Merger of convenience

Merger of convenience

DTAC and True's proposed union is fraught with risks, but many argue the telecom giants had no alternative in a saturated market with shrinking margins

The planned merger of Total Access Communication Plc (DTAC) and True Corporation has led to criticism of potential market dominance as well as an understanding of the firms' business needs, but the move sends a clear signal that the telecom business may not be as promising as it used to be.

Some industry pundits see the deal as Telenor, the Norwegian parent of DTAC, securing a soft exit from the Thai market.

The stunning merger plan was announced by Telenor and conglomerate Charoen Pokphand (CP) Group, the parent of True, at a joint press conference on Nov 22.

Both indicated True and DTAC will consolidate to form a new company that will move into technological fields in addition to the traditional telecom business.

The path towards the merger is expected to be rough, with a long list of regulatory and social challenges, as academics and consumer advocates claim the deal would lead to a critical level of market concentration with only two major players left -- Advanced Info Service (AIS) and the new merged entity -- which could take a toll on consumer benefits.

Nevertheless, the market believes the deal will eventually go through, as has happened with other controversial deals in the past.

DTAC and True must navigate handling differences in management culture, the procurement process and decision-making, while having to ensure they shore up margins from existing infrastructure and resources.


Mobile carriers in Thailand are struggling to increase profit margins because of considerable investments in their networks. The top three mobile operators are seeing an annual profit margin of less than 10% on average while the market is becoming saturated.

A combined 75 billion baht was spent by them on network investment last year.

"Telecom service is seen as the old world. If operators cannot add value to their infrastructure, they need to make heavy investments year-by-year, including network expansions and upgrades, service shops, mobile SIM sales and other fixed costs," said Pisut Ngamvijitvong, a senior analyst at Kasikorn Securities (KS).

Speaking during the briefing on the merger, CP Group chief executive Suphachai Chearavanont said the telecom landscape has rapidly evolved in recent years, driven by new technology and intense competition.

In Thailand, however, the carriers' role in pushing for innovation development is low, while they face smaller margins from routine business, he said.

Large regional players, meanwhile, have entered the market with digital services, prompting telecom businesses to readjust their strategies, Mr Suphachai said.

According to KS, as of the third quarter there were 19 million subscribers for DTAC, 32 million for True and 44 million for AIS.

The merger, if it took effect now, would see the new company's customer market share reach 54%, versus 46% for AIS.

Referring to the planned merger, Zaim Halil, senior research manager for telecom and Internet of Things (IoT) at IT market research firm IDC Malaysia, said Telenor realised growth in the traditional telecom business was saturated.

Regional mobile business has grown at single-digit rates over the past few years because of intense competition.

"Apart from that, the next-generation mobile technology -- 5G deployment -- is a capital expenditure-intensive investment, and forming a partner through merger would bring benefit and provide them with the required capex for full-blown 5G deployment in the country," said Mr Halil.

According to him, Telenor is attempting to merge its business to position it as the market leader in the country and leverage that position to further expand its presence, network and services in Thailand.

Mr Halil said the merger would create "some extent of monopoly power" in the telecom market, giving the company the largest subscriber base.

"Both the consumer and enterprise subscribers will have a limited choice of service providers for them to select for connectivity-related services," he said.

However, the merged entity will be able to provide a better quality of service to subscribers at competitive rates, said Mr Halil.


CP and Telenor agreed to enter into an equal partnership to establish a new entity for their technology drive. An equal partnership means both companies will hold equal shares in the new entity.

Both expect to wrap up the due diligence process in the first quarter of next year, followed by approval by shareholders and related agencies.

A voluntary tender offer will be made to 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.

The maximum funds required for the deal should not exceed 89.2 billion baht -- or 4.2 billion baht for DTAC and 84.9 billion for True, according to Mr Pisut.

The merged company is projected to have 33.1% stakes held equally by CP and Telenor, a 10% stake held by China Mobile and the rest by other small shareholders.

This is similar to what Tone Hegland Bachke, chief financial officer of Telenor, mentioned in an investor call on Nov 22. The sponsoring shareholders would target ownership in the combined company of around one-third each.

According to Mr Pisut, in this business era it is common to see only one or two major players in a segment, such as Lazada and Shopee in e-commerce or Kerry and Flash Express in parcel delivery service.

"This is the trend for businesses now and merger is a way to strengthen parties' business growth," he said.


An industry veteran who requested anonymity said True and DTAC are likely to reap short-term benefits from the merger deal.

True is likely to have a stronger corporate image as the deal would make the merged entity the country's biggest mobile operator in terms of subscriber base, telecom infrastructure and spectrum ranges.

"The merged company could undoubtedly claim it is the No.1 player in the mobile market," the source said.

The merger could unsettle AIS, which has been at the forefront of the industry for 30 years, and could force it to focus on service quality, mobile internet speeds and innovation to compete, said the source.

For Telenor and DTAC, they would also enjoy short-term benefits by halting investment in telecom infrastructure and reducing fixed costs.

DTAC holds the smallest number of spectrum ranges and bandwidth of the big three carriers. It lacks the 2600-megahertz range that has been used to provide 5G service nationwide.

True, DTAC and AIS shareholders have benefited from rising share prices since the deal was announced.

DTAC and Telenor would also benefit from CP Group, which has warm relations with state agencies and the government, overcoming any business hurdles in Thailand, the industry source said.

The source compared this deal with the move by Gulf Energy Development Plc to make a tender offer to purchase shares of Intouch Holdings, the parent of AIS, which resulted in Gulf replacing Singapore's Singtel as the No.1 shareholder in Intouch. Gulf owner Sarath Ratanavadi has good connections with government figures and political parties.

CP and Gulf are unlikely to fight in the telecom sector as each has a hand in various industries, said the industry veteran.

"CP's connections would be beneficial to the merged company in the long run," said the veteran.

CP and DTAC told the public the new merged entity will pursue a tech journey, covering space tech, artificial intelligence (AI), IoT, digital media, telecom, scientists and engineers, the cloud, and tech startups.

They claimed the new company would enable Thailand to thrive in the tech field and create prosperity for the country.

Another industry source pointed out the two firms did not mention the telecom business during the conference, noting they might feel uncomfortable explaining how the merger would add value or increase margins for this business.

"Digital roadmaps and innovation developments may be easier to say," the source said.

Touching on telecom business growth might be hard without mentioning market dominance or easing competition as well as redundant cost reductions, the source said.


According to the source, the merged entity would also face internal challenges.

One big question is how it would add value or create larger profit margins from the use of its infrastructure and resources.

Second, DTAC and True have different internal management cultures, procurement processes and policymaking, which could lead to critical inconveniences in a long-term partnership.

Telenor is seen as strictly complying with the rules, even in its investment and infrastructure expansion, while CP and True appear to be flexible on decisions relating to procurement, project investment and expenditure, the source said.

True has some major sub-contractors handle its investment and infrastructure expansion, while DTAC uses only affiliated companies.

The merger is expected to shed 25% of total staff and reduce various fixed costs.

"The shareholding structure of the merged company, with Telenor holding about 33%, may need to be monitored for any changes when its share price increases," the source said.


The Trade Competition Commission, the regulatory body supervising fair trade and competition, said official information from the two parties remains scant.

"This is a mega-deal on telecom that is considered complicated and may affect consumers. Everyone has a mobile phone as a basic apparatus for daily use," said Sakon Varunyuwatana, chairman of the commission.

"The decision on deal approval belongs to the National Broadcasting and Telecommunications Commission [NBTC]."

Mr Sakon said his commission sees it as imperative that it work closely with the NBTC to monitor the deal.

"The issue that concerns the board the most is official information about the deal is scant and incomplete," he said.

The board agreed to set up a panel to study the legal and business perspectives of the deal, said Mr Sakon.

A source at the commission who requested anonymity said it is studying whether the deal would lead to market dominance as well as its effect on consumers.


Glen Cardoza, senior analyst at Counterpoint Technology Market Research, said the merged entity is most likely to pool resources to create a stronger 5G infrastructure system for enterprises and consumers, as AIS is currently the front runner in the 5G field.

"Major challenges include DTAC not receiving its 5G licence and True's high current debt value," said Mr Cardoza.

"AIS is way ahead of both competitors and it's quite likely the 5G subscriber base will widen in favour of AIS within the next year."

According to him, the effect on the Thai telecom sector will most likely be felt in the second half of next year based on how the completion of the merger plays out and upcoming efforts from AIS.

During the merger process a price war is unlikely and operators may seek to tap into any unsubscribed parts of the country, especially tier 3 and 4 geographies, Mr Cardoza said.

He said the merger will be a boon for the digital transformation drive, 5G supremacy and Industry 4.0.

In addition, it is likely major mobile operators will start looking to work with regional partners, said Mr Cardoza.

"It is more likely for AIS to do this faster than True, DTAC or the merged entity. Current transitions in Thai telecom will last longer and clear repercussions will most likely be seen towards the end of next year," he said.


Suthikorn Kingkaew, a project leader at the Thammasat University Research and Consultancy Institute, said the government should pay serious attention to the deal and come up with measures to ward off possible market dominance.

One key is to look at the behaviour of the merged company in the market, not only the size of it, said Mr Suthikorn.

He said the deal should help DTAC and True catch up with market leader AIS.

Currently DTAC does not invest much for fear of running losses, so its mobile signal is not as powerful, resulting in more users switching to other carriers, said Mr Suthikorn. True invested a lot in its network, but needs more users to justify the expenditure.

A merger would help the two better compete with AIS, he said.

Mr Suthikorn said the merger will have an impact on some fixed broadband internet operators, such as 3BB and TOT, because DTAC users are more likely to switch to this service from True based on the convenience of bill consolidation and the benefits of bundled promotional packages.

Policymakers must ensure the merged entity does not offer uncompetitive mobile and broadband bundled packages because this would cripple smaller players, he said.

As Thailand is not a big country and purchasing power is meagre, investment in mobile networks by more than two players may not be efficient and could erode the economy, said Mr Suthikorn, and the merger could help in this regard.

Referring to the new company's move into the tech sphere, he pointed out the sector is fiercely competitive, with existing super apps and over-the-top platforms that are already global or regional players.

However, with cost reductions and stronger competitiveness, the new company would have more money to invest in the digital realm and an opportunity to become a competitive player in the long run, said Mr Suthikorn.


According to True and DTAC, the merged company would set up a venture capital (VC) fund worth US$100-200 million to invest in promising startups.

Sompoat Chansomboon, chief executive of KT Venture Capital, an investment arm of Krungthai Bank, said the move should support more local startups.

The VC fund could reach out to the 50 million mobile users of the merged entity and even scale up to a larger customer base, he said.

This VC could also convince foreign startups to relocate to Thailand while stimulating investment in new tech frontiers, such as deep and advanced tech, space, AI and even the metaverse, said Mr Sompoat.

True already invested in 5G-based tech with a strong local market presence, while Telenor operates in many markets with technologies from Europe, he said.

"I am quite optimistic the new merged company will be competitive, but we need to see how it executes tasks or deals with cultural differences," said Mr Sompoat.

Sarun Sutuntivorakoon, president of the Thai Venture Capital Association, agreed the new entity would face challenges in terms of cultural differences between the two parties. Yet he believes the merger is needed for both parties to increase their competitiveness.

Mr Sarun said the new VC fund would be helpful for startups, particularly those in the Series A funding stage.

Sam Tanskul, managing director at Krungsri Finnovate, a corporate VC arm of Bank of Ayudhya, believes the consolidation to form a new tech company is the right option as satellite internet is likely to pose threats to the mobile business.

The move also combines two customer bases, which would drive market competition and create new partners.

"Currently, in all industries it is a game of big fish eating smaller ones. Mid-sized companies may need to combine to increase scale, as happened in the banking sector where TMB Bank and Thanachart Bank merged," Mr Sam said.

Pawoot Pongvitayapanu, an e-commerce pundit and angel investor, said True has a strong ecosystem, including e-wallets, games, and its linkage with CP, which could be a boon for the merged company's competitiveness in the local market.

More efforts are needed to develop technology to compete against global or regional players, Mr Pawoot said.

He believes the deal is the right move by mobile operators as they encounter various challenges, such as reduced revenue from network services and threats from satellite internet.

"For Telenor, the deal is like a soft exit as the company has appeared to focus less on investment in this market," said Mr Pawoot.

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