Merrill Lynch won the deal after bidding aggressively against six other houses comprising, ABN AMRO, DBS Bank, Goldman Sachs, Morgan Stanley, Salomon Smith Barney and UBS Warburg. Given its close relationship with C&W and its sell-side advisory role in the M&A transaction, its emergence as victor surprised few.
Indeed as one participant put it, "We didn't feel that many of the banks were busting a gut to win this deal. They didn't want to get stuck with bonds that had been difficult to price in an uncertain market and there was less incentive than usual because it's likely that Morgan Stanley will get league table accreditation for the deal, even though all the market risk now lies with Merrill's."
As buy-side advisor to SingTel, Morgan Stanley structured a bond issue back in March as one of three payment options for C&W Optus. At the time, C&W, which owned 52.5% of the company, said that it would accept option three, a shares, cash and bond alternative.
This entailed 0.54 SingTel shares, plus A$2 in cash and A$0.45 in SingTel dollar-denominated bonds. These bonds comprised five- and seven-year tranches of senior unsecured debt, each with a maximum amount of up to $494 million and launch spread of respectively 80bp and 90bp over Libor.
Formal pricing took place in New York last night (Tuesday) of two equal tranches of $220 million. The five-year bonds were priced at 99.739% with a coupon of 5.875% to yield 5.936% or 80bp over Libor and the seven-year bonds at 99.598% with a coupon of 6.25% to yield 6.322% or 90bp over Libor.
Merrill's meanwhile, having bid for the entire transaction the night before, was finalising the sale of the deal to investors at 55bp over Libor for the five year tranche and 65bp over Libor for the seven year tranche, a 25bp pick-up for Cable & Wireless.
The UK telecoms may also yet sell-down up to $180 million more SingTel bonds subject to the final completion of the Optus acquisition. Under the terms of the takeover, there are re-balancing clauses within option three to make sure that the total cash and bond amount paid by SingTel does not exceed A$9.25 billion ($4.88 billion), of which there is an A$7.2 billion cash limit and A$2 billion bond limit.
As James Pearson, Morgan Stanley's Asian M&A head explains, "The M&A transaction went unconditional on Thursday August 30th, with a 97% acceptance rate. It formally closes on September 17 when SingTel will be entitled to compulsorily purchase the remaining 3%.
“Cable & Wireless went for option three and as an additional payment, received a security which can be exchanged for either bonds or cash depending on the amount of cash left in the A$7.25 billion pool after the election of all shareholders."
Given that Pearson says minority shareholders have almost unanimously plumped for option two to maximize the amount of cash they will receive, this means that Cable & Wireless’s payment will need to re-balanced and is likely to receive an additional $180 million in bonds, which can then only be auctioned three weeks after the first deal.
SingTel’s desired scenario entailed minority shareholders accepting option two and the majority shareholder option three. It was particularly keen that Cable & Wireless accept option three in order to minimize the amount of cash it would need to pay out. At the same time, however, it appears to have gone out of its way to try and stop the bonds being sold back into the public markets.
“It’s really quite baffling,” says one banker. “Originally this deal was supposed to have been issued off the group’s newly established MTN programme and been sold under 144a format, enabling distribution to a wide global audience.
“What appears to have happened during the M&A negotiations is that it has become a neutered instrument. It is not rated, listed, 144a eligible or DTC clearable. As a result, there is a very limited audience for a piece of paper like this, because European investors won’t buy bonds that aren’t listed and US investors won’t buy bonds that aren’t DTC eligible.”
Some bankers consequently argue that such an unpopular and illiquid bond debut will handicap future fundraising activity SingTel might want to undertake in the international debt markets. “Our secondary market desk hates this piece of paper,” one banker comments. “They think it will be completely illiquid and they’ll get caught on the wrong side of a trade.”
“It’s a very strange benchmark to set,” a second argues. “SingTel will undoubtedly want to return to the debt markets to fund its regional expansion plans and it could have got even tighter pricing had it been possible to allocate to a wider audience.”
Indeed preliminary reports suggest that the majority of paper was sold into the Singapore bank market, with some supplementary demand from Hong Kong. “We did not find an institutional bid at all,” says one banker that pitched for the deal. “The biggest buyers were foreign banks based in Singapore, of which Japanese banks predominated. It’s not often that a high quality Singaporean credit comes at 50bp over Libor, so they were quite happy to book it as an asset.”
Where to price SingTel relative to comparables has been a matter of some debate and largely comes down to whether the company should be considered a double-A or single-A credit. At the heart of the issue lies the weakening effect of A-/Baa1 Optus on SingTel’s financial ratios.
In terms of pricing comparables, SingTel has a S$1 billion 2006 transaction outstanding in the domestic market. This was launched in February at 4bp over mid swaps, a Libor equivalent of roughly 9bp that put the deal in the high double-A category.
At the time of launch, the deal was heavily criticized for being exceptionally aggressive and has subsequently widened out to about 48bp over mid swaps, a Libor equivalent of about 50bp over.
At these levels it is trading 2bp tighter than Aa3/A+ rated Telstra, which has a 2008 bond outstanding in the Singaporean market at about 50bp over mid-swaps. In the international markets, Telstra also has four- and 10-year paper, respectively bid at 60bp and 85bp over Libor. On the interpolated curve, bankers say that this would equate to roughly 65bp to 70bp over for five-year paper and about 75bp over for seven-year paper.
Those bankers that believe SingTel should command a single-A rating consequently argue that a 55bp spread for five-year paper is 15bp to 20bp too aggressive relative to Telstra the group’s main Australian competitor, which is trading 10bp wider on a like-for-like basis.
However, as one analyst counter-argues, “SingTel has previously mentioned in passing that it believes it might secure an Aa3/A+ rating from the rating agencies. Since the home audience will always provide the strongest bid, this suggests that pricing is not too far out.”
Even those observers who believe that SingTel should command a double-A rating, conclude that it makes much more sense to pitch the company at the high single-A level instead. As one TMT expert notes, “There’s no doubt that SingTel’s debt ratios have always been quite spectacular on a stand-alone basis. But it’s important to assess the global concerns being expressed by the rating agencies towards the telecom sector.
“It’s also the case that SingTel has regional aspirations which are likely to weaken its ratios as it gears up further,” the banker adds. “The last thing the company would want to do in this situation is set itself up to be downgraded by the market and see spreads widen. Far better to take a longer-term view and be slightly conservative upfront.”
Those analysts who do believe the company should be rated double-A, tend to highlight the halo effect of AAA-rated Singapore, whose government will still own 65% of the company post acquisition. HSBC fixed income analyst Imogine Baker also comments that the company is not afflicted by the same problems dragging down the global telecoms sector.
She says, “It would be premature to talk about 3G issues in Singapore because the government has only just released guidelines. Domestic competition is also not as great a factor as elsewhere because SingTel is still highly protected in its home market.”
Pre-acquisition, SingTel had a net cash position of $3.3 billion as of March 2000. In its offer document, it says that net gearing will increase to approximately 22% post acquisition if Cable &Wireless accepts option three and minority shareholders option two. This is still some way below both Telstra’s net gearing of 94.1% and Aa1/AA-rated NTT’s net gearing of 77.4%.
In terms of timing the deal, bankers also believe that Cable & Wireless has probably got it right. “High-grade telecom spreads have probably softened about 15bp over the past few days because of KPN’s problems,” says one. “But the group looks like it has made quite an astute move getting the deal out before the autumn pipeline unfolds in earnest.”
