22nd March 2014
The ongoing speculation that Telekom Malaysia Bhd (TM) will be involved in a merger and acquisition (M&A) deal with Packet One Networks (M) Sdn Bhd (P1) gives rise to an interesting proposition - could a new wireless giant be created?
While details on the actual deal structure are scant for now, insiders point to one end result if it goes through: TM and P1 will collaborate to target the wireless broadband market and that TM, which has the much larger balance sheet, will eventually assume control over the new entity.
Spectrum wise, there is a fit between what the two companies would bring to the joint venture.
Spectrum basically refers to a range of radio frequencies. The bandwidth of a radio signal is the difference between the upper and lower frequencies of the signal. A spectrum belongs to a specific operator. Only that particular telco can operate in that space. Also to be noted is that lower frequency bands have a wider range of coverage but have smaller capacity in terms of the amount of data or voice signals that can be carried. On the flip side, higher frequency bands have capacities to carry 4G type services but have a lower range of coverage.
PI currently owns valuable swathes of spectrum in the 2.3GHz and 2.6GHz bands whereas TM has some spectrum in the much lower bands, namely 450MHz and 850MHz. (See table). Notes an analyst: “A collaboration could create a very powerful player given the combined low and high-frequency bands they have that can provide for superior coverage and capacity. Of course it is left to be seen if they can successfully derive the synergies”.
Another analyst says: “We view the move as positive to TM since this gives it the opportunity to complement its fixed broadband services with a wireless platform.”
Notably, TM would also gain access to P1’s existing customer base of more than half a million customers. P1 also has valuable infrastructure that will be of use – it owns over 2,000 base stations that have a coverage breadth of half the Malaysian population. Industry experts say it would take a few years for TM to build up such capacity or infrastructure.
Another advantage of having P1, is that TM would have a faster time to market for their wireless broadband offering. TM has already displayed its intention to venture into this segment of the market. The strategy makes sense, considering that the telco giant should see a slowing down of its fixed broadband business.
TM’s main thrust for the last few years has been the rollout of the high speed broadband or HSBB network. So far, TM has about 650,000 UniFi subscribers and has earned the bulk of its income from fixed broadband business.
However, PublicInvest Research noted that TM’s UniFi subscription growth has slowed substantially in the recent two quarters. In addition, it says TM’s management remained tight-lipped on the high speed broadband 2 (HSBB 2) project except saying that TM is still in discussion with the government but expects the negotiation to end soon.
HSBB 2 is the second phase of its fixed broadband business but details of this project are yet to be revealed. The first phase of HSBB was a public private partnership between the government and TM. It isn’t clear if TM will be involved in HSBB2 in a similar way, although analysts expect the same structure to be struck between the government and TM.
MIDF Research says TM stands to benefit from the government-driven HSBB2 project because TM is already the major provider of HSBB. The research house says that any upcoming newsflow on HSBB phase 2 is expected to benefit TM further.
AmResearch notes that the initial year of HSBB2 will see a capex increase and that TM’s guidance has not factored in HSBB 2 project yet.
AmResearch also says that given that initial costs will kick in before any incremental revenue is generated, TM’s earnings could see downward pressure initially, before turning around strongly in the following year as economies of scale kicks in. The research houses also points out that “TM is refreshing technology for its rural services from the current CDMA technology to LTE. The group attains the 850MHz spectrum band to offer these services, which gives it an advantage of lower roll-out cost given the better propagation qualities of lower spectrum bands.”
Adds AmResearch: “At this juncture, there is no clarity on whether TM is going to offer LTE in a big way, such as turning into a full-fledged mobile service provider. Management indicated that there is no regulatory constraint in how it utilises its 850MHz spectrum band.”
So it wasn’t surprising when last May, TM issued a request for proposal for LTE deployment. According to its briefing documents, TM had said it was seeking network providers to build an “end-to-end network and IT solution with some integration to existing TM infrastructure for the deployment of LTE”.
The document also revealed the timeline for the deployment of the 4G services.
The first commercial service is expected to be rolled out by Feb 12, 2014, with the end of rollout slated for Oct 15, 2014. TM’s plans then were to use its 800MHz spectrum as its LTE frequency band.
In addition, TM had stated it intended to have 100,000 users on its 4G network by 2014 and more than one million by 2017. It isn’t clear how an M&A deal with P1 would change TM’s strategic plans for penetrating the wireless broadband market now. But an analyst does not think that TM’s move into wireless broadband with P1 would become its key revenue growth driver.
“It is still considered a small business for now, compared with TM’s HSBB. Furthermore, TM would need to pump in capex into expanding the network,” he said.
Interestingly, TM’s share price has risen by some 10.6% since late Jan, closing at RM5.84 on Friday. At that price, TM offers investors a dividend yield of 4.47%, based on Bloomberg data.
Notably, the telecom giant announced hitting the RM10bil mark in revenue for the financial year ended Dec 31, 2013. It posted RM10.63bil in revenue and achieved RM1.36bil in normalised net profit for the period. TM and 15 global telcos recently inked an agreement to build a 20,000km undersea cable Internet link to transmitting 4,800 high-definition movies every second. Prior to that, TM sealed an agreement with Etisalat for fixed line and wireless services in the Middle East. The collaboration will enable TM to leverage on Etisalat’s SmartHub facility at Fujairah Cable Landing Station to deliver its content, Internetwork Packet Exchange, Internet Exchange and high speed data services for its customers in the region.
PublicInvest Research says while TM is expected to benefit from continued strong demad for data, it remained concerned on increasing competition and potential substitution for both fixed-line voice and data from faster and higher-quality mobile Internet services from 4G-LTE roll-out.
When asked about its potential M&A with P1 and its mobile wireless broadband strategies, TM says it “does not comment on matters of speculation.”
“Any such discussions with any party are part and parcel of our ordinary course of business. The company will make the necessary announcements if and when an agreement materialises from any such discussion,” it adds.
TM had in the past said it was not ruling out the possibility of collaborating with industry players to offer mobile broadband.
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