What next, SingTel?

THE abrupt collapse of takeover talks between South Africa’s MTN Group and India’s Bharti Airtel over the weekend has not drawn much interest from the market.

Some are hopeful this could mean a special dividend is on the cards soon, while others think SingTel may keep its money chest full for the time being, given that other projects are brewing.

When SingTel’s associate, 30 per cent-owned Bharti, announced it was in talks with MTN early this month, there was a fair bit of buzz. After all, if successful, the deal would be the largest takeover involving an Indian company, and it could have given a boost to SingTel which has been eyeing telcos in the Middle East and Africa.

There was speculation that the takeover – which had valued MTN, South Africa’s largest telco, at a reported US$50 billion – might see SingTel get involved either as a co-buyer or increasing its stake in Bharti where it is already the biggest shareholder. Merging MTN and Bharti would create the world’s sixth-largest mobile operator, with more than 130 million subscribers in around two dozen countries.

But Bharti, India’s leading mobile operator, said on Saturday it had called off the talks after MTN proposed a new structure which would have seen the Indian group becoming a unit of the South African-based mobile phone operator.

The new structure envisaged Bharti Airtel becoming a subsidiary of MTN and the exchange of majority shares of Bharti Airtel held by the Bharti family and SingTel, in exchange for a controlling stake in MTN.

‘Bharti believes that this convoluted way of getting an indirect control of the combined entity would have compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity,’ it said.

Bharti added that it had lined up funding from bankers of over US$60 billion.

Many believed that when SingTel did not announce a special dividend – which had been expected – when it released full-year (FY) 2008 results on May 14, it was saving up cash for the takeover.

The telco had, after all, between 2004 and 2007 returned extra cash to shareholders via capital reduction and special dividends when it did not make any significant investments.

Commenting on SingTel’s latest dividend, CEO Chua Sock Koong said: ‘We are balancing our desire for an efficient balance sheet with financial flexibility to make further investments.’

DBS analyst Sachin Mittal sees two outcomes from the scrapped takeover bid.

‘We expect SingTel’s share price to benefit from this news in the near term due to two key reasons: (1) Bharti’s stock price has fallen by close to 10 per cent from its peak in the last one month on possible overpayment concerns. As Bharti constitutes 33 per cent of our sum-of-the-parts valuation for SingTel, if Bharti stages 5-10 per cent recovery, SingTel can register 2-3 per cent recovery. (2) SingTel had omitted special dividends with its FY08 results (we had expected 8 cents) possibly to reserve cash for MTN deal. With no cash outlay required for the MTN deal now, investors can hope SingTel to announce special dividends in FY09, given its net debt to earnings before interest, tax, depreciation and amortisation at 0.9x is much below the optimal ratio of 1.5x-2.0x.’

Mr Mittal also thinks that SingTel remains under pressure to invest in emerging market telcos to deliver on its guidance of double-digit growth in earnings in the medium term (5-7 years).

But UBS’ Suresh Mahadevan does not think a special dividend is on the cards for the time being. He also said ‘SingTel’s strategy doesn’t revolve around acquisition’, adding that the ‘group has a fairly good footprint in the region, especially in India and Indonesia’.

As for the prospect of a special dividend, Mr Mahadevan points to Bharti’s statement where it had received a positive response from banks on funding the proposed takeover.

He figures Bharti would have done the deal with or without SingTel’s help.

It is good for SingTel to have financial flexibility in the meantime since it has put in a bid with partners Axia Netmedia of Canada and Singapore Press Holdings for the rewiring of the nation’s high-speed broadband network, he said.

Perhaps the lack of buzz stems from shareholders’ faith in SingTel’s management, and the general flight to quality during uncertain times. SingTel, along with rivals StarHub and MobileOne, continue to be rated favourably for their high dividend yields.

Said Mr Mahadevan: ‘Singapore telcos have good management teams which are completely aligned with shareholders’ interests.’

Or it could also be the start of the mid-year school holidays with many market players away.