Investment bankers have expressed great surprise that the Thaksin administration has decided to press ahead with a privatization which moved to the top of the government divestment list at the height of the telecommunications boom and has stayed there ever since despite the sector's huge drop-off in demand. There is also unanimous agreement that it will be impossible to meet the government's timeframe for the transaction and that whichever bank wins, it will have an enormous job on its hands.
Terms of reference have been sent to 49 banks, with a number already deciding not to participate on the basis that the restructuring job will be immense and the potential reward relatively small. Under the current timeframe, the government hopes to have the state agency restructured by March 2002 and listed by June of the same year. It has also specified that banks have to submit group proposals and that it will select one foreign bank and two local.
The two banks that have been historically closest to CAT are Lehman Brothers and UBS Warburg. The two completed a preliminary privatization review for the agency just prior to the financial crisis. Around the same time period, Lehman also provided a similar service to CAT's sister agency TOT (Telephone Organisation of Thailand), alongside Merrill Lynch and Morgan Stanley.
The government believes that on listing, CAT should have a market capitalization of about Bt64 billion ($1.4 billion). Bankers that have done some preliminary analysis believe that the upper limit is more likely to be about one third of this amount.
A common refrain among many is that TOT and CAT are probably the least prepared for privatization of any state-owned telco in the region.
"This is utter madness," concludes one specialist. "The sector is at its lowest ebb in my decade long experience as a telecom banker. CAT was the right company to list four years ago when gross margins on its IDD business were up at the 80% level. But the world has changed since then and it has no chance in the current environment. By pushing this forward, the government is in danger of losing any momentum it generates from a successful sale by PTT."
TOT and CAT currently function as both regulator and operator. The former runs the country's fixed line service and the latter is its monopoly IDD operator, although this will change when the industry is de-regulated by 2006. CAT also has equity stakes and board seats on most of the country's fledgling ISP's (Internet Service Providers) and runs the postal service, although this is due to be separated from it.
Greg Mazur, head of the Asian telecoms group at Salomon Smith Barney explains the challenges CAT faces when he says, "Probably three quarters of CAT's revenue comes from IDD. This has become a commodity business and has a limited future.
"Elsewhere in the world," he adds, "it's been the case that when IDD is de-regulated, international call rates drop by about 70% within the first 12 months. Many operators start to experience negative growth in this environment."
Analysts also caution that the overall operating environment for the Thai telecoms industry is as one describes it, "an unholy mess." Daniel Nielsen, is an analyst at Brooker Group, a domestically-listed business consultancy run by former deputy finance minister Pisit Leeatham. He is in the final stages of preparing a roughly 500-page report on the domestic telecoms industry, scheduled for publication early next year.
He says, "Whichever investment bank takes on this task will find a tangled mess that's going to take a long time to sort out. The idea that CAT can be whipped into shape by June next year is surprising to say the least.
"Still," he adds. "We've had these deadlines before and they're never taken that seriously."
He highlights three major issues that need to be addressed before either CAT or TOT can be successfully listed. Firstly and most importantly, he says they need to have their regulatory functions removed.
But as he further explains, "We've yet to be given a date when the new independent regulator - the National Telecommunications Commission (NTC) - is going to be established. In fact, no one can even agree on who should sit on the panel that will decide membership of the commission. The Senate threw out the government's first list of panel members on the grounds that they weren't impartial."
"And even when a commission is finally established, investors will want to wait and see that it functions properly and new licenses awarded fairly."
Secondly, there is the issue of concession conversion, whereby the two agencies will be compensated for the scrapping of their revenue sharing agreements with other operators such as cellular players TAC and AIS. A workable formula has yet to be agreed.
"The original formula was based on the life of the concessions, most of which stretch out to 2015 onwards," he comments. "This was scrapped and a new formula was decided, in which the operators would only compensate the agencies for revenue projections out to 2006, the year when the industry is supposed to be fully de-regulated. Many private operators are still not happy with this and believe that the clock should be stopped on the day the NTC is established."
Thirdly and underscoring one of the major problems hampering the government's whole privatization programme, is the issue of whether either agency is capable of thinking along private sector lines. TOT has a workforce of around 30,000 and has always historically been heavily unionized. CAT is far more streamlined, with a workforce of about 5,000 and is regarded as a fairly well run company.
How it will be able to convince investors that it can find ways to drive growth as IDD fragments is another matter, however. "In Indonesia, Indosat managed to do it by purchasing mobile operator Satelindo," one analyst notes. "But this option isn't open to CAT as Thailand only has two operators neither of which is likely to be up for sale. The same applies to the third - CP Orange - which comes on stream next year."
Nielsen points out that the government has awarded CAT two mobile licenses - one at 1,900 Mhz and one CDMA license. But he remains to be convinced that the agency can get either off the ground. "The question is whether CAT is capable of withstanding competition as its employees don't think like business people," he states. "They can't simply transform their thinking overnight and they were never able to make anything of their old mobile businesses."
"CP Orange has already got an organizational structure in place and awarded its equipment contracts," he continues. "CAT has yet to complete either. It had a January deadline, which it will miss, and this has been extended to March. If the agency still hasn't got anything in place by then, the frequency is supposed to be handed over to the NTC and in theory awarded to someone else."
Nielsen concludes that the difficulties facing the Thai telecom sector are encapsulated by the controversy surrounding the new telecoms bill, which reduces foreign ownership limits from 49% to 25%. "It's very confusing and there's a lot of concern," he says. "One week after the bill was rushed through the Senate, the Ministry of Information said that those companies which had already breached the limit would be exempt. But there are different classes of shares on the stock exchange and it's not even clear which will be allowed."
In its Annual Report for the Year Ending September 2000, CAT reported revenues of Bt29.094 billion ($649 million) of which, telecoms accounted for Bt22.146 billion ($494 million) and postal services Bt6.947 billion ($155 million). Net profit amounted to Bt5.688 billion ($127.11 million).