MobileOne makes it two

Singapore''s second largest cellular operator joins its listed fixed line counterpart and does what the market requires to ensure a successful flotation.

The institutional book for a 600.5 million share offering in MobileOne (M1) closed two times oversubscribed yesterday (Tuesday) with pricing settled at S$1.32, towards the bottom end of an S$1.25 to S$1.52 indicative range. Led by ABN AMRO and UBS Warburg, the offering represents 57.2% of the company's issued share capital pre shoe (65.8% post) and should raise proceeds of roughly S$790 million ($447 million).

Retail investors will be allocated between 5% to 30% of the base deal following an offer period which opens today and runs until December 2, with trading scheduled for December 4. Shares are being sold at S$1.25 - a 5% discount to the institutional price.

At these pricing levels, the IPO will be completed significantly below the original expectations of the selling shareholders - Keppel T&T, Singapore Press Holdings, PCCW and Cable & Wireless. However, right from the outset critics argued that the four vendors had unfeasibly ambitious price targets. Many now conclude they should be more than satisfied with the final result and particularly given China Telecom's recent and painful experience, which showed all too clearly the potential pitfalls of trying to bring large telecom-related offerings to the international equity markets.

The execution of the two offerings also stand in stark contrast to each other, with M1 and its lead managers responding to investor feedback at an early stage and delivering what the market needed in terms of dividend yield, retail discounts and valuation.

At S$1.32 per share, M1 has priced on a P/E ratio of roughly 10 times 2003 earnings. This compares to a 15.6 times level for SingTel, 12.9 times level for Maxis and 12.6 times average for a basket of Asian cellular companies spanning Hong Kong, China, Korea, the Philippines, Thailand and Malaysia.

On an EV/EBITDA basis it has come at roughly five times forward earnings compared to 6.3 times for Maxis and 6.7 times for SingTel. In terms of discount to DCF, pricing has come at a 26% discount to an equity valuation of S$1.8 billion - the mid point of the S$1.6 billion to S$2 billion range used by the leads.

Some might argue that the stock looks relatively expensive against its nearest domestic comparable SingTel, which is currently trading at an 18% discount according to the valuation assigned by one European investment bank. Given that M1's earnings stream lacks the geographic and product diversity of its larger rival, it should automatically trade at a discount. Most investors would also expect a 10% IPO discount.

However, pricing seems more reasonable in relation to Maxis, which is currently trading at a roughly 10% discount according to the same bank and is said to have been the main comparable used by funds. And as one banker points out, M1 has benefited from a recent re-rating of Asian cellular stocks, most of which have risen over the past two months. At the beginning of October, for example, Maxis was trading at 15% discount to its equity value and a stock like China Mobile at 28% compared to a current level of 15.5%.

But the main reason accounts were willing to accommodate even the low end of the company's price expectations was because of a decision to increase the pay-out ratio to 52% of 2002 net income and offer a much higher dividend yield than originally intended. At 4.7% for institutional investors and 5% for retail investors, M1's dividend yield will rank far higher than both the Singaporean average (3.29%) and that of any other Asian cellular play ex-Japan.

Some non-syndicate bankers have queried whether M1 will be able to maintain this pay-out ratio and its 3G capex commitments without having to increase gearing to fund the shortfall. However, bankers say the company has been quite clear in stating its belief that it will be able to do both and still become cash flow positive by 2004.

In total about 150 accounts are said to have participated in the institutional order book. By geography, allocations were split 40% Asia, 37% Europe and 23% US. Of the Asian demand about half is said to have derived from Singapore, although the vast majority (about 80%) is said to have come from international funds registered in Singapore rather than pure domestic funds.

Observers say that about 80% of the book constituted tier 1 accounts and most were said to be Singapore country funds or Asian funds rather than big global value or telecom funds. "Because the company has a market cap under $1 billion, it was just that bit too small for the really big players to look at," says one specialist.

On listing, M1 will be the 17th largest company on the Singapore Stock Exchange with an index weighting of roughly 0.3%. While relatively low, the ranking is of less importance than the deal's wider significance within the history of the Singaporean equity market. The largest IPO since 1999, M1 also now stands as the third largest in history behind SingTel and Chartered Semiconductor.

As one banker explains, "Singapore's weighting in the MSCI Asia Free has probably halved over the past 10 years because the market has been so starved of new equity issuance. The country needs more large, liquid IPO's like this. This deal has been very successful and it shows that investors do not always view vendors selling down a majority stake as a sign of weakness if the result is a large and liquid freefloat."

On completion, the four major shareholders will hold a combined stake of 42.8% pre-shoe, or 34.2% post shoe. They will also now be subject to a one-year lock-up unless the entire stake can be sold to a single shareholder. To ensure that future ownership issues did not cloud the IPO, tag- along rights post lock-up were also inserted into the prospectus. These state that if one of the four shareholders wants to sell further shares once the lock-up expires, the others have the option to sell at the same time on a pro-rata basis.

Many telecom specialists believe that three mobile operators in a small and saturated market such as Singapore is one too many. However, given the government's know reluctance to countenance a merger between StarHub and M1, the only viable option appears to be acquisition by an international operator. Telstra has previously shown interest in the company and a number of bankers consequently argue that future stock appreciation will be driven more by M&A fervour rather than earnings growth.

Co-leads are CLSA, Daiwa, HSBC and OCBC. UOB will act as co-ordinator of the retail tranche.