Long-term investors give M1 another lease

BEING contrarian can be rather unnerving, but Keppel Corp's move to buy out M1 at the time when the telecom industry is reeling from fierce competition appears a happy resolution for all parties, including M1's other shareholders who may not have the stomach for roller-coaster rides.

Keppel on Thursday said it will be making a pre-conditional voluntary general offer of S$2.06 cash a share for the M1 shares it does not own, and a separate offer to privatise subsidiary, Keppel Telecommunications and Transportation (Keppel T&T), at S$1.91 a share in cash. The offer for M1, made together with Singapore Press Holdings (SPH), values M1 at around S$1.91 billion.

The buyout offer may have come as a surprise to some. After all, Keppel together with SPH and Malaysia's Axiata Group Berhad - all holding a combined stake of 61 per cent - had pondered selling their stakes in M1 in a strategic review back in March 2017.

But Keppel's latest move should not really be a surprise. Conditions are now ripe for Keppel to resurrect plans to privatise Keppel T&T, a move it tried back in 2002, and eventually reap the synergistic potential with M1.

With a firmer grip on M1, M1's access to last-mile infrastructure can be used to provide connectivity for properties/infrastructure under Keppel's management. Keppel T&T's datacentre services can support M1's weak presence in the enterprise segment. Keppel can better integrate its electricity distribution business with M1's home services, and there are also media distribution opportunities that SPH can provide and better realise through M1, according to Kenny Liew, a technology, media and telecom (TMT) expert at Fitch Solutions.

The current shareholding structure, noted Joseph Ng at OCBC Investment Research, makes it challenging for Keppel to push for change and reposition M1 to take on disruption in the telco space. Keppel said it has plans to arrest the decline in M1 shareholder value through a combination of transformation efforts. These include the digital transformation of M1's operating platform, cost management initiatives and balance sheet optimisation to unlock value from underlying infrastructure, as well as growth initiatives into new markets and segments.

A simpler structure will allow Keppel to make this happen.

While revenues have slumped, M1 has continued turning over a very stable net profit. Its current share price weakness makes M1 a very attractive value buy for Keppel.

However, there are risks. These transformation efforts are expected to take "several years", and the outcomes cannot be totally certain. Dividends from M1 could be affected during such time by the intensifying competition in the Singapore telecom market, as well as the allocation of resources required for these efforts.

The clear winners at this point are M1 shareholders, who have seen upside injected into the share price. For those who don't share Keppel's long-term vision for M1, it may be best to consider taking up the offer. Fundamentals for the telecom market here have deteriorated and there are little organic growth opportunities left. The entry of Australia's TPG, the fourth Mobile Network Operator here, will only add to the uncertainties.

Analysts told BT that Keppel's management highlighted at a briefing with them that its primary goal was to seek a controlling stake of 50 per cent plus one M1 shares. They reckoned Keppel's management would probably prefer to only acquire enough shares to achieve their objective of control to avoid taking on too much debt for this acquisition. The intention appears not to take M1 private. At the current level of shareholdings, Keppel will only need an additional 17-18 per cent stake to reach that target.

So even if Axiata, which holds 28.3 per cent, were to reject the offer, it does little to impede Keppel's objectives. However, should acceptances run past 90 per cent, Keppel will adhere to listing rules and proceed with a delisting. Having said that, if Axiata does reject the offer and makes a counter offer, it will still be a win-win development for M1 shareholders, including Keppel and SPH.

READ MORE: Keppel, SPH to make joint offer for M1; Keppel to privatise Keppel T&T