SingTel says hello to iPhone; other telcos may follow suit

Advantage may be brief as all S’pore players may sell it by year-end

Singapore Telecommunications (SingTel) and its associates have clinched the prized right to sell the iPhone across four markets in Asia. Apple’s recent departure from exclusive operator tie-ups, however, means the red camp’s competitive advantage is potentially short-lived.

In a statement released yesterday, SingTel finally confirmed it will be distributing the iPhone in Singapore later this year. In addition, the operator said its three regional units – Optus, Bharti Airtel and Globe Telecom – will also be part of the collective agreement and are set to take the coveted device to Australia, India and the Philippines respectively.

The announcement ends months of speculation over whether SingTel will be given first dips at selling Apple’s flagship smart phone in Asia. Industry experts have repeatedly pointed to the telco’s ability to negotiate a multi-country deal – due to its stakes in various regional operators – as a major factor that would eventually swing Apple’s decision in its favour.

With its slim touchscreen design, music functions and the availability of numerous add-on applications, the iPhone has already won over nearly 5.5 million fans since its debut in the United States last June. Although it is not officially available in Asia, gadget-crazed fans have been buying the handset from parallel importers and Internet auction sites, often paying a premium to be among the first to own the device.

The iPhone’s immense consumer appeal has prompted early resellers such as US operator AT&T and O2 in the United Kingdom to agree to Apple’s demand for a cut of subscriber revenue in return for exclusive selling rights. This approach, a first in the mobile phone industry, has been met with much resistance in Asia, particularly in markets such as China and Japan where talks have reportedly stalled due to Apple’s insistence on revenue-sharing.

SingTel declined to confirm if it had agreed to such terms. The company also did not provide details of the iPhone models to be made available, as well as pricing and launch dates across the four markets.

The current iPhone is only compatible with second-generation cellular networks, and an enhanced 3G (third-generation) version which supports functions such as video calling and high-speed Internet access is rumoured to be in the works, and could be unveiled as early as next month at an Apple conference in the US.

In Singapore, however, SingTel can be expected to reveal more information over the coming weeks in anticipation of the arrival of ‘true number portability’ on June 13. This is a new government mandate to allow mobile subscribers to retain their phone numbers when they switch telcos.

The move is expected to intensify competition in the mobile market and all three operators – SingTel, StarHub and MobileOne (M1) – have been trying to land the iPhone since last year to better their chances of retaining and drawing new customers when the new regime comes into effect.

‘With the right conditions, such as scarcity in the open market, attractive SingTel subsidies and price plans, we can certainly see customers moving to SingTel for the iPhone. But more than that, SingTel will be hoping to do what AT&T did in the US – to drive up data usage and revenues,’ said Aloysius Choong, a research manager with analyst firm IDC Asia-Pacific.

‘There may be some hardcore Apple fans who may actually switch to SingTel to get their hands on the iPhone. But I think we are not likely to see a huge impact on SingTel’s market share as a result of this development,’ said Soh Siow Meng, senior analyst of global telecom services at Current Analysis.

This is because the grey market has already taken some shine off the SingTel deal, and the likelihood of other local operators offering the iPhone adds to the subdued impact, he told BT.

For example, Vodafone confirmed last week it has secured the right to sell the iPhone in 10 countries, including India and Australia – two of the destinations covered under the SingTel agreement. This is a telling sign that Apple is increasingly moving away from its initial strategy of having exclusive operator tie-ups as it seeks to grow iPhone sales globally.

When contacted, both StarHub and M1 admitted that talks with Apple are still ongoing. ‘We expect all three operators would be offering the iPhone by the end of the year,’ a StarHub spokesman said.

SingTel shares closed unchanged at $3.71 at the end of trading yesterday.

SingTel involved in Bharti-MTN bid talks: source

SINGAPORE Telecommunications Ltd is actively involved in potential takeover talks between India’s top mobile firm Bharti Airtel Ltd and South African operator MTN Group Ltd, a source familiar with the situation told Reuters yesterday.

‘SingTel is part of the team that is looking at issues together with Sunil and Akhil,’ the source said, referring to Bharti’s founder and chairman Sunil Bharti Mittal and joint managing director Akhil Gupta.

The source said it was premature to speculate if SingTel – Bharti’s largest shareholder with over a 30 per cent stake – would provide any form of financial support to Bharti for a bid, as the deal was evolving.

‘It depends on the final structure of the deal. Valuations are not firm. It may be the case that no financial support is needed. There are no details at this stage. It’s a very complex deal,’ said the source, who declined to be identified because the details were not finalised.

SingTel, South-east Asia’s largest phone company, declined to comment.

Last Tuesday, SingTel confirmed that Bharti was in talks with MTN, after Bharti and MTN had said they were holding talks that may or may not lead to a deal. Bharti said separately it had not made any offer to buy all or part of MTN.

Goldman Sachs is advising SingTel on the negotiations, while Standard Chartered is advising Bharti, two people with direct knowledge of the deal told Reuters.

SingTel, Singapore’s largest listed firm, derives about three-quarters of its sales and two-thirds of pretax earnings outside the city-state. — Reuters

Court rules in favour of KPPU

The Jakarta District Court upheld the ruling by Indonesia’s competition watchdog (KPPU) that Temasek and its affiliates, i.e. SingTel and ST Telemedia had breached Indonesia’s anti-monopoly laws. Key highlights of the ruling are:

• Temasek was ordered to sell its stake in either Telkomsel or Indosat (as per KPPU’s ruling). However, the Jakarta District Court also gave Temasek the option of cutting stakes in both Indosat and Telkomsel by 50% (instead of selling off one telco).

• The deadline for divestment was shortened to 12 months vs the 2-year deadline set by KPPU.

• The divested stakes can be sold for up to 10% to each buyer, higher than the maximum of 5% mandated by the KPPU. The KPPU also earlier ruled that the buyers cannot be affiliated to Temasek.

• Temasek’s fine was reduced to Rp15bn vs. the Rp25bn imposed by KPPU.

• Overruling of KPPU’s decision to ask Telkomsel to cut prices by 15%.

Temasek said it will appeal the ruling. SingTel is studying the ruling before deciding on its appeal to the Supreme Court.

Comments

Temasek has not exhausted its options. We understand Temasek has 14 days to file an appeal with the Supreme Court. The Supreme Court has up to 9 months to hear the appeal, barring unforeseen circumstances. Should the Supreme Court rule in favour of KPPU again, we believe Temasek is likely to seek international arbitration. Hence, we expect this saga to be protracted. We gather that Temasek could concurrently seek international arbitration before the Supreme Court makes a judgement.

Temasek likely to keep Telkomsel, sell Indosat in worst case. In the worst case scenario if Temasek is forced to sell, we believe it will likely dispose Indosat which is the smaller of its two telcos in Indonesia. Hence, there should be no impact on SingTel. We note that the value of Temasek’s Indosat stake will be impaired by the maximum 10% stake as strategic shareholders are unlikely to be interested, and therefore will cast an uncertainty over the longer term direction of the telco.

Valuation and recommendation

Keeping Outperform with unchanged target price of S$4.45. Telkomsel’s fundamental value is unlikely to be impacted by the on-going case as we believe Temasek will sell Indosat in the worst case scenario.

However, we are reviewing our call on SingTel following our recent downgrade on Telkomsel (Underweight) due to intense price competition.

Headwinds from Indonesia and exchange rate movements

Story: An Indonesian district court upheld the ruling by the Indonesian competition watchdog KPPU that Temasek must divest its stake in either PT Telkomsel or PT Indosat. The court narrowed the timeframe for the sale of stake to one year from two years. In addition, a new divestment option was also offered of halving both stakes within one year.

Point: We continue to hold the view that if Temasek were forced to divest, Indosat is more likely to be divested due to its smaller size and the ease in seeking shareholder approval at ST Telemedia (STT). On the other hand, rather than keeping all its eggs in one basket, Temasek can also exercise the option of reducing its stake in Telkomsel and Indosat by 50% each, although seeking shareholder approval at both SingTel and STT could be an arduous task. Overall, we see more uncertainty for SingTel’s Indonesian operations.

We are also concerned by the strong Singapore dollar and weak Indian rupee. SGD reached an all time high of 30.5 INR last week, 7% above our long-term expectations of 28.5 INR. We have updated SGD/INR exchange rate to 30.0 in our model, which leads us to trim down SingTel’s FY09 and FY10 earnings estimates by 1% in both years.

Relevance: There are three key changes to our SOTP valuation : (1) Telkomsel is valued at 15x FY08 (Dec yearend) PE (prev. 18x), a 15% premium to current valuation for PT Telkom; (2) Bharti’s valuation is lowered by 5% in SGD due to the weak Indian rupee; (3) A higher holding company discount of 10% (prev. 5%) to reflect the higher risks of investments. We downgrade SingTel to HOLD with target price of S$3.98. Potential special dividends of 8-10 Scents with FY08 results and potential acquisition of MTN by Bharti are positive catalysts.

Bharti’s move seen as risky

Concerns include its funding for deal that could top US$20b if bidding war erupts

Bharti Airtel’s mooted African expansion will look to franchise a model that has made it the leader in the world’s fastest-growing mobile market, and diversify its exposure from an increasingly tough Indian market.

But analysts also see risks in buying into South Africa’s MTN Group – potentially India’s biggest foreign acquisition – with a lack of clarity over Bharti chairman Sunil Mittal’s plans adding to the uncertainty.

Concerns include: How would Bharti fund a deal that could top US$20 billion if a bidding war broke out; how would it integrate a similar-sized company and deal with regulators and customers in 21 countries; and will it be distracted from its home market just as significant changes are underway?

‘MTN is not a small company, and it’s not a cheap acquisition,’ said Rishi Sahay, director of IndusView Advisors.

‘The synergies are difficult to value as they’re different networks, different geographies, and they’re nearly the same size. So you may have to run it like two independent companies, and Mittal doesn’t have much international experience.’

Bharti Airtel, valued at around US$40 billion and more than one third-owned by Singapore Telecommunications Ltd and investment company Temasek Holdings, says it is in exploratory talks with MTN, but has not submitted an offer.

The Financial Times has reported Bharti has bid 165 rand per MTN share for a 51 per cent stake, valuing MTN at about US$37 billion, and has secured US$12 billion in financing.

‘It is more expensive to raise money today than it was a year ago, but maybe because M&A is cooling off elsewhere, it’s a good time for Indian companies to look at opportunities,’ said S Subramanian, head of investment banking at Enam Securities.

India’s wireless market, the world’s biggest after China in user numbers, grew 25-fold between 2002-07, ringing up record profits for telecom firms and attracting global players such as Vodafone, which last year bought a controlling stake in India’s third-largest mobile operator for US$11 billion. Local rival Reliance Communications Ltd is also expanding.

That stellar growth is expected to slow as the percentage of the population with a mobile phone tops 40 per cent by 2010 from 22 per cent now. As the telcos have to seek users in poorer rural areas to increase customer numbers, average revenue per user is likely to fall.

‘There has to be a natural limit to all this, because after a certain point of time, everybody who you think needs and can afford a phone, will have one,’ said Mahesh Uppal, director at telecoms consulting firm Com First.

‘We will have half a billion users by 2010, and after that I suspect the growth has to slow, because you are talking about really marginal users who will come into play.’

Competition is also getting tougher in India. The government recently awarded 120 new telecom licences and wants to allow users to retain their mobile number if they switch operators.

‘A few years down the line, growth opportunities in the Indian market could dry up and, therefore, the telecom companies will have to look overseas for expansion,’ said Yogesh Kirve, sector analyst with Anand Rathi Financial Services. ‘If you go for organic growth overseas, it will be very time consuming.’

If Bharti bought into MTN, which operates in Africa and the Middle East, the combined entity would today have 130 million subscribers, giving it significant leverage with equipment suppliers and handset vendors, UBS analysts said.

MTN had 68.2 million subscribers as of March, compared with Bharti’s 62 million. The South African firm’s annual revenue is US$9.6 billion, against Bharti’s US$6.7 billion, according to Citigroup.

‘We see little by way of synergy benefits,’ said Kawaljeet Saluja and Rohit Chordia, analysts at Kotak Securities.

‘More importantly, growth rates of MTN would be significantly lower than Bharti,’ they said, adding consensus forecasts point to 16.7 per cent annual growth in MTN’s operating profit over three years, compared with a compound annual growth rate of 31.7 per cent for Bharti over the same period.

One Mumbai-based analyst said that could be an opportunity Bharti was looking to exploit, leveraging on its success in India’s emerging market.

‘Bharti is one of the pioneers in bringing down tariffs sharply … yet maintaining strong margins,’ said the analyst, who asked not to be named because of company policy. ‘Once Bharti uses its own efficiency in MTN, the South African firm’s numbers will look much, much better.’

Exporting a business culture to another firm is easier said than done. IndusView’s Sahay said there were not many examples of successful mega telecom deals.

‘Look at Sprint, Nextel,’ he said. ‘However, if Mittal wants to play in the big league, he has to do a big deal. Telecom is so regulated, there aren’t many opportunities. So you don’t know when and where the next one will be.’ – Reuters