There is a palpable shift on the local telco scene. From the tough competition in growth years, some of the smaller players have adopted a more open and collaborative stance as they all struggle to eke out new growth.
StarHub and M1 got the ball rolling last year when they entered into a joint venture to share the costly bill of 5G deployment. Most recently, the collaborative stance took another big step forward. On Sept 22, StarHub announced it is taking 51% stake in a new entity holding MyRepublic’s Singapore broadband business.
Both broadband brands will co-exist, but with this deal, StarHub gains an additional 6% market share to make it a combined total of 40%, putting it closer to Singtel’s 43%. StarHub is also gaining access to a potential enterprise customer base now with MyRepublic for it to upsell additional ICT services.
StarHub’s total investment in the deal will be up to $162.8 million, with an initial consideration of $70.8 million for 50.1% shares of MyRepublic Broadband, as well as a deferred consideration of up to $92 million should future financial performance matrices be met.
In addition to equity, StarHub has agreed to refinance $74.2 million of debt for MyRepublic for a period of three years, on completion of the transaction, which is expected by end of the year. MyRepublic Broadband will then become a StarHub subsidiary. With earnings of $5.2 million for the year ended June 30, 2021, the deal values MyRepublic Broadband at a 7.6 times FY2021 Ebitda.
“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 in its Sept 23 note on StarHub.
“We are positive on the acquisition, as it would strengthen StarHub’s position in the fixed broadband market; and unlock scale and synergies via joint goto-market opportunities, wholesale offerings and cost savings,” it adds.
For MyRepublic, the cash infusion from StarHub will give it more flexibility, such as making its own deals, especially across the region, or in terms of the timing of its own IPO, which has been floated multiple times. “Everything consumers and enterprises love about MyRepublic is about to get even bigger and better through the commercial and operational synergies from this partnership,” says MyRepublic’s co-founder and CEO, Malcolm Rodrigues.
“More importantly, this milestone propels us forward in MyRepublic’s journey towards IPO. With StarHub on board as a key investor, we are charting a new course for the long-term direction of the industry,” says Rodrigues, who was with StarHub before starting MyRepublic.
StarHub’s CEO Nikhil Eapen says that the pandemic has shown the importance of quality broadband services. “We intend to scale up and deliver better and faster services to our customers, while realising high-quality earnings accretion,” he says.
“We stand to mutually benefit from StarHub’s digital-first technology platforms, our challenger mindset in innovation and customer-centricity, and MyRepublic’s lean operating model and experiences in regional markets,” he adds, without referring directly to the latter’s higher operating margins in broadband.
StarHub will be paying for its deal via a mix of equity and debt as well as drawing from its own internal cash resources, all of which has to be balanced between new capital expenditure and dividends for shareholders.
A StarHub spokesperson tells The Edge Singapore that its cash flow remains healthy, generating net cash from operating activities of $245.2 million for 1HFY2021 ended June 30, and free cash flow of $182.1 million. It has lowered its net debt to Ebitda slightly, from 1.41 times as at Dec 30, 2020, to 1.25 times as at June 30, thereby giving it further flexibility.
“StarHub sees clear synergistic value in MyRepublic’s broadband business in Singapore, which is a profitable and growing business and expected to be accretive to our earnings. It will also allow StarHub to accelerate our growing range of connectivity,” the spokesperson says. “This is the start of a long-term partnership, which may open doors to other opportunities for greater collaboration between both companies.”
RHB Group Research concurs that there is more room for the two telcos to collaborate beyond broadband. “There are possibilities that this may extend to other lines of businesses including mobile. Collaborations will be an integral part of the telco ecosystem to create and unlock value,” it says.
Through this deal, StarHub could help propel MyRepublic’s IPO aspirations. “MyRepublic has varied shareholders in the past and the execution of the deal is consistent with the intention to drive strategic partnerships and investors. StarHub does not have direct involvement in the IPO, but is happy to offer consultancy services to MyRepublic via its board seat in the broadband business,” says RHB.
To that end, RHB has kept its “neutral” call on StarHub with a target price of $1.35. “We are positive on StarHub’s acquisition of MyRepublic’s fixed broadband business, given the scale advantage and positive synergies. The deal is earnings-accretive from the outset,” it says.
UOB Kay Hian (UOBKH) too has a “hold” recommendation on StarHub with a $1.30 target price. UOBKH likes that this deal will augment StarHub’s broadband market share to 40%, from 34%, and StarHub will get to keep both brands. More importantly, StarHub will be able to tap into MyRepublic’s enterprise business through this acquisition.
CGS-CIMB has a more positive stance on StarHub as it maintains its “add” call with a target price of $1.65. Analyst Foong Choong Chen sees this deal as positive and a win-win situation for both parties.
“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 subscriber 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 the region. As for cost synergies, StarHub highlighted joint goto market opportunities, as well as infrastructure and resource rationalisation,” says Foong.
Meanwhile, 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.
Additionally, Mittal believes that StarHub will likely retain its stake in MyRepublic’s broadband business at 50.1% and not dig into the 49.9% currently still held by MyRepublic, as the remaining stake can be bought by StarHub subject to undisclosed stringent conditions. “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.
StarHub shares closed at $1.25 on Sept 23, up 1.63% for the day and down 4.58% year to date.
Singtel to take up full Bharti Airtel rights
Separately, Singtel has confirmed it will subscribe to its full allotment of a US$2.9 billion ($3.9 billion) rights issue planned by its Indian associate Bharti Airtel, in which it held a stake of around 32%. The total amount is around US$405 million.
Plans for the rights were first announced on Aug 30. Back in March 2019, it had raised US$3.5 billion from an earlier round of rights issue. Singtel did not take up its full share. GIC was roped in and its contribution of US$700 million was more than the US$525 million Singtel stumped up then.
However, Singtel’s CFO Arthur Lang describes this latest cash call as an “offensive” move, so Bharti can invest to capture new growth, and not one of “survival”, as in the 2019 cash call.
In 2019, the rights were priced at just INR220 ($4.03), and Bharti’s debt to Ebitda was over five times. The latest round of rights is priced at INR535 and the corresponding gearing ratio is down to around 3.5 times. At INR535, the rights shares are priced at a 35.9% discount to Bharti Airtel’s last traded price of INR727. Year to date, Bharti Airtel shares are on a tear, up more than 200%, as the brutal price war cooled.
On Sept 15, the hard-hit sector got a big positive boost from its own government with a package of relief measures. They include a four-year moratorium on airwaves payments due. The operators have the right to use the airwaves for 30 years instead of 20 years now. The usage charge for airwaves acquired via future auctions will be waived and different operators can share the airwaves freely. The measures also include a four-year deferral in payments of adjusted gross revenue due.
In an interview with The Edge Singapore last week, Lang calls the relief package “truly a game changer” that will give the mobile operators the breathing room to run a sustainable business.
Lang estimates that with the new measures, Bharti Airtel can free up some US$1.8 billion in free cash flow per year over the coming four years — a substantial proportion to its existing Ebitda of around US$5 billion. The exact impact on Singtel cannot be quantified now. But he believes that at the very least, Bharti can maintain a more sustainable dividend payout to Singtel.
“Bharti contributes almost one-third of our Singtel sum-of-the-parts valuation and hence Bharti’s rally could continue to boost Singtel’s share price,” says DBS Group Research.
Singtel shares closed on Sept 23 at $2.48, up 0.4% for the day and up 7.36% year to date.
Photo: Bloomberg
