Telecom companies still need a lot more capital, be it to secure 3G licenses in auctions or build out and upgrade their networks and services. The problem is investors are no longer so keen on telecom shares or bonds, particularly the riskier ones, and banking regulators are getting concerned about the high level of certain banks’ loan exposures to the sector.
“Investors are more selective in terms of what they want to buy. People don’t just buy the telecoms sector any more, they buy companies with strong performances,” says ABN Amro analyst Joe Locke.
For Asia, this was borne out last week in fund-raisings by Asia Global Crossing and, to a lesser extent, Globe Telecom.
Asia Global Crossing had originally planned an initial public offering on Nasdaq of 53 million shares, with a greenshoe option for a further 7.95 million shares, plus another 9.2 million shares earmarked for sale to strategic investors – Hutchison Whampoa of Hong Kong, Singapore Technologies Telemedia and Taiwan’s Microelectronics Technology – at a price of $14 - $16 a share. The company, which is a subsidiary of Global Crossing and has Softbank and Microsoft as significant shareholders, last week cut the IPO price range to $9 - $11 a share. Also the number of shares on offer was changed so that the strategic investors’ planned investment of $138 million would be filled from the 53 million shares in the IPO.
Despite this, Asia Global Crossing, was finally priced on Friday at just $7 a share, although the number of shares offered was raised to 68 million. The joint bookrunners handling the issue, Goldman Sachs and Salomon Smith Barney, agreed to subscribe for 7 million apiece on their own accounts, the strategic investors will buy 19.7 million and Asia Global Crossing Chairman Gary Winnick is buying a couple of million. In the event, neither Goldman Sachs nor Salomon Smith Barney has had to take up any shares.
As things stand, $476 million will be raised from Asia Global Crossing’s IPO, compared with initial hopes for a maximum $1.11 billion.
The terms of a concurrent $400 million bond offering also had to be revised. The indicative yield for the issue - rated B+/B2 and was arranged by Chase Securities and Merrill Lynch – was last week raised to 13.5% - 13.75% from 12.75%. In the event, $408 million of 13-3/8% 10-year senior notes were sold at $979.90 per $1,000 bond, giving a yield of 13.75%.
Asia Global Crossing’s parent company will be making available a $400 million subordinated loan facility (up from $200 million originally) to Asia Global Crossing to make up for the shortfall from its fund-raising exercise. In addition, Asia Global Crossing will be cutting back on its investment budget. The company, which owns 50% of Hutchison Global Crossing and 65% of Pacific Crossing-1, an undersea fibre-optic cable linking Japan and the US, plans to build a 19,000 kilometre fibre-optic network linking Asia’s leading cities.
Around the Globe
For Globe Telecom, the second biggest mobile phone network provider in the Philippines, initial hopes for an issue of around 12 million Philippine depositary receipts (PDRs) were shelved and the company instead proceeded with a more modest offering of 6.4 million new PDRs. The PDR issue, handled by Morgan Stanley Dean Witter, was last week priced at P725 ($15.69), an 8.2% discount to the price at which Globe Telecom’s shares had been trading prior to the pricing announcement.
The decision to keep both the size and pricing of the offering at a modest level reflects both investor caution towards telecoms stocks as well as negative sentiment towards the Philippines. The Filipino stockmarket – the Philippines composite index is down more than 40% this year - has been rocked by a number of scandals and is well off most investors’ radar screens for the time being.
Elsewhere, last month’s initial public offering of Taiwan’s Chunghwa Telecom, handled by Chinatrust Commercial Bank, failed to generate much interest among Taiwan investors, in part due to weakness in the local stockmarket. The TWSE Index has fallen to 6,209 from a high of 10,186 over the last six months, The Taiwan government hoped to sell 16% of the company, or 1.5 billion shares, but in the event only managed to offload 3%, or 272.5 million shares, at the NT$104 asking price. Goldman Sachs has won the much sought after mandate to sell ADRs representing about 12% of the company to international investors. This sale is supposed to proceed in the first quarter of 2001 and can’t be priced cheaper than the NT$104 already paid by Taiwanese investors.
The weak Taiwan stockmarket is again blamed for the poor performance of Taiwan Cellular, which last month listed at NT$86 a share and last traded at NT$65. The TWSE has fallen by a more modest 10% during the period since Taiwan Cellular listed.
Can you hear me?
Despite poor demand for telecom-related investments, there is no shortage of new fund-raisings in the pipeline.
The most significant deal is the $14 billion sale of shares in Nippon Telegraph & Telephone Corp by the Japanese government and the company itself. The shares are to be sold at a discount of between 3% and 5% to the their last trading price prior to pricing. NTT last traded at Y1.18 million, well down from the Y1.7 million immediately prior to last year’s sale of part of the government’s stake. Last year’s NTT share sale by the government - the fifth completed to date – was priced at a more modest 2% to 4% discount to the stock’s last trading price. Goldman Sachs, Merrill Lynch, Nikko Salomon Smith Barney and Nomura have won the mandate to handle the sale.
Much smaller is Telekom Malaysia’s planned bond issue. Merrill Lynch has been appointed to arrange the sale of $300 million - $400 million of 10-year bonds.
Assuming talks regarding $3 billion of investments by Telstra in mobile phone and IP backbone joint-ventures with Pacific Century CyberWorks (PCCW), as well as PCCW itself, are successful, both these companies will be raising funds. The deal, first announced in April, is being renegotiated for the second time, reflecting the relative appreciation of Telstra cash vis a vis PCCW’s telecom assets and shares.
If a deal is struck, PCCW will be looking to refinance up to $9 billion of the borrowings it took on to acquire Cable & Wireless HKT and raise a further HK$7 billion ($898 million) to pay for the construction of Hong Kong’s CyberPort. Given that its share price has dropped by around two-thirds since February, PCCW’s favourite currency, its own equity, is out of bounds. Telstra, which has seen its Standard & Poor’s credit rating drop three notches since it started talking to PCCW, will be issuing a bond to pay for its PCCW investment.
Morgan Stanley Dean Witter credit analyst Michael Lam says he doesn’t expect quality issuers such as PCCW and Telstra to have any problems raising capital. “Asian telecom companies in 2000 year to date have not tapped the market as much as they have in the past. I don’t think there’s a problem with appetite,” he adds.
Certainly, there are pockets of appetite, most notably for the China mobile phone network providers. The biggest, China Mobile, is acquiring seven networks from its state-owned parent for $32.8 billion, $10.17 billion of which will be paid in cash. To help raise this cash, China mobile plans to issue $4.1 billion of shares, $600 million of convertibles and has already agreed to borrow $1.5 billion from mainland China banks. Goldman Sachs, Merrill Lynch and China International Capital Corp – a joint-venture between Morgan Stanley Dean Witter and China Construction Bank - are arranging the share and convertible issues, both of which should see strong demand.
In evidence of China Mobile’s popularity, one need only look at its stock performance compared to that of SmarTone, Sun Hung Kai Properties’ mobile phone service provider in Hong Kong. Eighteen months ago, China Mobile’s share price was roughly half that of SmarTone. Since then, China Mobile shares have more than quadrupled in value, while SmarTone’s have more than halved.
“I think China Mobile is seen as a stable core holding that people see as a safe haven,” says one analyst. The other listed mainland China mobile phone service provider, China Unicom remains at a comfortable premium to its June initial public offering price of HK$15.58 – a deal that was arranged by China International Capital Corp and Morgan Stanley Dean Witter. China Unicom last traded at HK$17.70.
No doubt Jitong Communications is hoping investors’ love-in with mainland China telecom providers isn’t confined to the cellular arena. Jitong, which provides telecom services via the internet, hopes to raise up to $400 million via a dual listing in Hong Kong and New York. Dresdner Kleinwort Benson and Lehman Brothers are arranging the deal and BNP Prime Peregrine has been appointed as underwriter. At present, the 80 million H-shares on offer are expected to be priced at between HK$30 and HK$39.
