GPacket - gearing 1.93 times

So far (15 April 2013) there has been no further details or confirmation of negotiations related to reports that DIGI, YTL Comm and TM involved in the bidding for P1. Nonetheless such deal in one form or other has to happen. It is solely in need of a game changer if it is to turn the company around.

It has been mired in losses since the launch of its broadband WiMAX services in Aug 2008. P1 started off strongly but the launch of TM’s UNIFI in March 2010 turned out to be a major headwind for P1.

P1’s subscriber acquisition lost momentum in 2011 and slowed significantly in 2012 and in the first half of 2013, pushing back its target for achieving critical mass and profitability.

As things stands, it is difficult to envision how P1 can regain positive momentum.

To compete fully in the 4G mobile services market, P1 would need nationwide coverage. That means substantially more capex which would be difficult without corresponding improvement in revenue and cash flow.

Its gearing rose to 1.93 times as at end June 2013 from 1.33 times at end 2012 and 0.68 times in 2011. Taking into account prevailing intense competition in the market, it may no longer be financially feasible to push ahead as it is.

Clearly one of the options is an outright sale of P1. SK Telecom bought a 25.8% stake in the operator for US$100 million back in 2010 implying an EV of some rm1.24 billion. GPacket has net debt of rm198 million at end June 2013. Assuming all the debt is related to P1, it could come out ahead with some rm600 million for its stake or equivalent to about 86 sen per share.

YTL Comm should see greater benefits in acquiring P1’s broadband subscribers which would complement its existing base. It could expand the business as it already has nationwide coverage on its own network.

There is less rationale for TM to take and build on the WiMAX platform as it is already directly competing with P1.

DIGI would be less interested in P1’s existing fixed line business and subscribers than its spectrum blocks in a world of tech convergence.

Still GPacket may well opt to retain its stake in P1. The broadband business is its primary thrust going forward – among its other business, the devices unit is very competitive and loss making while margins for the communications units are wafer thin with limited prospects. There is also the potential complication related to SK Telecom’s – a competing telco – stake in P1.

GPacket could still share infra and spectrum with DIGI, much like MAXIS-REDTONE agreement. Both companies could then continue to, independently, offer their suite of services. P1 would save on future capex to expand coverage – which is needed if it is to grow subscribers – while DIGI would gain greater capacity.