On Sept 22, StarHub proposed its acquisition of a 50.1% interest in MyRepublic’s broadband business in Singapore.
StarHub’s total investment will be up to $162.8 million. An initial consideration of $70.8 million will be paid by StarHub for 50.1% of the shares in the new entity, MyRepublic Broadband, while a deferred consideration of up to $92 million will be paid if future financial performance matrices are met. In addition to equity, StarHub has agreed to refinance $74.2 million of debt for MyRepublic for a period of three years.
MyRepublic will retain the remaining 49.9% stake and its senior management team, helmed by co-founder and CEO Malcolm Rodrigues.
Upon successful acquisition, StarHub’s market share in Singapore’s broadband market will increase by 6% to 40%, trailing slightly behind market leader Singtel at 43%.
See: StarHub to invest up to $162.8 mil in MyRepublic’s broadband business, acquires 50.1% stake
What was once a highly competitive landscape, is now moving towards more open collaborations.
“The deal marks the first consolidation of its kind in over a decade, and is in line with management’s narrative on M&A,” says RHB Group Research, who is overall positive on the acquisition as it would strengthen StarHub’s position in the fibre broadband market; and unlock scale and synergies via joint go-to-market opportunities, wholesale offerings, and cost savings.
Revenue synergies are expected in the form of the extension of connectivity services, cloud gaming, and over-the-top services to MyRepublic, with StarHub benefiting from MyRepublic’s approximately 6,000 enterprise customer base and regional footprint. StarHub would also be able to offer broadband network services to MyRepublic as a wholesale provider via Nucleus Connect.
To that end, StarHub’s management does not rule out other collaborations or partnerships, including for mobile, with MyRepublic currently its mobile virtual network operator.
RHB has a “neutral” call on StarHub with a target price of $1.35.
Similarly, UOB Kay Hian has kept its “hold” call on StarHub with a target price of $1.30 and entry price of $1.15.
“The transaction is priced at 8 times EV/EBITDA, which we deem as fair given its controlling stake. There is a 3% earnings enhancement upon completion of the deal. Overall, the deal is fair as StarHub aims to drive its broadband market share to 40% with the acquisition,” says analyst Chong Lee Len, who also likes the stock for its sustainable dividend yield of 4.8% for FY2022.
On the other hand, CGS-CIMB has a more positive outlook on the stock as it keeps its “add” call on StarHub with a target price of $1.65.
Analyst Foong Choong Chen sees this deal as a “win-win situation” for both parties.
“Based on MyRepublic’s FY2021 net profit (pre-synergies), we estimate the deal will enhance StarHub’s FY2022 core EPS by 4.6%, after considering the interest income foregone on the cash to fund the initial consideration (and ignoring the net interest income from the loan to MyRepublic). StarHub’s net debt/EBITDA would rise marginally from 1.32 times to 1.41 times post-deal, excluding the loan to be extended to MyRepublic,” says Foong.
Meanwhile, the analyst believes that there could be more synergies apart from the broadband segment. “In terms of revenue synergies, StarHub will be able to sell its growing range of connectivity, over-the-top content, cloud gaming and other services into MyRepublic’s subs base, while there will likely be wholesale business opportunities too. There is also the potential to work with the MyRepublic Group to offer solutions to its enterprise clients in Singapore and in the region. As for cost synergies, StarHub highlighted joint go-to market opportunities, as well as infrastructure and resource rationalisation,” he adds.
DBS Group Research too has a “buy” recommendation on StarHub with an increased target price of $1.44.
The way analyst Sachin Mittal sees it, this acquisition may be small, but it will still be accretive and will help boost StarHub’s earnings to enter a sustainable growth territory in FY2022. “We expect StarHub to register mid-single-digit earnings from FY2022 onwards, thanks to recovery from the pandemic in FY2022, reversing five years of declining earnings from mobile services, and potential mobile sector consolidation in 2022, thus reviving long-term growth of the mobile business. Meanwhile, enterprise business should continue to grow, led by Cybersecurity & regional ICT services,” says Mittal.
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To that end, Mittal believes that StarHub will likely retain its stake in MyRepublic at 50.1% and not dig in to the 49.9% currently still held by MyRepublic, as the remaining stake can be bought by StarHub subject to undisclosed stringent conditions.
“We think that StarHub might keep its ownership in MyRepublic’s broadband at 50.1% and not pursue the remainder stake as StarHub is already in a position to control the business and MyRepublic might want to retain the 49.9% stake in the business which might benefit from cross-selling of new products from StarHub,” says Mittal.
As at 3.45pm, shares in StarHub are trading at $1.27, giving it a FY2021 price-to-earnings ratio of 15.8 times and a dividend yield of 4.1%, according to RHB’s estimates.
Photo: StarHub
