FarEasTone plans ADR issue to fund 3G expansion

Mandate proposals give management some light holiday reading over Chinese New Year.

FarEasTone, Taiwan’s third-largest mobile phone company by subscriber numbers, is nearing the final approval for its over-the-counter (OTC) listing, a prerequisite under Taiwan law for its plans to launch an American Depositary Receipts (ADR) offering later this year.

The company and lead manager, Capital Securities, have been going through the procedure for getting an OTC listing in Taiwan for the last 18 months and expect to submit final paperwork for approval before February 22.

FarEasTone is also in the process of selecting bankers for an ADR issue, with proposals from the five or six shortlisted banks due last Friday, the last business day before Taiwan shut down for the one-week Chinese New Year holiday.

According to President Joseph O’Konek, the earliest listing date on the OTC board would most likely be the middle of April. “And if everything were to go like clockwork we’d certainly like to go to the foreign markets before summer,” he says.

Funds from the ADR are earmarked for FarEasTone’s expansion into 3G technology and will no doubt help the company if Taiwan’s government decides to go ahead with an auction process for allocating 3G licenses later this year.

“The value from doing an OTC listing is actually the value we will get out of equity from offshore investors. It’s not going to come from the local market,” says O’Konek. “Opportunities will depend on market conditions and if we can get the price that we believe the company is worth.”

So what does FarEasTone believe it’s worth? O’Konek declines to give any concrete figures but says they are looking at multiples - such as value per SIM card - and benchmarking themselves against other local and global telecom companies.

“We’re clearly not interested in going out at values that are under $1000 a customer. That’s not going to create value for the shareholders,” he says.

Given that FarEasTone had 3.4 million revenue producing SIM cards as of 31 December 2000, that would see the company valued at at least $3.4 billion.

Low domestic liquidity

AT&T Wireless, which until last month directly held 11.8% of FarEasTone, has recently upped its stake in FarEasTone to just above 20% in direct and indirect holdings. AT&T has also created a vehicle in Taiwan whereby it can make more room for direct investments from other companies that are not set up to do so.

Currently, government regulations limit direct foreign ownership of telecom companies in Taiwan to 20%, but concessions made to the US during negotiations leading up to WTO accession will allow a total foreign ownership, direct and indirect, of 60%. The Directorate General of Telecommunications, under the Ministry of Transportation and Communications, said in November that it plans to revise the law to allow direct foreign ownership in local telecom firms to 40% from the current 20%.

AT&T Wireless is FarEasTone’s second largest shareholder after Yuan Ding Investments, a wholly-owned subsidiary of Far Eastern Textiles. Other shareholders include China Industrial Development Bank and Chiao Tung Bank.

“We’ve got all the mechanisms in place that will allow foreign investors to take a share of FarEasTone once the OTC listing takes place,” says O’Konek. “But there won’t be a whole lot of liquidity in the first phase of it. We believe most of our shareholders are holders not traders.

“That’s probably a big difference between ourselves and what we’ve seen happening with ChungHwa Telecom as well as the listing of TCC (Taiwan Cellular Corp) . They put up 10 million shares and over 20 million traded the first day and they’ve continued to have a lot of trading activity,” he says.

Third generation

There is still no firm information from Taiwan’s regulators on when 3G license auctions will occur, or even if this is the method that will be used to allocate spectrum. But with as many as eight potential local bidders, on top of interest from global and regional players such as Hutchison and SingTel, it’s likely that the government will pursue a mixture of beauty contest and auction to allocate the five spectrums of bandwidth it is expected to license.

Besides the four large incumbent mobile operators - ChungHwa, Taiwan Cellular Corp, KG Telecom and FarEasTone - two or three other consortiums from outside the industry have expressed interest in a license. One of the largest is led by Cathay Life. ETTV, Taiwan’s largest cable operator, has also put a group together, and O’Konek says that Eastern Broadband is another local company looking for a license.

According to the latest government figures, 70% of Taiwan’s population owns a mobile phone. Given the maturity of the market, intense competition and the expenses involved in 3G technology and licensing, O’Konek says that having done the economic modelling on the value of a license for an incumbent such as FarEasTone as opposed to a new entrant, he doubts whether it makes sense for new players to enter the fray.

“3G is all about migration. The rules about how you model the business are different from 2G, where for the most part it was green-field opportunities. Even for the third, fourth and fifth operators, as they came into markets that were less than 25% penetrated, it was still basically open,” he says. “But for new operators coming into a 3G environment, they’re probably looking at nine to 10 years as a break even point.”

Given a number of factors, O’Konek expects that FarEasTone would break even on its 3G investments after about five years. This would only happen if: the government demands a reasonable price for the license; the company reaches its goal of 25% market share (it’s currently at around 20%) and maintains that share through 2.5G and 3G; and FarEasTone sustains industry average ARPUs (average revenue per unit). ARPUs at FarEasTone are currently above average at NT$1100 ($33.80) per month.

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