WRAP: SingTel Issues Formal Optus Bid, Support Lukewarm
Updated: Monday, May 21, 2001 04:27 AM ET
By Graham Morgan
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--Singapore Telecommunications Ltd. (P.SGT, news, msgs) moved one step closer to creating a pan-Asian communications giant Monday, releasing its formal bid document for Australia's Optus but receiving only lukewarm support from independent directors of the target company.
The merged entity will have assets of S$29.2 billion after the takeover of Cable & Wireless Optus Ltd. (A.CWO, news, msgs).
It will represent a formidable rival to Australia's largest telecom Telstra Corp. (TLS, news, msgs) and Hong Kong's Pacific Century CyberWorks Ltd. (H.PCW, news, msgs), which finalized the merger of their Asian assets in February.
U.K.-based Cable & Wireless PLC (CWP, news, msgs), which owns 52.5% of Optus, has ensured the passage of control to SingTel by agreeing to the terms of the friendly takeover. The bid values Optus close to A$14 billion.
Although the takeover was a foregone conclusion, the formal bid received a frosty reception from independent directors of Optus and independent valuer Grant Samuel & Associates.
After failing to win better terms from SingTel despite detailed negotiations, the five independent directors stopped short of saying the bid was fair.
"On balance, your independent directors recommend acceptance of the SingTel offer," they said. "You should be aware that the decision to recommend acceptance was made after much deliberation and was at the margin."
Grant Samuel summed up the bid, saying it was "not fair but is reasonable". The apparently conflicting judgment is based on the fact that SingTel's share price has slumped since the bid was announced late March, in line with many other telcos around the world.
This slump has pushed the value of Optus shares under the deal well below the valuation range of A$3.85-A$4.42 a share set by Grant Samuel in its independent experts report.
Optus ended trade five cents lower at A$3.50, with a market capitalization of A$13.2 billion. The stock was one of the local market's most active with 8.7 million traded, with some local brokers still disappointed SingTel hasn't been persuaded to include an all-cash alternative.
The fundamentals of the finalized bid are unchanged from a draft bid document released late March, which gave Optus shareholders three alternative options to sell their shares, two of which are out-of-the-money at current prices.
SingTel President and Chief Executive Lee Hsien Yang, the youngest son of Singapore's elder statesman Lee Kuan Yew and brother to Singapore's Deputy Prime Minister Lee Hsien Loong, talked up the acquisition at a press conference held in the Sydney headquarters of Optus.
The merged SingTel-Optus operations will be "cash-flow accretive from day one," and "particularly well positioned for growth," Lee said.
He also foreshadowed "significant cost savings and revenue enhancing opportunities," which both companies are already working on, but didn't give further details.
"Optus shareholders who accept our offer and receive SingTel shares will have a unique opportunity to participate in a leading Asia Pacific integrated communications service provider, with diverse, stable revenue streams and attractive growth prospects," Lee said.
Lee Damps Concerns Over Satellites, Southern Cross
Lee brushed aside two key sticking points, dealing with satellite licenses and questions over the ownership of the Southern Cross Cable Network joint venture, that have bogged down sentiment towards the deal over the past two months.
There had been some market and investor concern that the bid could be derailed if the U.S. government refused to grant satellite technology licenses to SingTel, which is currently 78% owned by the Singapore government.
Separately, a standoff between Lee and Telecom Corp. of New Zealand Ltd. (NZT, news, msgs) chief executive Theresa Gattung over a preemptive right to buy a stake in the cable joint venture led to some doubts among Singapore investors about the price it was paying for Optus.
Lee said the U.S. license approval process was on track and that SingTel was confident enough of getting the necessary approvals that it lodged a formal application with Australia's Foreign Investment Review Board on May 15 to buy Optus.
He inferred that Southern Cross is no longer an issue, with a resolution in favor of SingTel. The joint venture company operates a submarine fiber optic cable between Australia and the U.S. via New Zealand. It is 50%-owned by Telecom New Zealand, 40%-owned by Optus and 10%-owned by Worldcom Inc. (WCOM, news, msgs).
When questioned about Southern Cross, Lee pointed to an agreement between SingTel and Telecom NZ to lay a cable link between Perth and Singapore announced last week as proof that the companies have put the preemptive right issue behind them. 21/05/01 08-01G
Independents Seem Reluctant To Accept
"Lee seems to have cleared the way for this deal and hasn't given minority shareholders any sweetener except, perhaps, access to a bigger pan-Asian company," said one telecoms analyst at an international bank who asked not to be identified.
To seal the second biggest corporate transaction in Australian history, SingTel offered Optus shareholders: a straight SingTel share swap, a SingTel share swap plus cash, and a SingTel share, cash and bond offering. (The biggest deal by far was the A$56 billion merger between Australia's BHP Ltd. (BHP, news, msgs) and London's Billiton Plc (U.BIX, news, msgs) settled last Friday.)
The share swap involves the exchange of 1.66 SingTel shares for every Optus share held. When the bid was first launched it valued Optus shares at A$4.57 each.
The second alternative is for 0.8 SingTel shares for each Optus share plus A$2.25 in cash, which valued each Optus share at A$4.45 in late March. The third option is for 0.54 SingTel share plus A$2 in cash and A$0.45 in SingTel U.S. dollar-denominated bonds, and is only likely to be taken up by Cable & Wireless PLC.
While the five Optus independent directors recommended that minority shareholders sell to SingTel, as they will for their own shares, it appears to be with some reluctance.
"We have sought to negotiate from SingTel a better deal for shareholders on a number of occasions. We have not been successful in this regard and don't believe that a better offer will be made at the present time," they said.
"We note that of the different forms of consideration available, the share and cash consideration is closest to being fair."
The Grant Samuel report and its qualifications were accompanied by the Optus target statement document which was bundled with the independent directors ruling. This was soon followed by the SingTel bid papers which together amounted to more than 400 pages of close-typed print.
"The SingTel offer is not fair but is reasonable," the independent valuer said.
"A comparison of Grant Samuel's valuation of Optus (A, news, msgs$3.85-A$4.42 a share) and the value attributed to the SingTel offer suggests that the SingTel offer is not fair but is only just not fair."
Grant Samuel said at prices between S$1.75 and S$1.90 a shares, the SingTel offer "would not be fair". SingTel stock had fallen 1.7% to S$1.72 in afternoon Singapore trade Monday while the overall market was slightly higher.
"In Grant Samuel's judgment it is likely that SingTel shares will trade at prices in the range of S$1.70 to S$1.90 when the market stabilizes post the acquisition of Optus," it added.
Analysts expect most minority shareholders to accept the second option, but not many like having exposure to SingTel shares, which are close to their all-time low.
"I was really hoping they would put a cash bid on the table," said Scott Marshall, senior analyst at Shaw Stockbroking.
"However, it's likely SingTel will get a large take-up of the offer," Marshall added.
SingTel has preliminary approval from the Australian Stock Exchange to list its shares and will delist Optus if it secures 100% control.
-By Graham Morgan, Dow Jones Newswires;
61-2-8235-2962; graham.morgan@dowjones.com
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