Telenor has offered to pay M$6.60 per share and is hoping this price will allow it to up its stake in DiGi from 32% to 61%. Should all shareholders tender their shares, it would have to make its offer on a pro-rata basis. That’s because Malaysian law says a foreign company cannot own more than 61% of a telecom company. This means that if 100 shares are tendered, Telenor would only be obliged to buy 61 of the 100.
The M$6.60 price represents a 24.5 % premium to the price at the close yesterday, although it is a 13% discount to the 52-week high for the stock. However, a control premium of between 25-30% is normal for mobile telephone companies internationally, so the price is reckoned to be fair.
“Investors will have to decide whether it is a good time to cash out, or whether to stay in because the company gains more value because Telenor will control it,” says Greg Mazur, Salomon Smith Barney’s Asian telecoms group head. Salomon is advising Telenor – having advised the firm on its original 32% investment in 1999.
DiGI is the number three mobile operator (out of five) in Malaysia with 1.07 million subscribers out of a total market of 6 million.
The top operator in Malaysia is Maxis which has a 29% market share, and until recently, had BT as a shareholder (BT has since decided to quit its Asian investments). The second major player is TRI, which is controlled by Tajudin Ramli (of Malaysian Airlines fame) and Deutsche Telkom. TRI has $900 million of net debt, and has a 27% market share.
Behind DiGi, and almost uniquely (from a global perspective) local incumbent Telekom Malaysia lies in fourth with a 16% share. Normally incumbents hold the one or two slot.
Last (but not least) is Time, which was part of a recent restructuring, and is associated with the Renong Group.
So why is Telenor so excited about a market with five major competitors, and in which it is a mere third?
One has to understand that Telenor hails from a market where the subscriber penetration is 80%. Meanwhile, it invested in Malaysia in 1999 when the comparable penetration rate was only 14%. By the end of last year it was 25% and at the time of writing it is 28%. That is still a long way off 80%.
Telenor believes it has a lot of experience to bring to bear which will help DiGi improve its market share and moreover do so in the context of a vastly more ‘penetrated’ market.
Its Malaysian investment is part of a bigger picture too. Telenor has investments in 13 mobile operators around the globe and now has a strategy to gain a controlling stake in these investments wherever possible – as it hopes to do in DiGi.
In addition, it reckons it has already made 60% on its investment in Malaysia already, and while Malaysia is not exactly the flavour of the month in the eyes of many, Telenor is clearly confident it can make much, much more. With penetration levels having doubled in the last year in Thailand and Indonesia, it may prove to be a very savvy decision.
The most intellectually interesting part of the transaction is the revelation that Telenor can only buy 61%. In Hong Kong and Singapore it is possible for a foreign entity to own 100% of a telco, while in every other Asian country limits of 49% prevail (that is, below a level of control).
Why 61%? With a peculiarly Malaysian-panache, the government of the good Doctor decided to go for something in between full control and the titillating 49% ceiling.
And so there we are. Telenor – if successful – will exert control, but the company will still be listed in Kuala Lumpur.
The other source of debate will be, what will DiGi’s other major shareholder do? Vincent Tan, a close associate of Dr Mahathir, owns 32% of DiGi and his Berjaya Group may well prove keen to sell in order to relieve debt problems.
