Thailand’s True plans spin-off of network assets into infrastructure fund

The fund will have a minimum value of $2.26 billion and at least two-thirds will be offered to public investors in an IPO.
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True is planning to spin off part of its network infrastructure
<div style="text-align: left;"> True is planning to spin off part of its network infrastructure </div>

True Corp, the Thai telecom operator that is controlled by the country’s richest man, Dhanin Chearavanont, said yesterday that it intends to spin off part of its network infrastructure for a separate listing through an infrastructure fund.

The fund, which is similar to a business trust in other jurisdictions, will have a minimum value of Bt70 billion ($2.26 billion) and at least two-thirds of the fund will be sold to public investors through an initial public offering, it said in a document published on its website.

The money raised from the sale of assets to the fund will be used to repay some of the substantial debt that it has racked up while building out its 3G and broadband networks in recent years. Part of the proceeds may also go towards direct investments into future projects, it said.

True is the only fully integrated, nationwide telecom operator in Thailand with about 26 million subscribers across its fixed-line, mobile, broadband and pay-TV networks. It provides mobile services mainly under the TrueMove and TrueMove H brands.

The move comes after BTS Group, the operator of the Skytrain system in Bangkok, became the first Thai company to list an infrastructure fund in April this year, thus opening the door to an entirely new asset class. BTS Rail Mass Transit Growth Infrastructure Fund is backed by the cash flow from ticket sales for the Skytrain and raised $1.4 billion through a highly successful IPO.

The fund gained as much as 12% in the first two weeks of trading, but has since fallen back towards the issue price amid the sizeable sell-off in yield plays in May and June. Yesterday it closed Bt0.10 above its IPO price at Bt10.90, which translates into a forward yield of about 5.9%.

But True’s spin-off plan is also part of an ongoing trend whereby companies are restructuring their existing platforms and assets in various ways to raise cash. For some that means selling part of their assets to get leaner and meaner, while for others it is about seeking a separate listing for part of their assets to bring out previously hidden value.

On Sunday, Hong Kong-listed Hutchison Whampoa confirmed a report in the Wall Street Journal saying that it is looking to sell its ParknShop (PNS) supermarket chain. In an announcement, it said that its wholly owned subsidiary A S Watson & Co is “conducting a strategic review of is supermarket retail business operating under [the PNS brand] to optimise the value for the shareholders of the company”.

PNS operates 345 stores in Hong Kong, Macau and mainland China, and had revenues of about $2.8 billion in 2012. The general belief is that Hutchison is looking to sell the business to one or more strategic buyers, rather than to spin it off through the stock market.

Depending on the type of assets a company has, business trusts and real estate investment trusts (Reits) are otherwise perfect for realising value as they allow the controlling shareholders to sell the majority of the assets, while still retaining control of the business through the management company. The existing shareholders can also continue to benefit from its performance through regular dividend payments.

The recent aversion towards yield plays, caused by rising US interest rates and expectations that the Fed will start to cut back on its stimulus programme later this year, may make it more difficult to push out such trusts. However, bankers believe the prospects in Thailand are still pretty bright, partly because infrastructure funds is a new product and partly because they have significant tax benefits for both issuers and investors.

The key thing is to have quality assets that provide a stable cash flow and to price them correctly so that they offer an attractive yield pick-up over the risk-free rate.

True said that the principal investment mandate of its fund will be to invest in infrastructure businesses that have the potential of long-term growth to ensure regular distributions to unitholders.

As the main unitholders of the fund, the company will continue to benefit from the telecom infrastructure, receiving dividend income from its investment. There is also the possibility of capital gains if the net asset value per unit increases, it added.

An infrastructure trust makes a lot of sense for True, since its shareholders are currently not benefitting from the revenue growth generated from the network as a lot of it is eaten up by the large interest payments on its debt.

And it got at least an initial thumbs up from investors who pushed True’s share price 6.9% higher yesterday. The stock is already up 70% this year, part of which has been driven by earlier talk of a potential spin-off.

As of the end of 2012, the company had Bt96.3 billion of long-term net debt — 6.9 times its shareholders’ equity of Bt14 billion and five times its Ebitda (excluding liabilities under finance leases).

The interest expense on that debt amounted to about Bt6.6 billion last year, which together with a 29% increase in operating costs led to a net loss of Bt7.4 billion. Total revenues increased by 24% to Bt89.3 billion.

The group has made some progress on reducing the liabilities in the past 18 months, however, including a buy-back of most of its US dollar-denominated bonds in late 2011. As of the end of last year, the portion of consolidated liabilities denominated in foreign currencies had dropped to 7.2% from 40.2% at the end of 2010.

However, approximately 70% of its consolidated debt is still subject to floating rates, which is obviously a concern as interest rates are on the rise.

The assets sold to the fund will include about 13,000 telecom towers, 45,000 kilometres of fibre optic cable networks and related transmission equipment, and the right to receive rent generated from the lease of certain 3G equipment, including 13,500 base stations.

In order to continue to provide its telecom and broadband services, True will lease back part of the infrastructure assets that it is selling to the fund for 15 years at a maximum cost of Bt55 billion, it said in the announcement.

The company is currently in the process of applying for approval to set up the infrastructure fund so it will take some time yet before the IPO will hit the market. While it might be technically possible to launch a deal towards the end of this year, sources say the first quarter of next year is a more realistic timetable.

True’s existing shareholders will need to approve the sale of the infrastructure assets to the fund as well as the lease-back and the company’s take-up of a maximum of one-third of the fund units at an extraordinary general meeting on September 12.

If the fund sells two-thirds of its total share capital at a valuation of Bt70 billion, the deal will total as much as Bt46.6 billion ($1.5 billion) and will exceed the BTS infrastructure fund as the largest IPO in Thailand ever.

According to sources, True has hired Credit Suisse and UBS to work on the public offering and the structuring of the fund. UBS was a joint bookrunner on the BTS IPO as well. They are expected to be joined by at least one domestic bank.

True is 63.3% owned by the Chearavanont-controlled Charoen Pokphand Group and its associates.

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