You'd think it would be tough for an Asian company to raise $2.3 billion in debt these days--particularly a telco with billions sunk into politically unstable countries like Indonesia and the Philippines. But that's exactly what Singapore Telecommunications Ltd. (SGTJY) did on Nov. 16 in one of Asia's largest-ever corporate bond offers.
As if defying gravity, SingTel is spreading its wings and flying high. In just six years, the company has spent $3.5 billion taking stakes in mostly Asian telecom companies--much of that just in the past year. With 48% of its $3 billion annual revenue now pouring in from outside Singapore, SingTel is looking more like a competitive multinational than the state-owned monopoly it used to be. The challenge now will be to convince investors SingTel is not about to fall to earth.
SingTel's unlikely Icarus is Lee Hsien Yang. More civil servant than takeover artist, the 43-year-old chief executive is the son of the city-state's founding father, Lee Kuan Yew. He sees expansion beyond Singapore's boundaries as the only way to avoid the slow profit growth that comes to a company that has saturated its home market, as SingTel has. Besides, since 1997 deregulation has swept through Singapore, opening its telecom markets to serious competition for the first time. The new bond will help finance recent investments in Asia-Pacific telcos and improve SingTel's cash flow by retiring older, more expensive debt.
Of course, expansion in Southeast Asia is risky politically. "Sure, it's scary," Lee says. "Indonesia has had four Presidents in four years, and the Philippines is a basket case." SingTel is also taking financial risks. When SingTel bought 22% of Indonesia's P.T. Telekomunikasi Selular (Telkomsel) for $600 million on Nov. 1, it was valuing the entire company at $2.7 billion--a much higher value than independent estimates. Moreover, analysts predict a 20% depreciation in the Indonesian rupiah over the next 12 months, which would cut sharply into SingTel's earnings. In Australia, SingTel paid 50 times earnings--yes, 50--for Cable & Wireless Optus Ltd. in a controversial deal that closed in late October. And it financed the deal partly by issuing 1.4 billion new shares of stock, an 8% equity dilution that has driven SingTel's share price down. Shares now sell for 47% of their price at SingTel's 1993 initial public offering.
Skeptical securities analysts wonder whether SingTel even knows what it has bought, pointing out that the accounting practices of companies like Telkomsel, Globe Telecom (GLTMF) of the Philippines, and Advanced Info Services (AVIFY) of Thailand are anything but transparent. They worry that hidden losses in the companies could push down SingTel's earnings, which already declined 9% for the six months through September compared with the same period last year. "People are waiting for the skeletons to come out of the closet," says an analyst in Singapore.
The risks are largely embedded in SingTel's strategy. "As you do this, inevitably you make lots of mistakes," says Paul A. Coughlin, managing director of Standard & Poor's in Hong Kong. "It's the price of moving out of such a small environment."
Lee argues that he's investing in markets that will recover, and picking partners that are market leaders. For example, India's Bharti Telecom Ltd. has licenses covering 92% of the country's cellular-phone user base, while Advanced Info has 50% of Thailand's cellular market.
And some of SingTel's investments are already winners. It bought a 12% stake in Belgium's Belgacom for $650 million and a 22% piece of Advanced Info for $320 million; both have since doubled in value. "SingTel has done things right," adds Jonathan Shaw, telecom analyst at Bear Stearns Asia Ltd. in Hong Kong. "We believe SingTel will be in a very strong position to capitalize when [Asia's] economies recover." Shaw values SingTel at $1.16 per share, or 23% above the current price.
That's why SingTel is now able to raise more debt cheaper than its competitors. When its bonds went on sale Nov. 16, SingTel had planned to raise only $1.5 billion, but investor interest was such that it took in $2.3 billion. By contrast, a bond issue a week earlier by Pacific Century CyberWorks Ltd. (PCWKF), SingTel's archrival in Hong Kong, raised only $750 million. SingTel paid from 125 to 225 basis points above U.S. Treasury bills on its three tranches. PCCW paid a premium of 360 basis points. Clearly, investors are convinced that Lee's bird will fly. By Michael Shari in Singapore