Singapore Telecommunications Unveils Details of Bid for Cable & Wireless Optus
March 27, 2001
Tech Center
By S. KARENE WITCHER and SARA WEBB
Staff Reporters of THE WALL STREET JOURNAL
Singapore Telecommunications Ltd. unveiled details of an offer for Cable & Wireless Optus Ltd., Australia's second-largest telecommunications carrier, that values the company at up to 17.2 billion Australian dollars (US$8.43 billion), but investors reacted coolly, sending the share prices of both companies tumbling.
Optus is 52.5% owned by Cable & Wireless PLC of Britain, which has accepted SingTel's offer. Under rules governing takeovers in Australia, Cable & Wireless could only agree to sell an initial Optus stake of 19.9% to SingTel over the weekend. It intends to sell the remainder to the Singaporeans once a formal offer has been made to all Optus shareholders, expected in the next few weeks.
SingTel is offering Optus shareholders three separate alternatives.
One offer is 1.66 SingTel shares for every Optus share. The second alternative is 0.80 SingTel share plus A$2.25 in cash for each Optus share. And the third option is 0.54 SingTel share, plus A$2 in cash, plus 45 Australian cents of SingTel bonds denominated in U.S. dollars for each Optus share.
The Premium Range
The value that each alternative implies for Optus shares will vary depending on movements in SingTel's share price. But applying Friday's closing SingTel price of 2.42 Singapore dollars (US$1.35) and the prevailing currency-exchange rates, and measuring that against the average price of Optus shares over the past 30 trading days of A$3.90 apiece, implies a range of premiums between almost 1% for the share, cash and bond alternative and 17% for the all-stock alternative, which is pitched higher to entice shareholders.
1 Competition Over Optus Bid Heats Up Between Vodafone, SingTel (Mar. 23)
2 Vodafone to Make Conditional Bid for Optus Next Week (Mar. 22)
3 SingTel's $8.93 Billion Optus Offer Is 20% Premium Above Current Value (March 12)
"The fact there's no all cash alternative is a big negative," said Peter Mouatt, a fund manager at Macquarie Funds Management in Sydney. Still, he thinks the transaction eventually will be accepted by Optus shareholders, not least because Cable & Wireless intends to accept SingTel's offer for its controlling stake. The bulk of Optus's shareholders are Australian and global investment institutions rather than individual shareholders.
Meanwhile, the share prices of both Optus and SingTel could come under pressure as investors try to determine the most favorable alternative among the complicated array. On Monday, the price of Optus shares fell in Australia about 4.6%, or nine Australian cents, to A$3.80 in heavy volume, while the overall market firmed up. In Singapore, the price of SingTel shares dived 9.5% to close at S$2.19. The broader market in Singapore edged higher. In London, Cable & Wireless shares soared 11%, or 46.5 pence (66.3 U.S. cents), in the afternoon to 490.5 pence.
No Revisions
Despite the gyrating share prices, which can change the relative valuations, a person close to SingTel said the Singapore company has no intention of revising the terms of its offer.
"It's a tough one" to analyze, said Bruce Smith, who tracks telecommunications stocks for fund manager Zurich Scudder Investments Australia, which holds Optus shares. At first glance, Mr. Smith says, the cash and share alternative looks the most appealing, but he is going to take some time to study the offer before making a decision.
Among other things, fund managers say they worry SingTel's shares are expensive despite their recent falls, which limits the longer-term upside in exchanging their Optus shares for SingTel shares. Further, they worry that even if shareholders accept SingTel shares, which could reduce the Singapore government's stake to around 65% from 78%, the stock still will be relatively tightly held, making it difficult to trade. And they aren't yet comfortable with SingTel's management or its stated expansion plans in the Asian-Pacific region. They say another concern is the potential overhang of stock, because Cable & Wireless isn't a long-term holder, and the Singapore government has repeatedly signaled its intention to pare its stake in such government-linked companies.
'The Market Is Puzzled'
What is more, some fund managers doubt that buying Optus, which has some capital-hungry businesses, will prove to be a smart move. "The market is puzzled about why they are getting into a very competitive market, and [one] that's very well developed," said a Singapore-based fund manager at a U.S. concern. Indeed, some analysts tracking SingTel argue the Singaporeans are paying too much.
"I think SingTel generally rushed into the deal," said Jason See, chief investment officer at OUB Asset Management in Singapore, adding that the offer for Optus is generally perceived as overpriced in Singapore.
Mr. See predicts SingTel shares will stay under pressure because of the deal and its impact. Among other things, SingTel is assuming about A$3 billion of Optus's debt as part of the transaction. Separately, Credit Suisse First Boston downgraded SingTel to hold from buy on news of the deal, saying it is convinced the deal doesn't add value to SingTel. Also, ABN Amro downgraded its recommendation on SingTel to "reduce" from "add," partly because the proposed transaction will be highly dilutive to SingTel shareholders and impairs SingTel's ability to pay a relatively high dividend yield. SingTel plans to list on the Australian Stock Exchange in addition to being listed in Singapore.
The next step is for Optus's independent directors to make a recommendation to minority shareholders to accept or reject SingTel's offer. If enough shareholders reject the three alternatives, SingTel could end up owning a controlling stake of more than 50%, but well short of its goal of 100% of Optus. The directors have commissioned Australian investment bank Grant Samuel & Associates to prepare an analysis of SingTel's offer.
"There is inevitably all kinds of noise in the market today, and we think it will take some time for people to understand what is being put to the shareholders," said Lee Hsien Yang, chief executive of SingTel, which is being advised on the transaction by Morgan Stanley Dean Witter & Co.
Canberra Welcomes Deal
Meanwhile, Mr. Lee, who was in Australia Monday, told reporters that he doesn't expect any roadblocks from either the Australian government or the country's antitrust regulators. Indeed, the Australian government welcomed the bid Monday, and analysts doubt regulators will intervene.
Cable & Wireless put Optus on the auction block because owning a full-service telecommunications company no longer fits with the company's global strategy of focusing on data and business services. Cable & Wireless was thought to have favored a rival bid from Vodafone Group PLC, which intended to divest all of Optus's businesses except for mobile telephones. Monday, Stephen Pettit, a Cable & Wireless executive, told reporters that "we never favored Vodafone" and said his company picked SingTel partly because the deal faces few regulatory hurdles and the British company decided it can contract with SingTel to serve its customers rather than having to own that business. Vodafone withdrew its bid over the weekend before regulators reviewed its proposal.
Cable & Wireless intends to accept the alternative of a mix of cash, shares and bonds. Depending on how the transaction unfolds, the British company could wind up with up to 6% of SingTel. If it ends up with more than a 3% stake, it must hold those shares for at least six months.
Snaring Optus is a victory for the Singaporean carrier, which has lost out on two other major transactions in the region over the past year, one for the Hong Kong arm of Cable & Wireless and the other for Time Engineering Bhd., a Malaysian telecommunications company. SingTel plans to keep all of Optus's assets, and Mr. Lee said once the Optus transaction is concluded the Singapore carrier will have attained its goal of having 50% of its revenue generated from outside Singapore. The new entity will have a combined 10 million mobile-phone subscribers in Australia, Singapore, Thailand and the Philippines, making SingTel one of Asia's largest wireless communications operators outside Japan.
-- Hasan Jafri and Graham Morgan of Dow Jones Newswires contributed to this article.
Write to S. Karene Witcher at skwitcher@awsj.com4 and Sara Webb at sara.webb@awsj.com5
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