Telecom IPOs in Thailand - what is the hold up?

Brooker group analyst explains why the privatization of Thailand''s two telecoms operators was never going to get off the ground this year.

In recent weeks, progress towards privatizing and listing Thailand's two telecom sector state enterprises - TOT Corporation Plc (TOT; originally scheduled for November 2002) and the Communications Authority of Thailand (CAT; initially earmarked for 4Q2002) - has slowed dramatically. While it may be convenient for the authorities to blame "unfavourable financial market conditions" for the delays, the reality is that the slow progress is very much due to domestic factors that are largely officialdom's own making.

Let's look first at TOT's predicament. It is now official that TOT's IPO has been delayed until 1Q2003. While TOT was successful in transforming itself into a public corporation (at least on paper) back in August, since then there has been very little progress towards meeting its IPO schedule.

Indeed, about all that has been accomplished in recent weeks was a decision by TOT's board on 23 September to approve the company's plans to boost its registered capital to Bt45 billion from the current Bt6 billion by floating 4.5 billion shares (representing a 30% stake). However, to date there is still no official Cabinet decision on the date of TOT's share offering.

In essence, there are three key issues that are holding up progress on TOT's IPO that need to be addressed:

First, TOT itself has been handicapped by questions surrounding the choice of a successor to outgoing president Sutham Malia, whose term expires on 30 September 2002. For weeks there had been speculation in the market that that Prime Minister Thaksin was not satisfied with the selection process for TOT's new president, which in turn made it very difficult for the company to make any announcement on the matter. Finally, on 27 September, the Ministry of Finance revealed that it has approved TOT's choice of Sittichai Songpiriyakit as the new president.

Previously, Mr. Sittichai was one of TOT's seven senior executive vice presidents (SEVP) and is widely regarded as an "inside man". Before addressing TOT's IPO schedule, one of his first tasks will be to select four new SEVPs, including his own successor and people to fill three slots being vacated by retiring executives. Sittichai's term of service will be for two years, and he is due to officially take office sometime in October. Thus, until this management handover is complete there is little chance of TOT making any hard decisions about its IPO schedule.

In fact, for some time now outgoing president Sutham Malia has been adding to the confusion surrounding the timing of TOT's IPO by insisting that the November target date was still on. Meanwhile, other official sources have been dropping hints for weeks that the schedule would be postponed until 1Q2003 at the earliest. Hopefully, the flow of conflicting statements coming out of TOT will now stop, with Mr. Sittichai's statements being taken as the last word of what the company intends to do.

Second, TOT's IPO schedule is bedeviled by the fact that the Thai government has yet to set up the National Telecommunications Commission (NTC), which is due to become the new regulator to replace TOT, particularly with regards to issuing licenses to all the telecom private sector operators. With no regulator in place nobody can be sure what its policies will be or what the industry's regulations will look like.

Needless to say, this situation adds significantly to uncertainty for potential investors in TOT shares. The fact that the NTC is still not in place is a frustration for CAT's IPO plans as well, especially since it hopes to launch its own mobile phone service not long after its privatization process is complete, if not before.

Thirdly, and most significantly, the IPO process for both TOT and CAT will have trouble moving forward as long as there is no decision on the tricky question of concession conversion. For more than three years, negotiations between the public and private sectors have been debating this issue of how to best convert the private telecom concessions into license payments, as well as to relieve the private sector players from the burden of making huge revenue share payments to TOT and CAT.

For example, TT&T Public Company Ltd û the operator of a 1.5 million fixed-line concession in provincial markets û is saddled with the industry's highest revenue share obligation to TOT amounting to approximately 44% of its annual revenues. The principal concept of pushing for concession conversion is to relieve the private sector of such obligations in order to put them on the same footing with new entrants into the telecom sector once the market is fully liberalized in 2006 in line with Thailand's obligations to the WTO.

Unfortunately, for both TOT and CAT sorting out the issue of concession conversion will punch huge holes in their revenue streams with no clear indication of how either entity will replace them. In FY 2001 (ending 30 September 2001), concession payments received from private sector telecom operators accounted for 23.6% of total revenue, up from 21.5% in FY 2000. While CAT's accounts do not offer a breakdown that would shed light on this matter, the revenue share payments to this state enterprise are also thought to be substantial.

Faced with losing a sizable portion of their turnover, both TOT and CAT are scrambling to launch new telecom services, including mobile phone and Internet-based services, before the day of reckoning comes via concession conversion.

But it's not just lost revenues that TOT and CAT need to worry about. The other key aspect of concession conversion is the question of what happens to the asset side of the equation. Originally, the process of concession conversion envisaged a couple of years ago was that TOT and CAT would retain ownership of the telecom networks transferred to them as part of the Build-Transfer-Operate (BTO) contracts signed with the private sector players.

Yet in the past year or so, the private sector operators have lobbied hard to water-down this assumption to the point where both TOT and CAT are likely to have to forego a sizable chunk of these assets in the course of concession conversion. Some of the private sector operators want to buy the telecom networks back (at a substantial discount, of course), while other proposals being discussed envisage the yet-to-be established NTC assuming ownership of some of the networks in order to protect the public from greedy private operators.

With 52% of the TOT's assets in FY 2001 consisting of "assets from concessions", the uncertainty over just how many of these assets would be taken off its balance sheet as a result of concession conversion makes it almost impossible to do a comprehensive valuation of the company in preparation for its IPO.

While the first of these three factors is close to being resolved, until the NTC is established and until a framework for concession conversion is agreed, the outlook for a timely listing of the TOT and the CAT is poor.

Meanwhile, perhaps the biggest loser out of this whole situation is the long-suffering Thai consumer of telecom services. In a recent study by the Thai Development Research Institute (TDRI), a quasi-government think tank, it was revealed that fixed-line telephone services in Thailand cost between 30% to 50% more than in neighboring countries. Likewise, international call services û which must pass through CAT's international gateway û are priced substantially higher than elsewhere in the region.

For example, an international call from Thailand to the United States under standard rates costs Bt22 per minute (51 cents), compared with the equivalent of Bt17.50 in the Philippines and Bt9.30 in Singapore. Even mobile phone handset prices are still much higher in Thailand despite the generous promotions being offered by ADVANC, TAC and TA Orange. For instance, the Nokia 8310 model (pre-subsidy basis) was priced at between Bt17,000 and Bt19,000 in Thailand as of mid-2002, compared with Bt7,300 in the Philippines, Bt10,000 in Singapore and Bt14,000 in Hong Kong.

Indeed, one could argue that vested private and public sector interests in Thailand would prefer to put off finding solutions to the twin issues of setting up the NTC and concession conversion as long as possible. In this way, it may be possible to keep telecom rates and prices in the domestic market at or close to current levels at least until 2006 when Thailand is obliged to deregulate its telecom sector.

Danial Nielsen is an analyst for the Brooker Group. For more information about the Brooker Group please click here.