Sunday, April 6, 2014

GPacket & Telekom .. Can Buy ah ? ... Is A Waiting Game !!!

For Telekom …

TM’s acquisition of a 57% controlling stake in P1 is a good idea but “pricey and requires hefty future investment”.

Investors are advice to switch to DiGi as it offers modest growth from rising market share and a solid balance sheet.

To recap TM was paying RM350mil for new shares in P1 for a 57% stake, while forking out RM210mil at the same time to buy exchangeable bonds from Green Packet Bhd, which presently owns 57% of P1.

The injection of the RM350mil into P1, on the other hand, will give it a boost to expand its wireless business and move into the 4G mobile space.

The acquisition price suggested that P1’s subscriber base would grow fourfold to 1.8 million. It will be a stretch for P1 to achieve 1.8 million subscribers as Celcom, the largest wireless broadband operator in the country, only has 1.2 million users.

Nonetheless the acquisition was “opportunistic and synergistic for TM” because it extended TM’s offering from fixed services to the wireless space. Both telcos would benefit from TM’s extensive fibre coverage but claimed P1’s 2.3GHz and 2.6GHz spectra had poor propagation qualities. This proposition would be more positive if TM could use the 850MHz spectrum for non-universal service provision (USP) areas.

TM had not obtained approval from the regulator to convert the use of its 2x10MHz spectrum in the 850MHz band for use in non-universal service provision (non-USP)/rural areas.

Time will tell if the scenario will change should Telekom’s stake in P1’s rise substantial.

According to the terms of the planned rm210 million convertible bonds issuance by GPacekt, Telekom could end up taking over the latter’s entire 30% stake in the enlarged P1 if GPacket defaults on the debt papers. This would raise TM’s stake from 57% to 87%, leaving South Korea SK Telecom with a 13% stake. As it is, Telekom is taking up 60% or rm990 million of P1’s planned rm1.68 billion convertible bonds to raise cash for network rollout over the next three to five years from 2014.

For GPacket …

Telekom cash injection into P1 and recharge its expansion is no guarantee of success in the very competitive telco sector.

Telekom is paying only rm350 million for a 57% stake in P1. Telekom’s 57% stake comes from the issuance of new shares by P1. This means that GPacket does not get a share of the rm350 million proceeds but its stake will be diluted to 30% based on the enlarged share capital of P1.

GPacket will get some cash flow – from the issuance of rm210 million worth of redeemable exchangeable bonds to Telekom. The first tranche for rm120 million should be issued later 2014 with the balance likely in 2015.

Save for some rm30 million that will be used to acquire P1 shares held by minority shareholders, the remaining proceeds can be utilized by GPacket for settlement of liabilities and working capital.

But given that GPacket will also subscribe for 15% of the rm1.65 billion redeemable convertible bonds to be issued by P1 – equivalent to roughly rm248 million over the next three years from 2014, it is unlikely there will be any special payout to shareholders from this whole exercise.

This means that GPacket shareholders will have to wait for P1’s turnaround. In the meantime the company will likely remain in the red with limited chance for dividends.

With Telekom in the picture, P1 is slated to raise rm2 billion in fresh capital – rm1.65 billion in convertible bonds and rm350 million from new shares issued to Telekom – to fund its LTE network rollout for the next three years from 2014. Telekom and SK Telecom will subscribe to 60% and 25% of the bonds while GPacket will take up the remaining 15%.

Going forward, there is no guarantee of P1’s turnaround due to LTE space is extremely competitive and dominated by MAXIS, Celcom and DIGI.

Meanwhile GPacekt has been ordered to pay Intel Capital Corp rm60 million in April 2014, together with interest of 1.5% per month compounded month to month from Nov 28 2012 to the date of full settlement.

The KL High Court had ordered GPacket to remit the full payment within 90 days from the date of the court’s decision, less the amount of rm3.29 million which the company had already paid in Aug 2013.

It also stated that upon receipt of the full amount, Intel is to transfer 200000 Class B (ICPS) in Packet One Networks to GPacket.

The verdict will have a material impact on GPacket. As at end 2013, the company’s cash balance stood at rm36.68 million against borrowings of rm218 million.

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