SingTel pays big cheque for high-growth exposure

Singapore Telecommunications is set to spend S$2.5 billion ($1.8 billion) buying stakes in Thailand’s Intouch Holdings and India's Bharti Telecom, underscoring its ambition to become a regional telecom powerhouse by diversifying away from more mature markets.

SingTel said on Thursday that it will pay Temasek $1.2 billion for a 21% stake in Intouch. It is also increasing its stake in Bharti Telecom, which controls Bharti Airtel, the world’s third-largest mobile operator in terms of subscribers.

“Thailand and India are fundamentally attractive markets which are reaping the benefits of rapidly increasing smartphone penetration and mobile data adoption by a growing middle class,” SingTel said in an investor presentation to explain the rationale behind the new investments.

Thailand's mobile penetration was 126% as of the end of last year while India's was about 80% as of the end of last year, according to data from Thailand's National Broadcasting Telecommunications Commission and India's Telecom Regulatory Authority.

In comparison, Singapore’s mobile penetration was about 147.5% as of the end of June, hinting at a saturated market. Data from Infocomm Development Authority of Singapore shows the city’s total mobile subscriptions grew only 0.5% in the first six months of this year. There were also declines in 2G, 3G, as well as post-paid 4G user numbers, with only pre-paid subscriptions recording an increase.

Meanwhile in Australia, where SingTel operates through its subsidiary Optus, the mobile penetration rate stands at 142%.

As such, the investments in Intouch and Bharti Telecom should help to increase Singapore telco's exposure to higher growth regions.

Singapore and Australia accounted for 53% of SingTel’s earnings before interest, taxes, depreciation and amortisation last year, according to its annual report.

According to the share purchase proposal, SingTel will pay Bt60.83 for every Intouch share, which represents a 1.9% discount to the stock’s Bt62 Wednesday close.

Bangkok-listed Intouch owns 40.45% interest in Advanced Info Service (AIS), Thailand’s largest mobile carrier, as well as 41.14% in Thaicom.

SingTel already had a 23.3% stake in AIS before the transaction, so will increase its shareholding to 31.8% indirectly through the Intouch ownership.

Concurrently, SingTel is investing $600 million to buy Temasek’s 7.39% stake in Bharti Telecom. It is paying Rs235.62 for every share in the Bombay-listed firm, representing a 6.4% discount to its last close. The transaction will increase SingTel’s stake in Bharti Telecom to 36%.

SingTel will settle S$1.6 billion of the total investment through a placement of 386 million shares with Temasek at S$4.16 per share. The rest will be funded using internal cash and short-term debt.

Temasek is currently SingTel’s majority shareholder with a 51% stake. The share placement will increase the state fund’s shareholding to 52.3%.

Credit rating, NetLink spin-off

SingTel may have decided to sell equity to fund a majority of the twin deal to protect its A+ credit rating. Fitch has already warned that a debt-funded deal would have further weakened the company’s net leverage and threatened its rating due to the limited headroom.

Under the current terms of the double investment, SingTel’s net debt-to-Ebitda ratio will only increase slightly by 10% to 1.1 times even if the entire non-equity portion is funded by debt, Nomura said in a report Thursday.

As of the end of June, SingTel had S$965 million in cash -- sufficient to settle the S$900 million portion of the non-equity payment.

The Intouch and Bharti Telecom investments could nonetheless prompt SingTel to expedite its plan to spin off NetLink Trust, its Singapore-based fibre network infrastructure unit.

SingTel is required by law to divest at least 75% of its interest in NetLink Trust by April 2018 and could raise as much as $2 billion through an independent listing on the Singapore Exchange, according to sources familiar with the company.

Besides NetLink Trust, SingTel also owns a 47% stake in Philippine telecom operator Global Telecom, a 35% stake in Indonesia’s Telkomsel, as well as Australia’s Optus.