TM International confirms $1.4 billion rights issue

The Malaysian mobile phone operator secures strong support from Khazanah for the deal, which is expected to be followed by a similar-sized rights offering from Maybank.

Malaysian mobile phone operator TM International confirmed yesterday that it will raise M$5.25 billion ($1.4 billion) from a rights issue over the next couple of months and said it has received a firm commitment from its largest shareholder, Khazanah Nasional, to cover up to 65% of the deal, if necessary.

TMI didn't specify how many new shares it will issue or at what price, but based on yesterday's market capitalisation of $3.1 billion, the rights offering will account for about 45% of its present value. At that size, it will be the largest equity fundraising by a telecom company in Asia and also the largest rights issue from Malaysia to date. However, TMI may not be able to claim that last record at all, since Malayan Banking (Maybank) is widely expected to announce a rights issue of its own today -- which according to various press reports may be slightly larger.

The fact that two such high-profile Malaysian companies are choosing to tap their existing shareholder bases at the same time is hardly a coincidence. Both companies need new capital following multiple acquisitions over the past year and, in the current market environment where investors remain hesitant about taking on too much risk, rights issues are seen as pretty much the only way to raise equity in size. Both companies have obviously also been watching the progress of the recent rights issues in Singapore -- a couple of which are still ongoing -- which has been encouraging in terms of the investor take-up.

In a research note issue a couple of days before TMI's announcement, AmResearch argued that a rights issue would be "the most viable option" for a de-leveraging exercise, "given TMI's relatively geared balance sheet...and the current tight debt market."

Indeed, TMI will use the proceeds to repay M$5.15 billion of borrowings, including a bridge loan of about $500 million that expires in August. The latter means it needs to get its fundraising off the ground quite soon, and doesn't really have the option of waiting for the broader capital markets to recover.

The company hasn't yet set a launch date for deal, but said applications for the issuance and listing of new shares will be made within one month of yesterday's announcement. The rights issue also needs the approval of TMI's shareholders at an extraordinary general meeting. Typically, in Malaysia, such a meeting can be held 23 days after the initial announcement, suggesting the company will be ready to launch the offering in late March or early April. A source said the transaction is expected to be completed by the end of April or early May.

TMI said in a statement that the offering price will be set closer to the launch date so as to allow as much flexibility as possible in light of the volatile markets. However, it did note that the discount is expected to be in line with other recent rights issues in the region. The relative discount will be based on the theoretical ex-rights price and the five-day volume-weighted average price immediately before the price-fixing date, it said.

Among the major rights issues completed or announced so far, DBS offered a 35% discount to the theoretical ex-rights price on its $2.7 billion rights offering in January; while CapitaLand and CapitaMall Trust set the prices for their still ongoing rights offerings at discounts of 35% and 28.7% respectively. CapitaLand is raising $1.2 billion, while CapitaMall is raising $805 million. Both deals are fully underwritten.

Indonesia's Bank Danamon has announced a smaller $335 million rights offering at a 34% discount to the theoretical ex-rights price, which will open in early April, assuming shareholders give it their nod of approval at an EGM in March. Meanwhile, Korea's Shinhan Bank is about to tap its existing shareholders for $1.15 billion, although the price on this offering has yet to be determined.

Like the other deals, TMI is aiming for its rights issue to be fully underwritten to make sure that it gets all the capital it needs. So far, it has secured a firm commitment from Khazanah, the Malaysian government's investment vehicle, which will take up its own entitlement of 44.5% and will also underwrite a further 20% of the issue. The investment company will seek an exemption from having to make a general offer for the company in case it ends up increasing its stake as a result of this undertaking.

The rest of the deal will be underwritten by other parties that have yet to be appointed. However, TMI says it has received indications from "several" financial institutions who are interested in providing such support. It is widely expected that Goldman Sachs and J.P. Morgan are among these institutions since they were appointed by TMI late last year to help it work out a recapitalise plan. Neither of the US banks was named in yesterday's announcement, however, which listed CIMB as a principal adviser for the rights issue and a simultaneous proposal to increase TMI's authorised share capital to M$12 billion from M$5 billion. CIMB has also been appointed joint financial adviser together with RHB Capital.

TMI has been expanding quite aggressively around the region in recent years and aside from its Celcom business in Malaysia it also has mobile operations, through wholly- or partially owned companies, in Indonesia, Cambodia, Mauritius, Thailand, Sri Lanka, Bangladesh, Pakistan, Iran and Singapore. When it was spun off from Telekom Malaysia through a dividend in specie in April last year it was viewed as the more exciting and nimble part of the group with high growth prospects, but it was also lumbered with quite a lot of debts, and the expectation that the company would have to deleverage has been acting as an overhang on the share price.

After falling 11% over the past four sessions, the stock closed at M$3.06 yesterday - only four sen above its all time low of M$3.02 that it hit earlier this month. It has declined 61% from its first day close of M$7.85, which also ranks as its all-time high.

TMI said yesterday that the repayment of M$5.15 billion of debt will reduce its total borrowings to M$14.87 billion ($4 billion) and lower its gearing to 0.9 times from 1.79 times. It will also reduce its interest costs by M$240.5 million, based on its weighted average cost of borrowings as of the end of 2008. This will translate into a saving of M$140.3 million in 2009 fiscal year if the borrowings are paid back by the end of May.

The company posted a 72% decline in a net profit for 2008 to M$498.0 million from M$1.78 billion, as its finance costs doubled to M$1.02 billion. Revenues improved to M$11.35 billion from M$9.97 billion.   

In a move that suggests it is keen to create its own identity away from Telecom Malaysia, TM International yesterday also proposed to change its name to Axiata Group. It didn't provide any reason for the change and didn't explain the thinking behind the new name. Shareholders will get to vote on the proposal at the upcoming EGM.

¬ Haymarket Media Limited. All rights reserved.
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