SingTel signals strong competition for Telstra
Christine Lacy
27/03/2001
The Australian telecommunications sector is bracing for a major rationalisation and increased competition following Singapore Telecommunications' $17.2 billion takeover bid for Cable & Wireless Optus.
If successful, the bid will make SingTel the second-biggest telco in the Asia-Pacific region. It will compete aggressively against Telstra, which has pinned its regional expansion plans on an alliance with Pacific Century CyberWorks of Hong Kong.
The telco's push for dominance in Australasia will seriously affect other companies that have already faltered in their attempts to be part of the industry shake-out. They include Vodafone Pacific, Hutchison Telecommunications and Telecom New Zealand, which have abandoned alliance talks.
Investor reaction to yesterday's SingTel cash-and-share offer for Optus was poor as institutions are concerned about the prospect of receiving SingTel shares in return for Optus stock.
Optus shares plummeted 19.2¢ to $3.80 while SingTel, which is planning a dual listing on the Australian Stock Exchange after the takeover, fell S23¢ to $S2.19 on concerns its offer would result in an overhang of scrip and weigh on its trading price.
"Cash is king and we didn't get cash. Now investors have to deal with scrip that they are not familiar with and a company of which the local investment community understanding is lacking," said AMP Henderson Global Investors' head of active equities, Mr Marcus Fanning.
The combined SingTel and Optus operations will be the region's largest mobile-phone operator with a presence in five countries and a comprehensive data network across Asia to tackle the Telstra/PCCW alliance.
"As industry growth slows...and as a number of the large number of new infrastructure companies run into various challenges, either raising cash or raising equity funding, that is a formula for consolidation," Telstra chief executive Dr Ziggy Switkowski said yesterday from Beijing.
SingTel chief executive Mr Lee Hsien Yang said in Sydney his group had the edge on Telstra.
"SingTel has experience on both sides of the fence being the incumbent in Singapore and in other markets we have been a new entrant," he said.
But Dr Switkowski said he remained confident of Telstra's domestic position and place in the region.
He said that as the industry changed and was being restructured, "we're thinking through our strategies to give us confidence of being successful, no matter what else happens in the business".
"Telstra, and all of the other players, have had to work proportionately harder. And our focus remains on, you know, how can we do better and better, no matter how the industry changes."
Optus's closing price of $3.80 compared with SingTel's offer price of up to $4.57 a share for the all-scrip offer represents a 17 per cent premium to its trading price in the past month and a 14 per cent premium to its close before the bid was announced.
SingTel's $S2.19 close values its Optus offer at about $4.25 a share based on the offer of $2.25 cash and 0.8 SingTel shares for every Optus share held.
Optus chief executive Mr Chris Anderson welcomed the bid, which he said would see the exit of a "keyhole shareholder in favour of a powerful regional player with expertise around the globe".
Mr Lee said SingTel was committed to the maintenance of Optus as a full-service telco offering bundled services throughout the region.
Optus's 52.5 per cent parent, Cable & Wireless plc, has already accepted SingTel's cash, share and bond offer for 19.9 per cent of the company - in effect 38 per cent of its holding - regardless of whether the bid succeeds.
While C&W can accept a higher offer for its remaining holding in Optus, its willingness to trade with SingTel will be heightened by a $US100 million break fee, payable to SingTel if it withdraws the bid.
The cash, share and bond alternative values each Optus share at $3.94 and satisfies C&W's desire to exit Optus with a maximum of cash and a minimum of SingTel scrip.
Depending on the nature of minorities' acceptance of the bid, C&W will emerge with up to 6.1 per cent of SingTel's stock.
That holding will be the subject of a lock-up arrangement for potentially as long as six months.
The Singapore Government, which controls 78 per cent of SingTel, could be diluted to as low as 65 per cent as stock is issued to fund the transaction, and will also be subject to a lock-up.
The bid is conditional on 50 per cent acceptance and approval from the Foreign Investment Review Board, although the Federal Government indicated yesterday there were no obvious impediments to the deal.
The chairman of the Australian Competition and Consumer Commission, Professor Allan Fels, said he had no objection to the SingTel bid.
Optus minorities can also elect to hold their Optus stock, which would see the CWO vehicle remain listed on the Australian Stock Exchange, trading alongside the dual-listed SingTel.
It is believed that SingTel initially proposed the cash purchase of only C&W's 52.5 per cent stake in Optus, but was blocked by the Australian group's independent directors, led by Mr John Morschel, who insisted that small shareholders be given the opportunity to share in any control premium.
"From a minority perspective it was important that there be an outcome to the process and important that a range of choices be made available to the minorities allowing them to participate in the premium for control," said JP Morgan managing director Mr Stephen Chipkin, who advised CWO's independent directors on the takeover.
"We believe the proposal achieves that."
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