Starhub sends out RFPs for its IPO

Singapore telco shortlists banks. Is a blowout third quarter IPO on the cards?

Singapore telco, Starhub has sent out a request for proposals (RFP) to investment banks with a view to launching an IPO of around S$700 million ($418 million) during the third quarter.

The telco has looked at doing an IPO in the past, and in fact ABN AMRO and CSFB held a mandate won from a similar process three years ago. The RFP is said to have been sent to CSFB, Goldman Sachs, Merrill Lynch, UBS and ING, with a bake-off to occur by the end of the month.

ABN AMRO is not believed to have been asked to submit an RFP because it led the IPO of rival operator, MobileOne in late 2002. UBS was also involved in this deal, and whether or not its relationship with MobileOne will count against it is open to speculation. ING has been asked to bid for relationship reasons, although with its pending sale to Macquarie Bank, it may be viewed as an outsider in the group.

CSFB is regarded as the bank closest to Starhub, having continuously covered the company in the past four years through thick and thin. As to the remaining pair, Merrills is obviously on something of an ECM roll at the moment, while Goldman's name is normally on shortlists for telecoms deals.

Aside from the international banks, DBS may play a role given its strong local retail distribution.

Starhub originally wanted to IPO during the tech boom, but having missed its window, ended up merging with local cable TV operator, SCV. This integrated its fixed line business with SCV's "last mile" distribution to customers and opened up possibilities in broadband. The merger, however, required the absorption of SCV's debt and effectively put the Starhub IPO on hold.

However, some of Starhub's major shareholders have long been keen to exit via an IPO. Foremost among these is the UK's BT, which has exited all of its Asian telco investments, but still holds 12% of Starhub.

BT's president for Asia, Graham Moore told FinanceAsia, "Given our change in strategy since 2000, our stake in Starhub is non-strategic. Our focus is now on the corporate marketplace and we will consider exiting if the IPO occurs."

Moore, a director of Starhub, adds that BT has been "very pleased with Starhub's performance. It has a good management team, which have achieved many of the goals they set themselves. The mobile business is now the fastest growing."

The other key foreign shareholder that looks likely to exit via the IPO is Japan's NTT, which holds a 15% stake. Meanwhile, Starhub's controlling shareholder (owning 50%) is Singapore Technologies Telemedia (STT), the Temasek-controlled company that also has key telecoms stakes in Global Crossing, Indosat and Equinix.

Indeed, one of the ongoing debates stymying the Starhub IPO has been whether to list all of STT's telecoms assets in one single vehicle, versus a standalone listing for Starhub. While the former might make a lot of sense, it seems the standalone operation currently looks the preferred - and probably less complex - option.

Starhub has now entrenched itself as a strong player in the Singaporean telecom market, which until only a few years ago was utterly dominated by SingTel.

Starhub's businesses and the fact it is a 'challenger' rather than an incumbent make it hard, however, to benchmark it. There is no other company in Asia that looks exactly like it - a consideration for the banks and investors who have to value it in the IPO.

The company's businesses include broadband, IDD, corporate telephony/fixed line, cable TV, as well as mobile.

According to analysts' estimates (Starhub isn't required to publish figures) the company derives 54% of it revenues from mobile, 17% from fixed line, 19% from cable TV and 10% from broadband.

The strongest area of growth, say analysts, is mobile which in the past year saw 36.7% subscriber growth and 42.7% revenue growth. Its overall market share in mobile has increased from 19.7% to 25.2%, and is still rising.

"MobileOne's market share is 31%," says one banker, "and the Singapore mobile market - like Taiwan - is fast moving to a position where all three operators have roughly one third market share each."

Starhub has been particularly taking market share from the incumbent and market leader, SingTel. One reason for this is that Starhub has been offering a very enticing package that allows its subscribers to make free IDD calls to Malaysia, Hong Kong, China and the USA (by 'free' that means the calls are treated like local calls and are deducted from the prepaid minutes that a normal monthly subscription includes).

Starhub is able to pursue this strategy since its own IDD market share is only 14% versus SingTel's 77%. The IDD giveaway has become a unique selling point for the company, with more people using Starhub phones for IDD than anything else. Starhub's mobile growth is thus not only a direct threat to SingTel's mobile business but also its IDD business.

Indeed, being the smallest of the three has seen Starhub launch more innovative, consumer-friendly packages in several areas - such as per second billing, free incoming calls and airtime rollover between months.

In 2003 analysts estimate that Starhub saw revenue growth of 23% to S$1.11 billion and EBITDA grow from S$61 million to S$213 million.

However, Starhub's P&L is complicated by two things: a government compensation package and its amortization policy. In the case of the former, the government offered Starhub compensation for an earlier than intended liberalization of the local telecom business.

In 2002 this amounted to S$361 million, but in 2003 was only S$90 million. That lower number led Starhub to make a net loss of S$46 million in 2003.

If you strip out the compensation, Starhub made a net loss of S$258 million in 2002 and S$136 million in 2003 - an improvement of 47%.

The amortization policy is the other key thing. Starhub amortizes around S$340 million per year, because it has a policy of depreciating over five years versus 10-15 years as other companies might. Analysts estimate that if Starhub was not depreciating so aggressively it would have been profitable in 2003.

The company, however, does not pay a dividend and has a gearing of 40%.

The lack of a dividend will be a challenge from an IPO perspective. MobileOne was sold on the basis of its healthy dividend in 2002, and investors saw this as necessary because of the low growth of the local market.

"Singapore is not Indonesia," says one banker. "This is not a fast growing domestic telecom market. Investors would buy Telkomsel for its growth; not Starhub."

Lacking a dividend and with less enticing growth, Starhub might not prove to be the easiest sell. However, with market conditions so hot, few bankers expect the sale to face problems, provided the valuation is not excessive and dividends kick in from next year.

What PE range are we looking at? MobileOne sold 57% of its total stock on the basis of 10 times 2003 earnings. But possibly the most directly comparable company - thanks to its also having a cable TV business - is Telstra in Australia, which UBS estimates is trading on a 2004 estimated PE of 13.5 times.

In Starhub's favour, investors have become enamoured of Asian telecoms stories once again, and the pipeline of telco deals this year is manageable. Aside from Starhub, Malaysia's Celcom plans an IPO this year, while China Netcom looks likely to be the biggest telco IPO of 2004.

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