It’s difficult to gauge how the potential merger between TPG and Vodafone Hutchison Australia, or VHA, would impact the incumbent Singapore telcos without knowing the deal structure, Daiwa said in a note dated Thursday.
Reports emerged on Wednesday that TPG Telecom was in merger talks with Vodafone Hutchison Australia, that sent shares of Singtel climbing on Thursday amid hopes that it would ease competition pressures in Australia.
But Daiwa noted it wasn’t yet clear how the potential TPG-VHA merger might impact TPG’s plan to launch mobile services in Singapore as the city-state’s fourth operator by the end of the year, with the structure of any deal to be closely watched.
“On our calculations, a pure equity transaction would result in a combined TPG-VHA entity being saddled with high gearing,” Daiwa said. “Such a structure would almost immediately signal that TPG will adopt a focused or niche approach to the Singapore market.”
That’s because the entity wouldn’t be able to take on much additional debt to finance an aggressive move into Singapore, Daiwa said, adding that often the way such entities create shareholder value is to reduce debt.
But it also noted that if the potential TPG-VHA transaction were to end up being more complex, the entity’s gearing may not be high and it wouldn’t offer much insight into the Singapore strategy. It pointed to a Bloomberg article suggesting a potential 50-25-25 equity split between TPG, Vodafone and Hutchison, which Daiwa said could result in debt restructuring for loans at VHA which are guaranteed by its parent.
Another factor that may influence how the potential merger impacts the Singapore telco market is that barriers to exiting it are low, Daiwa said.
“An exit, now or later following a patchy network rollout, would at best be egg on the face, with little or no financial ramifications for TPG,” Daiwa said.
But Daiwa said it was upgraded its view on the Singapore telecom market to Positive from Negative, to reflect its upgrade of Singtel on the potential merger. Singtel has replaced NetLink NBN as its top sector pick, it said.
It rates Singtel at Outperform with S$3.47 target, StarHub at Hold with S$1.72 target, M1 at Hold with S$1.55 target and NetLink NBN Trust at Buy with S$0.92 target.
Shares of M1 were up 0.63 percent at S$1.61 at 10:47 A.M. SGT, Singtel was down 2.13 percent at S$3.21, StarHub was down 0.60 percent at S$1.65 and NetLink NBN was flat at S$0.795. Singtel shares ended up 6.5 percent on Thursday.