Starhub completes IPO

Flotation priced at bottom end of range but in line with rival operator M1.

Singapore's third and smallest cellular operator raised S$457.7 million ($271 million) after pricing its IPO at the bottom end of its indicative range yesterday (October 6). The 481.8 million share deal was priced at S$0.95 after being marketed at S$0.95 to S$1.15 by lead managers Credit Suisse First Boston and UBS.

The institutional order book is said to have closed two times covered at the bottom end of the range, with enough room to price the deal a couple of cents higher. However, the vendors are said to have agreed to leave some breathing space for secondary market trading.

Institutions were allocated 85.2% of the base deal, with retail receiving 6.3% and the Japanese POWL (Public Offer Without Listing) 8.5%. The POWL was run by Nomura and specialists say it could have been pushed further given that Japanese investors only became price sensitive at the S$1.05 level.

Retail, on the other hand, delivered a lukewarm response, with books closing 1.6 times covered.

At S$0.95, Starhub has been priced on an EV/EBITDA multiple of 5.7 times 2005 earnings based on an average syndicate EBITDA projection of S$400 million. This places the deal anywhere from a slight discount to slight premium to M1, depending on which bank's forecasts are used to value Singapore's second largest operator. The latter was trading at S$1.56 at the time Starhub priced, equating to an EV/EBITDA multiple ranging from 5 to 6.7 times earnings.

M1 and Starhub currently report similar levels of EBITDA earnings. The big difference between the two is that M1 is now an ex-growth stock running a high dividend yield of just over 6%, whereas Starhub is still in its growth phase and does not pay a dividend. Indeed as of June 2004, it was still running at a net loss - S$45.5 million ($26.6 million).

During roadshows Asian fund managers expressed considerable caution about Starhub's growth potential given that Singapore is a mature market with a penetration rate of 87.4%.

What seems to have enabled the deal to price so close to M1 is the upside potential from Starhub's pay-TV operations. This factor is clearly reflected in the deal's distribution statistics.

About 75 institutions participated in the deal, which achieved a 50% hit ratio from the one-on-one meetings. By geography, there is a split of 41% Europe, 33% Asia and 26% US.

By number of orders, Asia accounted for 40%, the US 32% and Europe 28%. This latter split shows that the biggest orders derived from Europe, where investors have a much deeper understanding of the pay-TV sector thanks to their successful experiences with companies like Britain's BSkyB.

Pre-greenshoe the deal will have a freefloat of 22.8%. All of the deal, including the greenshoe, comprises secondary shares. Four shareholders sold down, with BT divesting 10.8%, Singapore Press Holdings 8.05%, NTT 3.87% and MediaCorp 0.04%. Pre deal BT owned 11.87%, Singapore Press Holdings 9.08%, NTT 14.51% and MediaCorp 14.07%.

Syndicate banks did a good job positioning the company given that a country's smallest operator normally prices at a clear discount to bigger competitors. As one puts it, "This is a loss making company, which doesn't pay a dividend yield in a saturated market."

A second says, "It didn't help that Hutchison Telecommunications dropped its price range on the day we closed our books. Some people had expected us to do likewise but it was never necessary."

Some believe that the vendors could have been more realistic in setting a price range, but at least the company was able to clear it rather than cut it. Others also argue that had the selling shareholders held out for another year, they could have achieved a higher valuation since pay-TV companies normally trade at a premium to cellular operators.

Starhub's pay-TV and broadband operations have not yet had a chance to prove themselves although the company is forecasting they will account for 16% of EBITDA in 2005 up from 8% 2004.