sources say the status of talks remains uncertain, and SK Telecom maintains that it may team up with a European telecommunications company instead.
British Telecom has yet to clarify its plans, but the possibility that it will dump all of its mobile assets in Hong Kong, India, Korea, Malaysia and Singapore has potential buyers drooling. The cash-strapped group's chief executive, Sir Peter Bonfield, said in November that the firm wanted to focus on Japan and Western Europe, and was interested in reducing its stakes elsewhere in Asia.
The timing and extent of the sell-off remains unclear. Robert Chew, a Singapore-based telecom partner with Accenture, formerly Andersen Consulting, is more skeptical than most. He isn't convinced this will be a "tipping-point year" for the regionalization or globalization of the Asian mobile telecom industry, adding that economic conditions might be too uncertain for companies to embark on grand buying sprees.
Even with a rough consensus on where everything is moving with the approach of 3G, some operators in the region may choose to hold off on selling. Hong Kong's carriers, for example, have stubbornly resisted consolidation. "All the commercial arrows point the right way," says Credit Suisse's Mr. Lai, "but shareholder egos have already stopped that for a long time."
Write to H. Asher Bolande at hyam.bolande@awsj.com
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