Shares of Singapore telco M1 surged 28.22 percent to S$2.09 by 1:36 P.M. SGT on Friday, trading above the S$2.06 a share takeover offer price announced Thursday amid speculation a higher bid might emerge.
To be sure, a bit of the share price rise could be related to short covering. According to SGX data, for the week of 17 September to 21 September alone, 233,800 M1 shares were sold short.
However, Daiwa said a higher bid was likely, and upgraded its rating on M1 shares to Outperform, from Hold, and raised its target price to S$2.30 from S$1.55. It noted another major shareholder, Axiata, might be able to bid as much as S$2.50 a share.
“In our opinion, the rationale for the transaction – intense industry competition, need for transformation efforts that could impact dividends and plans to support M1’s management – may not gain traction with M1’s long-term shareholders,” Daiwa said in a note dated Thursday.
“This is because we believe M1 is already a well-run organisation and the odds of disruptive competition from TPG Telecom have lessened recently,” it said.
Daiwa also noted that the bid pointed to potential balance sheet “optimization,” but said that was something that likely could be done currently, such as by using higher gearing or network collaboration with rivals, and which would benefit existing shareholders.
Keppel Corp. and SPH on Thursday said they would use a special purpose vehicle called Konnectivity, to make an offer for all of M1 at S$2.06 a share. The offer price was a premium of 26 percent to the last traded price of S$1.63 on Friday of last week. M1 shares were halted before the market open on Monday before resuming trade on Friday.
Konnectivity has a deemed interest of 33.27 percent of M1, it noted, with Keppel Telecommunications & Transportation, which is 79 percent owned by Keppel, owning 19.2 percent, while SPH has a 13.45 percent stake held via wholly owned subsidiary SPH Multimedia. Axiata has an around 28.7 percent stake.
It’s not the first time potential corporate action has swirled around M1. A previous review of M1 holdings by Axiata, Keppel and SPH, which was concluded in July 2017, had failed to result in a deal over the company’s future.
How much could Axiata bid?
Daiwa said it “found it strange” that the three were looking to sell their M1 shares about a year ago, when the stock was trading around S$2.19 a share, but now two of the companies are looking to buy instead.
“We view the current offer as highly opportunistic and perhaps driven by financial rather than strategic considerations,” Daiwa said, adding that while the offer price appears reasonable, particularly against its previous S$1.55 target price, it wasn’t convinced long-term shareholders would be enticed unless offered better terms.
The investment bank also noted that Axiata has “long expressed” that it wanted to take control of or dispose of its M1 stake.
On Thursday, Axiata said it was still reviewing the offer.
Separately, Reuters reported on Thursday, citing a source with direct knowledge of the matter, that Axiata was likely to reject the offer, with the source calling it “opportunistic” and “inadequate.” The source said Axiata was talking with private equity firms and other companies and was considering launching its own offer to increase its M1 stake, according to the Reuters report.
“The company has been clear in our position that the offer should reflect the accurate future value of M1 (inclusive of an acceptable control premium), consistent with market standards,” Axiata said in a filing to Bursa Malaysia on Thursday.
Daiwa noted that Axiata purchased its shares at S$2.20 in 2007 and it said it viewed Axiata’s acceptance of the offer as unlikely. Daiwa estimated that Axiata could engage in a bidding war of up to as much as S$2.50 a share, based on the strength of its balance sheet.
Shares of M1 have trended lower for years, flirting with nearly S$4.00 a share in February 2015 before trading as high S$2.31 in May of 2017 and as high as S$1.90 in January.