Telecom mega merger faces hurdles
DTAC, True formally announce tie-up
published : 23 Nov 2021 at 06:11
newspaper section: Business
writer: Komsan Tortermvasana, Suchit Leesa-nguansuk and Srisamorn Phoosuphanusorn
The merger of True Corporation Plc and Total Access Communication Plc (DTAC) could cause a potential telecom market dominance, while the National Broadcasting and Telecommunications Commission (NBTC) will have the authority to look into the issue, according to the Office of Trade Competition Commission (OTCC).
Conglomerate Charoen Pokphand (CP) Group, the parent of True, and Norway's Telenor Group, the parent of DTAC, on Monday agreed to enter into an equal partnership to explore ways to establish a new tech company through amalgamation of the two subsidiaries.
Sakon Varunyuwatana, chairperson of the Trade Competition Commission, said the merger is bound to create a company with market dominance, but Section 4 of the Trade Competition Act 2560 stipulates that this Act shall not apply to acts of a business regulated by specific law in respect of trade competition.
"So the mega-deal of the two mobile operators should be under the supervision of the NBTC, not the OTCC," said Mr Sakon. "What we need to do is to keep a close watch on the function of the NBTC and details of the deal."
Under the act, a potential market dominance takes place if the merger results in an entity with a market share of more than 50%.
The commission will discuss this merger deal in its meeting on Nov 25.
KEEPING AN EYE ON IT
The NBTC has directed its management to set up a committee responsible for monitoring the merger deal. The panel will have to report updated information to NBTC board each month.
This was spelled out by Prawit Leesathapornwongsa, an NBTC board member, after a meeting on Monday between DTAC chief executive Sharad Mehrotra and the NBTC management and some board members to discuss the prospect of a merger deal.
Some NBTC board members also demanded a meeting between the NBTC, the Securities and Exchange Commission (SEC) and the Trade Competition Commission for proper resolutions regarding the merger.
NBTC has no authority to deal with Telenor or CP as the two companies are not licensees of the NBTC office.
The licensees are DTAC TriNet, wholly owned by DTAC, and True Move H Universal Communication (TUC), a mobile operator wholly owned by True.
DTAC TriNet and TUC are obliged to inform the NBTC before the merger, according to the NBTC's regulations.
"The NBTC office should issue some regulatory conditions involving the deal so as to prevent possible domination in the market and ensure consumer protection," Mr Prawit said.
Mr Mehrotra told the meeting that it is still too early to conclude whether DTAC TriNet and TUC will merge into a company or not, and that prospect will be clear by June next year after the due diligence of asset valuations by March 2022, Mr Prawit said.
True representatives will meet the NBTC today to discuss the deal's prospects.
True and DTAC agreed to a swap ratio of one existing share in DTAC to 24.5 shares in the new company, and one share in True to 2.4 shares.
A voluntary tender offer will also be made with DTAC shareholders at 47.76 baht per share and True shareholders at 5.09 baht per share. The offering will be carried out by Citrine Global Co, a joint venture of Telenor Asia and CP.
DTAC and True are expected to run the business independently until the end of the second quarter of next year, when the formation of the new technology company is expected to be completed.
Apart from the telecom business, this new joint venture will move into new advanced technology, such as artificial intelligence (AI), cloud, Internet of Things (IoT), digital media solutions and smart devices as well as space technology.
"We will also explore opportunities in space technologies to expand our potential areas for new innovations," said Suphachai Chearavanont, chief executive of CP and chairman of the board of True Corporation.
"Our actions today are not just about where we as a company want to be next year. They are about where we want our country to be in 2030," he said.
"What we all do now will determine how prosperous our country becomes in the 2030s because new-generation mobile technologies will impact the way we work, the way we communicate, spend our leisure time, the way we travel, transport goods, shop and manufacture. It's a time of 'all change'."
According to him, technologies will open up "unimaginable opportunities" for young generations everywhere, turning a whole generation of bright Thais into great inventors and very successful businessmen. "We must decide and act now," he said.
"The world's leading economies are already moving fast in preparing themselves, and so must we. Similar strategies have been pursued by telecom companies in the United States, Europe, and Asia as countries prepare for the massive, paradigm-changing consequences of the arrival of new-generation mobile technologies by 2030," said Mr Suphachai.
Meanwhile, an industry expert close to the deal discussions, who requested anonymity, indicated that the new company would also be looking at space-based communications technologies, among other new technologies and services to pursue.
"Satellite-based communication technologies are given importance because of their anticipated increasing role in next-generation mobile communications, complementing current land-based technologies that are used to transmit signals, and that Thailand needs to actively drive this in the race to become a digital hub," the expert said.
According to the expert, both sides have been supporting the creation of a fund worth 3-6 million baht to support digital entrepreneurship, which could turn Thailand into a future tech hub.
Referring to the merger, Sigve Brekke, president and chief executive of Telenor, said technological advancement will move into full swing in the next 20 years in what is called "the perfect storm", driven by 5G, AI and IoT.
"It is also a business where you need to team up in partnerships that are different from what you did in the past," said Mr Brekke.
"So we will basically take the best from Telenor and the best from True and for this new company, it will be well positioned to meet those digital challenges."
According to Mr Brekke, the combination will foster strength to invest in future tech as well as new products and services.
The sizeable new company will have a turnover of 271 billion baht with 83 billion baht in profit before expense deductions, he said.
He said the new company will have a market share of less than 40%, similar to the level of AIS.
Somchai Lertsutiwong, chief executive of AIS, refused to comment on the historic deal between DTAC and True.
AIS's strategic policy, he said, is to move ahead with its leading position as a digital lifestyle provider and the first mover of the 5G network to serve customers in the digital era.
Another telecom industry source said that although TUC is the second biggest carrier in the country in terms of subscriber base, its margin has been low for a decade.
CP is also wracked with a total debt of 1.6 trillion baht while its high-speed train project is still mired with uncertainty.
The source said the deal could fuel challenges in the telecom segment in terms of market dominance and fair competition, which could affect customers.
"The deal reflects the dark side of the capital market mechanism regardless of the proper way of doing business," the source said.
The telecom regulator will have to make sure the deal complies with related regulations.
"With only two major operators, it is likely to see easier collusion than in the past," the source said.
The merger deal between DTAC and True is filled with challenges ahead as the combined market share of the two parties would exceed 50% and violate Thailand's anti-monopoly law, said an industry veteran, who requested anonymity.
The NBTC and the Trade Competition Commission will also mull over the licensing and spectrum of both telecom giants.
While the estimated valuation for DTAC now sits at US$3billion, analysts believe the figure is too high and overvalued. The appropriate pricing should be $2 billion as DTAC has failed to acquire any 5G licences.
The merger between DTAC and True would also fuel True's current debt of 500 billion baht and put additional pressure on True's consecutive yearly losses. The combined revenue between DTAC and True is nowhere close to AIS, which is now the leader in the market.
Another anonymous source also expressed doubts about True parent company CP's financial ability to seal the merger deal with DTAC.
Citing several major financial strains, including CP's recent purchase of grocery store chain Tesco, the delay in payment of 10.6 billion baht to the government regarding its Airport Rail Link takeover and expansion into the Eastern Economic Corridor (EEC) zone, and the company's agro-industrial and food subsidiary Charoen Pokphand Foods (CPF) record losses of this year.
"The merger deal could be a case of the blind leading the blind, but True is adamant about being the market leader at all costs," the source said.
Compared to another acquisition, InTouch Holdings's merger happened when Thailand's energy firm Gulf Development sealed the deal with Singapore's telecommunication giant Singtel and became a major shareholder of InTouch. This M&A differs from the True-DTAC merger because Gulf has the strong financial capability to close the deal.
The source added that the DTAC acquisition's reasoning lies in Telenor's intention to withdraw and consolidate mobile operations in Asia.
The merger between True and DTAC would result in utter chaos, citing a shockwave of uncertainty across two companies over employees' career prospects and potential massive layoffs, an anonymous source told the Bangkok Post.
The marketing departments of both firms will also be put on pause as confusion over the deal lingers.
The source added that most DTAC customers do not feel at ease that its service provider intends to merge with True. Many DTAC existing users have severed ties with True because of the telecom giant's unsatisfactory customer service experience.
Nonetheless, the source said, the true winner of the situation would be AIS, at the very least in the short term.
As for business profits, the source said the True-DTAC merger would undoubtedly generate more money for its shareholders.
However, there will be less competition from having fewer major players in the country's telecommunication segment. As a result, consumers would be left with more expensive services and higher bills due to the lack of promotions and competition.
While the progress in merging the two telecom giants may take several years, the dire consequences of the vacuum over that period will most likely result in lower service quality.
The source also said that the difference in management style between the two companies will worsen the matter. Telenor's leadership is much more straightforward, while CP business heavily relies on connections from state agencies.
"No matter which party benefits the most from this acquisition, the consumers, especially the DTAC users, will be the real losers in this scenario," the source concluded.
Pisut Ngamvijitvong, a senior analyst at Kasikorn Securities (KS), said the merger is a win-win situation for all major market players, namely True, DTAC and AIS as their shares prices all rallied following the good news.
The new merged unit will see CP hold a 29% stake and Telenor hold 27.3%.
Telenor and CP will both launch a tender offer for their partner's shares from the minority shareholders at the prices of 47.76 baht per share for DTAC and 5.09 baht for True.
He said the maximum fund requirement for the deal should not exceed 89.2 billion baht or 4.2 billion baht for DTAC and 84.9 billion baht for True.
Under the circumstances, KS expects both share prices to stand slightly above the tender offer prices.
Mr Pisut said a merger would rebalance the spectrum holding parity and thereafter competitive parity.
KS also foresees improving price competition immediately as the two remaining mobile network operators would have a similar revenue market share.
"We think both operators will develop some business collaboration given that their major shareholders are Thai and they have a good relationship," Mr Pisut said.
KS also upgraded its sector weighting from neutral to positive and raised its 2022 forecast target price by 8.5% from 207.24 baht to 224.94 baht for AIS, by 20.5% from 36.47 baht to 43.97 baht for DTAC, and by 23% from 4.23 baht to 5.2 baht for True.
All three stocks are expected to outperform after the deal, he said.
Prakit Siriwattanaket, managing director of Marchant Partners Asset Management, said in the short term, the merger between True and DTAC will boost both True and DTAC's profits as costs are reduced by sharing resources and lower price competition as there will be only two big players left in the industry.
After the merger, service branches of the two firms in overlapping areas will be reduced and redundant, causing a reduction of transmission towers and some employees.
Phusadee Arunmas, Nuntawun Polkuamdee and Dusida Worrachaddejchai