M&As in telco sector apparent

by **Cals** Sat 07 Sep 2013, 08:37

Published: Saturday September 7, 2013 MYT 12:00:00 AM
Updated: Saturday September 7, 2013 MYT 8:03:50 AM
M&As in telco sector apparent
BY RISEN JAYASEELAN
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THE growth of telecommunication operators, to a large extent, is dependent on the amount of wireless spectrum or radio waves they have rights over.
No doubt, some operators are able to do much more than others, with the same amount of spectrum.
Despite that, wireless spectrum remains a scare resource and notably often forms the basis for corporate deals among players.
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While the ideal way for telco players to acquire rights over the airwaves is to be allocated such spectrum by the regulator of the industry, there are other options available.
Operators can enter into arrangements with other players to lease the latters’ spectrum. Or they can acquire companies with spectrum assets.
The recent cases of such deals being struck involved the 2600 MHz spectrum band.
Late last year, the Government had dished out parts of this spectrum to eight players, namely Celcom Axiata Bhd, DiGi Telecommunications Sdn Bhd, Maxis Broadband Sdn Bhd, Altel Communications Sdn Bhd (a unit of Puncak Semangat), Packet One Networks (M) Sdn Bhd, REDtone Marketing Sdn Bhd, U Mobile Sdn Bhd and YTL Communications Sdn Bhd.
The 2600 MHz spectrum is crucial in the long run for the roll out of long-term evolution (LTE) or 4G-LTE services.
Since then, a number of collaboration-type deals have been struck.
Notably Maxis has inked deals with both REDtone and U Mobile to lease their 2600MHz spectrum for a tidy sum of money. Celcom had also inked a similar deal with Altel.
Analysts have pointed out that both these players have been quick to enter into these deals as a means of beefing up their access to the 2600 MHz spectrum for the future roll out of 4G-LTE.
TA Securities had explained earlier that as a result of its collaborations, Maxis has now “secured 3 x 20 MHz of contiguous 4G-LTE spectrum”.
(Spectrum assignments are often described in multiples of blocks of spectrum. Simply put, this means Maxis has access to 60 MHz of the 4G-LTE spectrum, compared with the only 20 MHz it was assigned and this is all thanks to the collaborations it has entered into.)
Similarly, Celcom’s deal with Altel gives the former more access. To be noted is that Altel was allocated the single largest block of the 4G-LTE spectrum, of 40 MHz. This means that Celcom will now technically have access to the same amount of 2600 MHz spectrum as Maxis (see table).
A closer look at the 2600 MHz spectrum allocation also illustrates the contiguity benefits of these collaborations.
The 2600 MHz spectrum is actually made up of 10MHz bands starting from 2500MHz all the way up to 2690MHz.
Maxis’ band (of between 2510MHz to 2520MHz) actually sits right in the middle of REDtone’s and U Mobile’s bands, which explains its rationale for collaboration to create one large band from 2500MHz to 2530MHz.
Similarly, with the Celcom and Altel deal inked, this group now “controls” the 2530MHz to 2560MHz bands.

DiGi left out
What is also clear in the 2600MHz space is that of the large players, DiGi has been left out of the loop, thus for now only having access to its two blocks of 10MHz each of this spectrum, that operates in the 2560MHz band. It’s band borders Altel’s and a guardband (which no one owns).
Such a scenario though is not surprising as DiGi has always been the most “spectrum-starved” player in the country among the big boys.
Furthermore, the 2600MHz spectrum for the moment isn’t the most ideal frequency to launch 4G-LTE services on.
It is something that will be crucial in the near future when data usage among users rises, which in turn is a certainty in today’s world. Simply put, the higher the frequency spectrum, the higher the data capacity, but the lower the coverage area.
Mobile operators today are freeing up some of their 1,800MHz band to make room for their initial roll out of 4G-LTE services. Part of that involves moving 2G customers from the 1,800 band into the 900 band, something which Maxis and Celcom are finding easier to do because of their excess 900 spectrum. Notably, Maxis and Celcom have rights to 32MHz and 34MHz of spectrum in the 900 band, respectively, compared with DiGi’s 4 MHz only. In the 2600 band, DiGi has only half of the 40 MHz that both Celcom and Maxis now have, post the latter’s collaborations with the other owners of the 2600 spectrum.
No surprise then that DiGi has declared that it is looking to acquire more 900 MHz spectrum but analysts have been quick to say that this is not likely to happen, considering that the two incumbents, namely, Celcom and Maxis, would be unwilling to give up their 900MHz spectrum. All available 900 MHz spectrum has already been dished out by the industry regulator.
This in turn has led some analysts to speculate that DiGi could be looking to acquire companies operating on the WiMAX spectrum, which is on the 2,300MHz band. There are four such operators, namely, Asiaspace Sdn Bhd, Packet One, REDtone and YTL Communications (the latter three being also recipients of the 2600 MHz spectrum).
On such a prospect, DiGi officials had earlier told StarBizWeek that they are constantly looking for ways to improve the balance of their spectrum portfolio and would evaluate all opportunities to do so.

Spectrum valuation
If indeed that valuable wireless spectrum is to be the driving force for mergers and acquisitions of companies or assets within the telco space, one question that would crop up is how is spectrum valued?
In the United States, one valuation method that has been developed is called MHz-POP, which is essentially a measure of the number of people covered by each megahertz of spectrum, with POP being short for population.
Sprint Nextel Corp’s acquisition of Clearwire Corp in the United States is a good case study. Sprint’s initial offer price of US$2.97 per Clearwire share had to be almost doubled after it emerged that Clearwire’s wireless spectrum was worth much more.
The US$2.97 offer valued Clearwire’s wireless spectrum at US$0.21 per MHz-POP. However independent advisors had then pointed out that the more appropriate valuation for the spectrum should be in the US$0.40 to US$0.70 per MHz-POP range, taking into account comparable recent transactions, broadband market forces as well as the fact that the Clearwire spectrum was the only remaining option for Sprint to keep pace with its competitors.
Sprint had subsequently revised its offer price to US$5 per Clearwire share, which worked out to a US$0.30 per MHz-POP valuation figure.
Applying this MHz-POP valuation method to examples in Malaysia, DiGi had, therefore, paid some 86 sen when it acquired the rights to Timedot.Com Bhd’s 30MHz of wireless spectrum in the 2100MHz range back in 2007, based on a population figure of 27 million then.
And in order for DiGi to be able to have the same spectrum position like Maxis and Celcom, it would need to acquire an additional 30MHz of the 900 band and 20MHz on the 2600 band.
If DiGi does opt to go down that route, here’s an indication of the kind of price it would have to pay using the MHz-POP valuation method on a population base of 29 million people: RM1.247bil (using the 86 sen figure from the DiGi-TimedotCom deal) or RM1.435mil (using the Clearwire/Sprint transaction number of US$0.30 per MHz-POP.
And if DiGi were to also acquire the companies that owned that spectrum, it would have to be paying even more for the fixed assets and the existing subscriber base of those operators.
Going by some accounts that DiGi’s growth will be significantly stymied by its lack of spectrum, don’t rule out the possibility that a mega billion ringgit acquisition deal could be on the cards.