3G spectrum sale as bargaining chip?

Three lots of 3G spectrum on sale with three potential bidders.

Theoretically a fourth operator can participate in the auction, practically no one should be interested.

This could be a bargaining chip in the hands of SingTel.

Prefer SingTel and M1 to StarHub.

Three lots of 3G spectrum on sale. The telecom regulator, IDA would be auctioning three lots of additional 3G spectrum in 1900-2100 MHz band , with reserve price of S$20m for each lot. Applicants wishing to secure the spectrum must submit offers by 4 October, with the auction starting on 15 November.

Theoretically a fourth operator can participate, practically, no one should be interested. We like to remind investors that new entrants in the broadband space, LGA and SuperInternet are retail service providers (RSPs), who do not own any infrastructure. 3G spectrum, on the other hand, is part of mobile infrastructure, which needs high upfront investments. RSPs are equivalent to mobile virtual network operators (MVNOs) who do not need additional spectrum, if cellular operators lease mobile infrastructure to them.

Bid price may exceed the reserve price if SingTel decides to bid for 2 lots. Incumbents wanted IDA to simply allocate one lot of 2x 5MHz to each operator. However, IDA disagreed and aims to secure higher price by allowing each operator to bid for up to two lots instead of just one lot. In the 2001 auction, each lot of 2x 15 MHz spectrum was allocated (without auction) to the 3 operators at S$100 million each. Recently, India recently concluded its own 3G auction that generated S$20 bn for the local government. While India is not a right comparison for Singapore, we believe 3G spectrum is worth more as data traffic is growing exponentially requiring more spectrum and capex. An aggressive SingTel may be willing to secure 2 lots of spectrum, spiking up the price. This could be a bargaining chip in the hands of SingTel with StarHub and M1 encroaching into SingTel’s traditional stronghold of SME and corporate broadband. StarHub and M1 could be impacted if bid price is higher than S$20m, especially StarHub with higher dividend commitments..

Prefer SingTel and M1 to StarHub. We prefer SingTel for an improving Bharti (1Q11 was the bottom for Bharti) and attractive valuations of 12.1x FY11F PER at over 10% discount to its historical average of 13.4x. We like M1 for its sustainable 6.5% dividend yield and as key beneficiary of National Broadband Network. For StarHub, we estimate that its group equity may turn negative in 2012F, if it continues with 20 cents DPS.

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