INTERVIEW: HK Sunday Exec Sees Telco M&A Action By Sep
By KIRSTI HASTINGS
Of DOW JONES NEWSWIRES
HONG KONG -- A few months from now, the Hong Kong mobile phone market may be a very different marketplace - less consumed by cutthroat competition and more driven by large-scale innovation - as the government's planned auction of third generation licenses weeds out two of the six struggling operators, according to Sunday Communications' (SDAY) Managing Director Craig Ehrlich.
And he should know.
Because if there is any merger and acquisition activity in Hong Kong's crowded cell phone market, Sunday, which ranks fifth of the six, will likely be involved.
"Consolidation is going to occur this year," Ehrlich said in an interview at his office Thursday. "And it's slightly more likely to occur before mid-September," when Hong Kong plans to offer four licenses to the highest bidders.
Sunday is already talking to potential partners, though Ehrlich declined to identify the companies. However, he offered some clues about how the consolidation might play out.
Currently the Hong Kong mobile phone market is dominated by the family of the city's richest man, Li Ka-shing. The biggest operator, Li's Hutchison Telecommunications - owned by Hutchison Whampoa Ltd. (H.HUW) and operated under the Orange brandname - has 1.7 million subscribers, according to its Web site. Sunday, in fifth place, has 490,000 subscribers.
Ranking second is CSL Ltd., owned by the tycoon's son Richard Li's Pacific Century CyberWorks (PCW). The company is the only profitable operator in the Hong Kong market, where a price war has been raging for the past year or so as companies slashed prices in a bid to win market share.
The other three operators ranked by subscriber numbers are SmarTone Telecommunications Ltd. (H.SMR), New World Mobility, a division of New World Development (H.NWD) and People's Telephone.
Merge Or Be Eaten
Ehrlich said two or three operators are expected to merge just before or immediately after the auction, or one of the bigger ones will take over a smaller operator. However, due to regulatory restrictions, he ruled out the possibility that the two Li giants will be permitted to grow.
"Two of the six will merge to strengthen their position to win a license (in the auction) or after (the auction,) if they lose then (companies will) merge to stay in the market," Ehrlich said.
Of the remaining players, only SmarTone has ample cash reserves to launch a takeover bid, he said. SmarTone said in March it's sitting on net cash of HK$3.68 billion.
The 3G auction will also separate those willing to make the investment necessary to build a new high-tech platform.
To enter the 3G market, a company will have to come up with "HK$1 billion to HK$2.5 billion to reinvest in the company. If you're marginal or not committed to the market this may be the right time for a merger," he said.
Ehrlich said while Sunday hopes to keep its popular brandname alive in the market, the company would be willing to entertain a takeover bid.
Sunday is widely praised for its innovative marketing and successful brandname. The Sunday brand is based on the idea that people wait all week for Sunday - the idea that "on Sunday I'll have time to do what I want," Ehrlich said.
Ehrlich, a former Hutchison Telecom executive, and his partners, including another ex-Hutchison executive, "set up Sunday for the long-term." However, he said, they never promised to be "the owners in the long term."
Consolidation To Spark Share Price Gains
Ehrlich said he has no conditions for a takeover offer except that it enhances shareholder value. It's not a difficult prospect for the share, which is down 87% to Wednesday's HK$0.48 close since first listing at the height of the frenzy for tech and telecom shares in March 2000.
The market consolidation should hopefully prompt some interest in Hong Kong wireless operators shares, said Ehrlich, who owns 500,000 Sunday shares and 15 million share options.
"Fund managers are looking for a catalyst," he said. "Assuming the mergers take place this year and assuming 3G licenses go at a 'reasonable price' at the auction, we'll see investors coming back in droves" to HK wireless stocks.
Erlich doesn't expect a non-Hong Kong player to be involved in the first round of consolidation, though a foreign telecom company may step in to team up with a license winner later. Singapore Telecommunications Ltd. (P.SGT) has expressed interest in the Hong Kong market and is often touted as a likely bidder for one of the struggling local operators.
Sunday also plans to bid for a 3G license in Singapore the next time licenses are up for sale, though it wasn't able to arrange project financing in time for the first round in April. It's in talks with a partner there too, though again Ehrlich declined to identify the company.
He dismissed concerns that building 3G in both markets isn't financially viable, saying Sunday aims to become a regional player and must expand outside of Hong Kong.
-By Kirsti Hastings, Dow Jones Newswires; (852) 2832 2337; kirsti.hastings@dowjones.com
-0- 17/05/01 08-35G
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