Telekom Malaysia in Sri Lankan spin off

Malaysia''s dominant telco confirms plans to IPO its Sri Lankan subsidiary, changing tack from its previous strategy of buying Asian assets.

Telekom Malaysia confirmed over the weekend that it was planning to seek a listing for its Sri Lankan mobile subsidiary MTN Networks, ending a month of speculation.

The deal is likely to be small and completed by the end of the year. It is thought that not much more than 10% will be sold and most of that will be reserved for local investors and employees. Telekom Malaysia has mandated NDB Investment Bank of Sri Lanka to advise it on the IPO.

According to analysts, if MTN is valued at 22.6 times earnings - which is where Sri Lanka Telecom trades - then MTN is worth around $720 million. Thus if 10% of the company is sold at IPO, the deal is likely to be only around $72 million in size. However, while small internationally, this deal will still be one of the five largest ever in Sri Lanka.

The investment has been a huge success for Telekom Malaysia. It began in 1995 and was one of Telekom's first forays outside its home market. It is now the number one mobile operator in Sri Lanka with over 50% of the market.

In many ways, the success of that investment has given Telekom Malaysia the confidence to pursue its other international acquisitions through its TM International subsidiary. At the beginning of the year, the company announced that it was buying a 23% stake in Indonesia's Excelcomindo while at the tail end of last year it announced plans to acquire a 48% stake in IDEA Cellular in India alongside ST Telemedia of Singapore.

What makes the Sri Lankan deal interesting is that it is a sale rather than an acquisition. True, Telekom Malaysia did sell its 12% stake in Telkom South Africa last year for a handsome profit, but generally the company has been an acquirer rather than a divestor of assets.

The rationale behind the IPO thus rests on three reasons. Firstly, the Sri Lankan market is under penetrated at 8% but still very competitive with four operators. Thus to stay ahead of the rest, MTN will need capex, especially with new capacity to build and 3G to think about.

With a listing, new equity can be raised to pay for this. Moreover, a listing gives MTN a currency if ever an M&A situation should develop with the other players. The ability for the subsidiaries to self-finance themselves is clearly important for Telekom Malaysia's management.

Telekom Malaysia Chairman Tan Sri Dato Ir Mohd Radzi Mansor, who is also Chairman of MTN stated: "MTN has time and again given us reason to be proud of its achievements both operationally and as a corporate entity. Its ability to garner international awards for its GSM services, and its success last January 2004 in being awarded a $50 million IFC loan without recourse from Telekom Malaysia its parent company, are clearly indications of a well-run company that will no doubt, not disappoint potential investors."

Secondly, Telekom Malaysia will be able to take advantage of the extremely strong Sri Lankan equity and currency markets. The equity market is up 40% in a year, and being able to sell a subsidiary at a price of 22 times earnings is very attractive.

The Sri Lankan rupee is also at record highs due to the huge influx of foreign currency aid in the weeks and months after the Tsunami hit last December. All this money has had to be changed into rupees and thus has pushed their value right up.

Finally, the deal makes sense as it gives MTN a new marketing platform. The goodwill generated by a successful IPO can work wonders for a company's local subsidiary. It affirms customers' loyalty with the company and boosts of employee morale. Also there are the acres of free publicity that such a move engenders.

In the weekend release, MTN Chief Executive Dr Hans Wijayasuriya noted that the success of MTN belonged to the Sri Lankan public. "It is therefore logical and timely that public ownership is added to Dialog's formula of success," he said.

This deal could signify a new strategy for Telekom Malaysia as it seeks to list its various subsidiaries around the region. It is still on the acquisition trail, as seen by its bid for 26% of Pakistan Telecommunications last month. But it could also seek to list those subs where the local market will give good valuations and where the subs themselves are in need of capex.

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