Overseas Calls

It has been a busy time for Telecom Malaysia (TM) recently, with the firm expanding its stakes overseas and looking for further growth.



Back in October, news came that the company had raised its stake in Indonesian mobile phone operator PT Excelcomindo Pratama from 25 to 56.9%. The firm was exercising a call option with PT Telekomindo Primabhakti, Excelcomindo's original owners, to buy the extra equity for RM1.73bn ($460m).



Excelcomindo is Indonesia's third-largest mobile phone operator by subscribers and was listed on the Jakarta Stock Exchange on September 29.



However, the Indonesian bourse bosses excluded Excelcomindo from the main index calculations because of the small number of the company's shares held by the public - currently a mere 0.13%, which analysts agree makes the firm prone to manipulation. TM is however known to be considering increasing the firm's public float by either selling shares or issuing more.



Then, a few days later, news came that SunShare, a joint venture between TM and Khazanah Nasional - a Malaysian government shareholding corporation - had received the go-ahead to raise its stake in Singaporean mobile operator MobileOne.



SunShare was approved by the Infocomm Development Authority of Singapore to acquire up to 30% of MobileOne, but has owned 17.7% since August when it bought this equity from Britain's Cable & Wireless and Hong Kong's PCCW. Since then, SunShare has continued buying from the open market and is currently thought to own as much as 24%.



TM's forays abroad are nothing new. In the mid-1990s, the firm made investments in an assortment of African nations, as Malaysia's former prime minister had sought to help less developed nations. However, as several of these investments have proved unprofitable over the years, they have been scaled back, with only two now remaining - in Guinea and Mali. Eventually, these too will likely be relinquished.



The firm is obviously seeking profitable opportunities overseas, though. "The government wants more government-linked companies [GLCs] to be world class competitors," explained Abdul Wahid Omar, CEO of TM when speaking to OBG recently. "They're looking for another Petronas, and so we are benchmarking against other firms internationally and in the region and adopting global standards."



The firm's Asian operations currently cover Sri Lanka, Bangladesh and Cambodia as well as Indonesia and Singapore. There were also headlines in 2004 when it looked likely TM would acquire a stake in an Indian operator. Whilst that deal was never sealed - as the markets priced themselves out by buying up the Indian firm's stock in anticipation of the deal - the firm is still looking for profitable opportunities in the region.



It makes sense in terms of the business. Malaysia's mobile sector is reaching maturity with its 2G technology and with the real profits of 3G expected to take a few years to come to full fruition, the less developed markets surrounding Malaysia are ripe for mobile services.



The numbers tell the story. Malaysia's mobile penetration is about 55%, while Indonesia has less than 15% and India is in single digits. Singapore is a different story though, and some analysts are confused by TM's moves in the city state.



"It seems to be an odd purchase," explained one analyst. "The mobile services providers are going abroad because of a penetration rate in Malaysia above 60%, yet Singapore's [penetration rate] is 96%."



Some say there is not much of interest in the Singapore business for foreigners, although MobileOne is known to have a healthy dividend yield - company policy is to pay out at least 70% of earnings. Whilst that is thought to be one motivation, another is the possible sale of the company; larger competitor StarHub has long been rumoured to be interested in buying MobileOne.



Meanwhile, the opportunity existing in other countries is no secret - and the competition there is likely to be strong. In the scramble for overseas markets, TM will also likely see some familiar faces.



TM's leading domestic rival, Maxis, said in January 2005 it would spend $100m to buy 51% of Indonesia's PT Natrindo Telepon Seluler. Chief Executive Jamaludin Ibrahim said at the time he didn't expect to have earnings before interest, tax, depreciation and amortisation (EBITDA) before 2009 or 2010, with an initial purchase offer for the unit coming at that time.



However, the company is one of the smallest mobile companies in Indonesia, with about 25,000 subscribers at the time of Maxis's purchase. Yet Maxis have said the company has the potential to be the third-largest mobile-services provider and the first to offer 3G products. The current third-place provider is none other than PT Excelcomindo Pratama, partially owned by TM.



The purchase looked shaky in June, when Indonesian media reported that the government would redo the process of awarding 3G licences. A report in a Malaysian newspaper speculated that Maxis's 3G licence in Indonesia would end up costing more than expected.



Whilst that hasn't transpired, the scare underscores investors' concerns about investing in Indonesia. There were also fears that the buy could cut into Maxis's dividend yield, although Maxis said in January 2005 that money for Natrindo would not reduce the company's dividend.



Some analysts and investors also considered the cost of the acquisition high, with Maxis shares sinking 8% following the announcement of the purchase.



The buy was Maxis's first outside Malaysia, and there are apparently no plans for more such deals at this point.



"Maxis had no choice but to go into Indonesia to ensure an avenue for growth," says Geoffrey Ng, who oversees $450m in mutual funds as chief investment officer of Pacific Mutual Fund. "They've got a long way to go to make it competitive."



Cashing in on the expected growth of mobile services in South East Asia will certainly be a hard fought battle. With timing, proximity and experience on their side, however, Malaysian operators are likely to get their slice of the pie.