Morgan Stanley goes one up against Goldman

In the first major M&A face-off of the year between the two bitter rivals, Morgan Stanley looks to be one up.
In the most significant Asian M&A deal of the year so far, SingTel appears to have outmanoeuvred Vodafone to buy Australia’s Optus. The $8.4 billion deal announced yesterday, will see SingTel gain a massive foothold in the Australian market and will further its ambitions to be a regional player.

It was advised on the deal by Morgan Stanley, which seems to have stolen the SingTel ‘house bank’ role from Goldman Sachs. Goldman, it will be recalled, advised SingTel on its bid for Hongkong Telecom last year. This bid failed when HKT’s shareholder, Cable & Wireless, chose to sell to Richard Li’s PCCW instead.

At this point, Morgan Stanley went into overdrive to improve its relations with SingTel, and began suggesting alternative deals around the region. Its attention to the client paid off when it was mandated to advise on this very transaction late last year. It won the mandate against strong competition from UBS Warburg, CSFB, Deutsche and ABN Amro.

Ironically enough, Goldman chose to go with Vodafone – which is one of its most important clients globally – and this must have looked a sensible strategy. Vodafone has never lost an M&A deal before.

Until now, that is. Vodafone appears to have bowed to the concerns of the Australian regulator which was worried about the dominance a merged Vodafone/Optus would have in Australia’s mobile phone market. Vodafone had fought a massive PR campaign to suggest otherwise, but in the end was forced to admit that Australia’s telco regulator was still not convinced.

This was good news for SingTel, which, according to a FinanceAsia poll only a fortnight ago, was reckoned to only have a 31% chance of winning Optus. One of the things that made SingTel nervous was the fact that the selling shareholder, Cable & Wireless, was the self-same one that was involved in the HKT debacle last year. SingTel lost face in that failed bid, and must have been concerned that Cable & Wireless might give it a bloody nose again, and merely use it to get a better price out of Vodafone.

This time around, Cable & Wireless – which was advised by Merrill Lynch, JP Morgan and Greenhill – has selected SingTel’s bid.

This is great news for SingTel, which will add the Australian business to its presences in Thailand and the Philippines. It makes SingTel probably the most significant regional rival to the almighty Vodafone and Hutchison Whampoa.

The deal will see SingTel’s net cash position of S$5.8 billion ($3.25 billion) turn into a net debt position of S$4.1 billion on enlarged assets of S$27.4 billion. This will give the company a 22% gearing, which is exceptionally modest by telecoms standards.

The company has an implied AA rating, which compares favourably with Deutsche Telekom’s A- and Telstra’s A+. Its strong credit profile means it will be able to continue buying the right assets around the region.

The acquisition of Optus will also help SingTel in another respect. It will get access to some top quality Australian management – people of the quality of Optus mobile phone head, Paul O’Sullivan. These human resources will be especially useful as SingTel continues its expansion.

However, it isn’t quite time to break out the bubbly yet. Thanks to idiosyncrasies in the Australian takeover code, a mandatory bid cannot be made. Thus, while Cable & Wireless owns 52.5% of Optus, it can only tender 19.9% to the buyer, which must then make a general offer.

Morgan Stanley expects to have the offer document out within six weeks and after that the offer period will last a further six weeks. SingTel needs over 50% acceptances to gain control. However, the rather unique Australian takeover code means 32% of Cable & Wireless’s stake in Optus is still ‘out there’ and should a higher bid come in within the next 12 weeks, the deal with SingTel could still unravel.

Obviously, Morgan Stanley will be doing its utmost to make sure that SingTel gets as many acceptances as possible and the deal goes through. The fact that SingTel is paying a 20.1% premium should bode well.

For Morgan Stanley, this will form part of a good run in Australia where it has advised Coca Cola Amatil on the sale of its Philippines bottling business and Mayne Nickless on its acquisition of Australian Hospital Care.

It is also a good start to the year for Morgan Stanley’s M&A guru James Pearson, who was recruited from ABN Amro last Autumn by M&A boss Harry Van Dyke. Pearson ran the transaction, and coordinated the team of 25 Morgan Stanley professionals who worked on it from the M&A, DCM, ECM and currency divisions.