WSJ - Heard in Asia: Optus Investors Should Curb Their Enthusiasm, Some Say
March 20, 2001
Heard in Asia
Optus Investors Should Curb
Their Enthusiasm, Some Say
By PHILLIP DAY
Staff Reporter of THE WALL STREET JOURNAL
SINGAPORE -- Is there a way for investors to profit from the bid for Optus?
Big deals like the coming sale of Australia's No. 2 mobile-phone company, Cable & Wireless Optus, often give canny investors a chance to profit. But in this case, investors should probably wait until the chips stop falling before they decide to bet on any of the companies involved.
"This deal is dripping with risk," says a Sydney-based equities analyst. "Even when it's concluded, I see all the risk on the downside."
The U.K.'s Cable & Wireless owns 52.5% of Optus. Shareholders have been demanding that Cable & Wireless rethink its acquisition strategy and return some cash to them in the form of dividends or a share buyback.
Those cries got louder last week after a profit warning took London analysts by surprise, driving the company's share price down by about a third in the 48 hours after it was made.
C&W shareholders are also still smarting from its sale of a majority stake in Hongkong Telecom a year ago. C&W took 4.5 billion shares of Richard Li's Pacific Century Cyber Works as part of that deal. The shares looked like a promising bet on Asia's booming technology sector, with Mr. Li's company positioned as one of the region's top Internet plays.
Offers Include Shares
But CyberWorks shares have lost more than 80% of their value since then, hit both by worries that Cable & Wireless would want to sell its stake as soon as possible and by the global backlash against technology-related stocks.
The two main bidders for Optus are also said to be offering large chunks of shares as part of the deal.
Singapore Telecommunications' offer might appear more attractive to Cable & Wireless at first glance, because it is said to be a half-cash, half-share offer that values Optus at around 17.5 billion Australian dollars ($8.66 billion), or around A$4.60 a share.
As far as Cable & Wireless is concerned, "the more cash the better," says Ralph Brook-Fox, a telecom analyst with Britannic Fund Managers in London. Britannic is a minor shareholder of Cable & Wireless.
The rival offer from U.K.-based Vodafone Group is said to be mostly shares in its closely held Vodafone Pacific subsidiary. Neither Vodafone nor SingTel has commented publicly about the offers.
The Vodafone offer is bogged down for now and may not make it past an investigation by Australia's competition watchdog. Vodafone is already the third-largest mobile operator in Australia with 19% of the market, behind Optus with about 33% and Telstra with 46%.
Analysts say Vodafone may pay a higher price and would likely sell back to C&W the business communications parts of Optus, which fit better into C&W's global strategy.
While that might make the Vodafone deal more palatable to C&W, minority Optus owners who received shares in Vodafone Pacific would have to hope the planned public offering of the company would come sooner rather than later.
And as the Sydney analyst notes, "the appetite for telcos is falling by the hour."
SingTel Shares Fall
Singapore investors haven't reacted kindly to word of SingTel's bid, concluding that SingTel is offering too high a price for Optus. Market rumors Monday that SingTel was withdrawing from the bidding caused its share price to jump as much as 2.5% before the company said negotiations were continuing. The shares fell 2.5% to 2.35 Singapore dollars ($1.32) Monday, 13% lower than the price before reports of the bid details emerged last week.
Optus shares fell 4.7% Monday to A$3.94 after the conflicting reports of SingTel's intentions.
SingTel spokesman Ivan Tan says that despite the details in the press, the market doesn't really know what his company is proposing. "Those numbers are just speculation," he says, adding that "a variety of factors" may be to blame for recent falls in SingTel's stock price.
But SingTel has far more than its share price at stake in this bid. The company appears increasingly desperate to expand from its Singapore base after losing out to Mr. Li's CyberWorks bid for the Hong Kong phone company, and also failing in its play for Malaysian broadband operator Time Engineering.
According to Michael Millar, a regional telecom analyst at SG Securities in Singapore, SingTel's reputation is at stake in the Optus bid.
Although the market has punished the company for its bid, "it's almost worse for them if this deal doesn't go through. Then we'd go back to a situation where people are saying, 'Management can't cut it, they can't make deals outside Singapore.' "
Mr. Millar says the Optus acquisition makes sense for SingTel because it helps the company meet its goals of diversifying out of Singapore, increasing the leverage on its balance sheet and lessening the government's share of its ownership.
The Singapore government, through Temasek Holdings, owns 78% of SingTel, the biggest company listed in Singapore.
SingTel is sitting on S$6.5 billion in cash, and the failure to make a deal might lead investors to start demanding some of that be returned to them through dividends or a share buy back.
But if the market punished SingTel for its bid, investors probably won't reward it for succeeding, especially since C&W and the 47.5% minority shareholders of Optus aren't likely to want to hold the 20% or so of SingTel they would get as part of the deal.
Barring a share placement, which might get around the problem, analysts say the SingTel stock overhang will be a worry.
"At the end of the day, Cable & Wireless does not need, does not want, exposure to SingTel, just like they did not need or want exposure to [CyberWorks]," says a Hong Kong telecom analyst.
Write to Phillip Day at phil.day@awsj.com1.
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