SingTel Falls on Pact to Pay Up to A$20 Bln for Optus (Update6)
By Mathew Carr
Singapore, March 26 (Bloomberg) -- Singapore Telecommunications Ltd. shares lost almost a tenth of their value on concern the company's offer of as much as A$20 billion ($9.9 billion) for Cable & Wireless Optus Ltd., Australia's No. 2 mobile- phone company, is too high.
Southeast Asia's largest phone company needs to broaden its Asian subscriber base as competition heats up at home. While the Optus purchase, if successful, would boost its mobile subscribers by more than half and give it a third of Australia's cell phone market, some analysts said it's paying too much.
``This is a deal that transforms SingTel,'' said Peter Milliken, an analyst at Lehman Brothers Asia Ltd. ``The question is has it overpaid for scale? We believe it probably has.''
Based on the value of SingTel stock Friday, the Singapore company is offering a premium of as much as 20 percent. That's even as Optus trades at nearly 50 times its earnings of the past 12 months -- more than twice that of Telstra Corp., its biggest rival.
Cable & Wireless Plc, which owns 53 percent of Optus, indicated it may accept SingTel's bid. Rival bidder Vodafone Group Plc yesterday withdrew its offer for Optus, which today said it will cease talks with Telecom Corp. of New Zealand and any other rival bidders.
The shares of Singapore's biggest company fell 23 cents, or 9.5 percent, to S$2.19, their largest one-day drop in 14 months. Some 95 million shares traded, 15 times the daily average of the past six months. Optus fell 4.8 percent to A$3.80 in trading of 70 million shares, its busiest day since March 1999.
Stock Slump
SingTel's stock slump today lowered the maximum it has bid in its stock, cash and assumed debt offer to A$18.4 billion, or A$4.11 a share from A$4.57 a share previously.
``As SingTel sells off, so should Optus,'' said John Bergin, head of Australian equity research at Alliance Capital Management Australia Ltd., which owns Optus shares.
The prospect of more SingTel share sales from the Singapore government, the company's ``aggressive'' regional growth plan and concern SingTel would lose market share in voice revenue helped decrease its share price, Bergin said.
To be sure, based on the price of SingTel's stock Friday, the company may end up paying between A$14.9 billion and A$16.1 billion, excluding A$3 billion in assumed debt. That's because Cable & Wireless, Optus' biggest shareholder, has indicated that of the three stock-and-cash options SingTel has put forward, it favors the cheapest, which has the least SingTel stock.
SingTel is comfortable it isn't paying too much because of Optus' growth rate and close inspection of its accounts, the Singapore company's president, Lee Hsien Yang, said in Sydney.
``We are comfortable, based on what we've seen,'' he said of SingTel's biggest purchase yet.
Expansion
Even so, SingTel's offer suggests it may be too eager in its expansion, some analysts said.
``If you're looking at front runners to be a regional carrier, it would be SingTel,'' said Abhijit Attavar, an analyst at Dresdner Kleinwort Wasserstein in Hong Kong. ``There's a price to pay for that and at the price right now, it's too expensive.''
SingTel now has 6 million subscribers in Singapore and other Asian nations, such as the Philippines and Thailand. With Optus, it would gain 3.4 million Australian subscribers.
Optus is seeking a buyer because its London-based parent wants to focus on bigger accounts. SingTel is trying to expand offshore to compensate for falling market share in Singapore.
There would be no immediate change to Optus' management team, SingTel's Lee said. Chris Anderson, Optus' chief executive, declined to say whether he will keep his job.
Cable & Wireless indicated it may accept 0.54 SingTel shares, plus A$2 cash and A$0.45 in SingTel bonds for its Optus stake -- valuing Optus stock at A$3.94. SingTel also made two alternative offers for Optus: a straight stock offer of 1.66 SingTel share for every Optus share, valuing Optus at A$4.57 a share and A$2.25 in cash and 0.8 of a SingTel share for each Optus share held, valuing it at A$4.45.
The all-share option would value Optus at as much as A$4.57 a share, the two companies said, or as much as a 20.1 percent premium to Optus' closing price March 9, when it submitted its bid.
``Most of my clients who are not going to sell (their Optus shares), which is very few, are going to go for the 0.8 SingTel and A$2.25 cash'' offer, said Rick Klusman, a director at brokers Johnson Taylor Potter who holds shares in C&W Optus. ``Then they've got some cash and can sit back on SingTel and see what they think from there.'' Klusman plans to sell his stake if C&W Optus trades above A$4.30.
``Given that SingTel's going to be listed here and it's going to have a very big capitalization and will have a heavy weighting in the Australian index, I think some people will go for the (pure SingTel share) option,'' he said.
Regulator's Nod
SingTel's offer remains conditional on it obtaining 50 percent of Optus and on Foreign Investment Review Board approval.
Australia's antitrust regulator won't block the takeover. ``We have no objection to their bid because they are a new entrant,'' said Allan Fels, Australian Competition & Consumer Commission chairman.
After the acquisition, SingTel said the government's stake in it will decline to about 68 percent from 78 percent now, though Lee said the Singapore government wouldn't rush to sell-down its SingTel stake as ``the government doesn't feel any fiscal pressures to do so.''
He said Cable & Wireless would gain a maximum 6 percent share in SingTel under the agreement.
``We think the SingTel paper is strong paper,'' Lee said in response to a question naming potential sellers of SingTel shares.
Lee said SingTel's earnings per share may be hurt short-term by the purchase though ``it is in the interests of shareholders to take the longer-term view of the transaction.''
He didn't quantify any cost savings except an expected 5 percent reduction in equipment buying costs.
Unrestrained
``We have taken pains to structure this to ensure we remain very strong in our balance sheets,'' said Koh Boon Hwee, SingTel's chairman. ``We have significant capacity for further acquisitions in our region of interest. We definitely are not going to stop if the opportunities present themselves.''
Optus appointed Grant Samuel & Associates to assess SingTel's offer. SingTel, which would assume A$2.9 billion in debt as part of its agreement, said it would take eight weeks to send its ``bidders statement'' to Optus shareholders.
SingTel said it would pay S$476 million a year for the next 20 years to write down goodwill on the purchase. Goodwill is the difference between the purchase price of a company and its book value.
As part of the agreement, Cable & Wireless will accept an initial bid to buy 19.9 percent of Optus. SingTel will attend shareholder meetings based on that shareholding.
If Cable & Wireless fails to sell SingTel all of its Optus shares after getting shareholder and regulatory approval, SingTel can buy that 19.9 percent of Optus at A$3.95 and can claim $100 million from the U.K. company.
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