Singapore Telecommunications (Singtel) is joining the wave of telcos divesting their infrastructure assets, as the company embarks on its “strategic reset” to reverse lacklustre earnings in recent years.
On Oct 1, Singtel announced plans to sell a 70% stake in Australia Tower Network (ATN), which holds its Australia subsidiary Optus’s tower infrastructure, for A$1.9 billion ($1.8 billion).
The buyer is AustralianSuper, the largest Australian superannuation and pension fund. The transaction involves 2,312 mobile network towers and rooftop sites and values ATN at an enterprise value of approximately A$2.3 billion, representing FY2021 pro-forma EV/Ebitda transaction multiple of 38 times. This is significantly above telco multiples, reflecting the high quality of the assets and tenants.
“The rise of digital technology and its accelerated adoption on the back of Covid-19 has had major implications for the physical infrastructure that facilitate and support this overwhelming demand for data connectivity we are witnessing,” says Singtel’s group CEO Yuen Kuan Moon.
“From our telecom towers to our data centres, it is imperative that we restructure our assets and re-organise our business to better fund, improve and grow our digital infrastructure. Not only will this secure our place in the digital economy, it will also allow us to help keep our communities supported and economies up and running,” he adds.
Besides its 30% remaining stake, Optus will be keeping a long-term lease agreement of 20 years with ATN, which will then be managed by AustralianSuper as part of the largest independent tower company. Optus will also be the anchor tenant on 565 new build-to-suit towers to be built over the next three years, which will form an integral part of its 5G network.
Optus CEO Kelly Bayer Rosmarin declines to disclose the lease Optus has to pay AustralianSuper other than it is on “very good commercial terms”. She points out that with proceeds of A$1.9 billion from the sale, Optus can then reinvest in its “active infrastructure and equipment and differentiation”.
Adding on, Yuen says: “The value of the transaction, the calibre of our partner and the access arrangements under the terms of the agreement will protect Optus’s strategic advantage and preserve its network leadership as it accelerates its 5G rollout across Australia.”
“This transaction also supports our larger infrastructure strategy to unlock value through an asset-right approach which will free up capital to reallocate and reinvest in key growth areas,” he adds.
Wave of divestment
In what is a growing trend, telcos are cashing in on their assets across the region, as they undertake active capital management while meeting investors’ demand for infrastructure assets.
What Singtel did with the Optus towers is neither unique nor was it the first. On June 30, just three months before the Optus tower sale, Telstra — Australia’s biggest telecommunications company — announced the sale of 49% of its tower business for US$2.1 billion ($2.8 billion) to a consortium comprising the Future Fund, Commonwealth Superannuation Corporation and Sunsuper.
As part of the deal, Telstra has signed a 15- year lease. It will use the proceeds to reinvest, pare debt and also return some to shareholders.
On Sept 2, Singtel’s 35%-owned Indonesian associate Telkomsel said it has entered into a sale-and-purchase agreement for the sale of 4,000 telecommunication towers to PT Dayamitra Telekomunikasi (Mitratel) for INR6.2 trillion ($591.7 million). The accompanying lease was for 10 years.
Apart from the towers, telcos’ data centres are also in the play. Globe Telecom, Singtel’s associate in the Philippines, is reportedly mulling the sale of its data centres for around US$200 million, reported Bloomberg in September.
Globe’s rival PLDT Inc is reportedly planning to sell its ten data centres too, with a possible price tag of US$500 million. Telkomsel rival Indosat is similarly looking to offload its data centres.
If so, they will join Hong Kong’s PCCW. In July, the company controlled by Richard Li — the younger son of Hong Kong tycoon Li Ka Shing — announced the sale of its nine data centres across the region for US$750 million. The buyer was DigitalBridge, a New York-listed REIT previously known as Colony Capital.
Singtel, however, does not have similar plans for its assets in Singapore. The dense urban landscape means there are few towers and most of the mobile stations are mounted on building rooftops instead. “So, it is quite a different model and may not be applicable to the Singapore context,” explains Yuen.
New partners
Singtel and its associates are investing in what it sees are new growth segments. On Oct 1, the same day the towers sale was announced, Singtel said it has formed a regional data centre business which will in turn form part of a regional digital infrastructure platform to capture new growth opportunities arising across Asia.
Singtel is also now in advanced talks with long-standing partner Indonesia’s Telkom to acquire and build data centre assets in Indonesia and the region. Singapore, Thailand and Indonesia jointly make up more than 70% of the Asean data centre market.
In addition, Singtel has signed an MOU with Gulf Energy — Thailand’s leading power and infrastructure company — to form a partnership to build and develop data centres across the country. The venture is a bet on the growing sophistication of Thailand’s economy, where 25% of the GDP is seen to be from the digital economy come 2027.
Gulf, controlled by Thai billionaire Sarath Ratanavadi, previously approached Singtel to acquire its stakes in its associate Intouch Holdings, which in turn, controls mobile operator Advanced Info Services (AIS), Thailand’s largest mobile carrier. However, Singtel rejected Gulf’s offer as it believed that the offer was significantly undervalued.
The rejection of Gulf’s offer should not be taken as an indication that Singtel could not work with this party. “When they offered us for our stake in InTouch, we did not want to sell, because we are actually looking at them as a long-term partner for our business in Thailand,” says Arthur Lang, Singtel’s group CFO.
“For most of our overseas associates, our modus operandi has always been to find strong, stable, long-term partners, whether it’s in Indonesia, India, Philippines or Thailand,” he adds.
Lang also says that within just a few weeks of Gulf owning its 42% of Intouch, the two parties are already in their first partnership. “We look forward to more collaborations,” he adds.
Singtel believes it is on the way to building an “extremely high quality” portfolio of data centre assets across the region, be it on its own or with partners “who actually see value in this type of portfolio,” says Lang. “At this point in time, our first and foremost objective is to unlock value for our shareholders,” he notes.
Market call
Overall, analysts are positive on Singtel’s move to unlock more value. Following the announcement on Oct 1, Singtel shares have dropped by 1 cent to close at $2.43 on Oct 5.
RHB Group Research, CGS-CIMB and DBS Group Research are keeping their “buy” calls on the stock. “We view positively Singtel’s disposal of a partial stake in ATN, the first value unlocking of infrastructure assets and capital recycling exercise under the strategic reset announced in May,” says RHB Research.
“We expect FY2022 core earnings to rebound after four years of decline, with green shoots of recovery in the mobile business,” notes RHB, which raised its target price to $3.37 from $3.
RHB is also positive on the regionalisation of Singtel’s data centre business as it presents opportunities for up-selling of cloud and cyber-security solutions across the expanded footprint.
Singtel intends to add 100MW of data centre capacity from the regional platform. Its Singapore data business is the country’s largest with over 70MW capacity. It currently rakes in over $250 million revenue and over 60% Ebitda margin. Based on 20 to 25 times Ebitda, RHB values Singtel’s data centre business at about $3 million to $4 billion.
With the various data centre partners, RHB expects Singtel to be a “leading” data centre player in three to five years.
CGS-CIMB analyst Foong Choong Chen notes that Singtel was able to fetch a valuation of 38 times EV/Ebitda for its Optus towers, versus just 28 times managed by Telstra for its earlier sale.
Singtel will refrain from paying one-off special dividends from the sale — the telco had a practice previously from doing so, like when it sold its stake in The Proximus Group (previously known as Belgacom) and when it spun off Netlink NBN Trust for its own listing. “Singtel prefers to reinvest the proceeds to reinvigorate the core business and drive new growth engines, which it hopes will lead to sustainably higher operating cash flow, and thus dividends, in the longer-run,” writes Foong, who has kept his target price of $2.90.
DBS Group Research analyst Sachin Mittal notes that due to the sharp decline in its core businesses in Singapore and Australia in recent years, Singtel is now trading at a holding company discount of around 40%, based on the market cap of its associates.
To put into context, the average discount over the past seven years averaged at just 21%. Now that the value unlocking has been kick-started by the Optus tower sale, “we expect the holding company discount to narrow to 10% to 15% due to a sustained multi-year improvement in the core business from FY2022 onwards,” writes Mittal, who believes Singtel is worth $3.13.
Photo: Bloomberg
