My first feature story in Asia Money

The hunt for good telecommunications assets will continue this year as incumbent acquirers may pay high premiums to fend off upcoming challengers, reports mergermarket.

The past 12 months have seen some frenzied consolidation in the Asia-Pacific telecommunications (TMT) industry. In the first quarter of 2006, announced M&A deals in the TMT sector amounted to US$26.5 billion, edging out financial services and energy with US$18.7 billion and US$17.6 billion worth of activity respectively, to become the busiest sector for consolidation in Asia-Pacific, according to mergermarket data.

Average deal size is also increasing, with six out of the 10 largest deals recorded over the past three years being announced in the past 12 months. M&A deals in the telecoms carriers sub-sector accounted for 17.4% of the US$46.1 billion in total value of deals announced across all sectors over the past four quarters.

Such frenetic activity has not been seen since 2000, when global telecommunications companies viewed extravagant takeovers and mergers as the only way to maintain competitiveness. The success of such TMT deals has varied, but many telecoms companies are now targeting Asia, with the belief that the region can provide sustained long-term growth.

Leading domestic communications companies have been scouring the market for new engines of growth while consolidation has continued in their own home markets. The biggest deal announced in the first quarter of 2006 was Vodafone's exit from Japan. As part of Vodafone's global restructuring plan, the telecoms giant in March agreed to sell its stake in Vodafone KK to Softbank for US$15.3 billion. UBS advised the vendor while Citigroup and Deutsche Bank advised the bidder.

Analysts predict foreign partnership deals will increase this year, but more in terms of value than volume as it will be increasingly difficult to find smaller, cheaper companies to snap up. As one sector analyst says: "Asia is no longer cheap."
With stabilizing local currencies and improving economies in many countries, Asian operators are expecting higher yield from their investments, which lessens the financial need for tie-ups. "Some companies are announcing higher dividends, while some of them are doing buybacks and they are positive about the businesses," says another analyst.

Besides finding it difficult to identify valued potential targets, traditional buyers will see their strategies complicated further by the emergence of cash-rich operators with ambitious management also looking to expand overseas. The recent acquisition by Etisalat and Dubai Islamic Bank of a 26% stake in Pakistan Telecom for US$2.6 billion, is an example of growing competition in potentially very lucrative markets. Aggressive plans by incumbent acquirers such as Japanese NTT DoCoMo, SingTel and Telekom Malaysia may face a challenge with the emergence of acquisitive counterparts from strong markets, such as SK Telecom, Maxis and Chunghwa Telecom. These players are expected to be looking for potential targets in Pakistan, Vietnam, India and China, where mobile-phone operations are less mature, and where the market is under-penetrated. M&A activity in the Philippines and Indonesia is slowing, and regulatory uncertainties in Thailand are hindering some deals from happening, some analysts believe.

Private equity funds in the TMT sector add another interesting dynamic. In January, Newbridge Capital, partnering with TPG-Axon Capital, announced its plan to become the third-largest shareholder in Hong Kong-based operator PCCW by buying shares from Pacific Century Regional Developments (PCRD), a Singapore investment holding company that owns a 23% stake in PCCW. The latest news reports state that the consortium now plans to up its offer in order to privatize PCRD.

While integrated players that can utilize content in different mediums are attractive, regulatory issues and politics, which surprisingly stained the Shin Corp/Temasek deal in Thailand, will be a key to success. For domestic consolidation, Hong Kong will continue to be an interesting arena following a few takeovers in the past 12 months. Deals such as the disposal of China Resources Peoples Telephone to China Mobile; the merger between New World Mobility and Telstra's CSL; and the purchase of Sunday by PCCW, of which 20% is, in turn, owned by China Netcom, were viewed by some as a proxy of future consolidation in the Chinese market. Market rumours regarding further restructuring are likely to continue but it will be interesting to see if there are any announcements before China rolls out its 3G licence this year. It will also be interesting to see whether heavy subsidies to Hutchison's global 3G businesses will affect its overall Asian strategy and whether PCCW's bid to gain market share in Hong Kong will cause a further shake-up in the sector.