Business





Saturday September 6, 2008

Astro’s Indon headache

By CECILIA KOK


DESPITE having to contend with some challenging issues while operating in Indonesia, Astro All Asia Network plc, a leading player in the pay-TV segment in Malaysia, has reiterated its interest to continue building its presence in the hugely attractive Indonesian market.

“There is much potential for growth in the Indonesian pay-TV market because it remains largely untapped. The penetration rate in the segment is very low at less than 2%,” says an analyst.

“Furthermore, Indonesia has a huge population of 237 million, which is about 10 times larger than Malaysia’s, and an estimated TV household of 50 million, compared to Malaysia’s five million,” he adds.

According to a local research house, the smallish Malaysia’s market is a limiting factor for Astro’s growth, hence venturing into regional markets such as Indonesia would be a natural progression for the company to boost its earnings.

Astro also has a presence in India under a joint venture with Sun Direct TV Pvt Ltd. But while its venture into India since last year has shown encouraging growth with a subscriber base of more than 500,000 as at the end of April, its Indonesian venture has yet to produce ideal results thus far.

About-turn

Astro began its entry into the Indonesian market in March 2005 via a joint-venture agreement with Indonesia’s Lippo group. Under the agreement, Astro and Lippo group would operate a pay-TV business via the latter’s wholly owned unit, PT Direct Vision (PTDV). The original agreement was for a 51:49 shareholding interest between Astro and Lippo group in PTDV respectively. But this was derailed five months down the road when a new ruling by the Indonesian government for all broadcasters came into effect to limit foreign equity participation to 20%, compared to the initial 51%. Subsequent negotiations between Astro and Lippo group to restructure the venture were held but both parties could never reach a solution up to this day.

Nevertheless, the full launch of the satellite pay-TV business went ahead in early 2006 under a trademark licensing agreement between Astro and PTDV that allowed the latter to use the “Astro Nusantara” brand in Indonesia. On top of that, Astro would be supplying broadcasting services and technical support to PTDV.

The agreement, however, expired on Monday and would not be renewed, according to Astro’s recent announcement to Bursa Malaysia. Astro further explains that its decision to resort to such a move is due to PTDV’s failure to settle a total outstanding payment of RM805mil, incurred since March 2005, within a stipulated time period.

But out of goodwill, Astro has agreed to requests by PTDV to continue providing support and services and extend the trademark licensing agreement for another 30 days for up to the end of this month. The move is to enable PTDV to buy time to make alternative arrangements so as to minimise the impact on its subscribers.

“We are still keen on the Indonesian market and have been exploring all options for an amicable solution that works in the best interest of our shareholders,” an Astro official recently confirmed.

An industry observer, however, opines that the much-coveted solution for Astro may not be achievable with the Lippo group. After all, Astro has already indicated that it was the Lippo group’s lack of enthusiasm to conclude documentations in relation to their joint venture that has contributed to the fall-out of their partnership.

In addition, Astro says the Lippo group has not contributed to the funding needs of PTDV up to this day, but all the investment and operating costs incurred by PTDV in developing its satellite pay-TV business have been met and supported solely by Astro.

Clash of the titans

Recent newspaper reports painted an even gloomier picture on the business partnership between Astro and Lippo group. What was supposed to be a strategic alliance between two of the wealthiest and most influential men in Southeast Asia is said to have collapsed and reached an irreparable stage.

The business relationship between T. Ananda Krishnan, who controls Astro, and his Indonesian partner James Riady, who controls the Lippo group, has reportedly turned sour since last year when a major transaction between Ananda and Saudi Telecom Co seemed to have sidelined Riady’s camp.

The transaction, which was worth a whopping US$3.1bil, saw Ananda selling a 25% stake in Maxis Communications Bhd and a 51% stake in PT Natrindo Telepon Seluler to Saudi Telecom in July 2007.

But just three months before the deal was closed, Ananda-controlled Maxis bought Lippo’s remaining 44% interest in Natrindo and increased its stake in the latter to 95%. Hence, giving Riady’s camp the impression that Ananda had already planned to rope in Saudi Telecom as a potential business partner even before finalising his purchase of Lippo’s remaining stake in Natrindo, according to the report.

Looming legal battle?

Now, allegations of embezzlement and fraud involving Astro officials in Indonesia could lock both Ananda and Riady’s camps in a prolonged dispute and bitter legal battle.

Astro has cried foul at the embezzlement and fraud allegations in its clarification to Bursa. According to the company, the sum of US$16.2mil that had become the subject of the “wild” allegations was actually a payment for the development of exclusive content for PTDV. The sum was paid by Astro through PTDV to its contract vendor, PT Adi Karya Visi.

On another note, Astro claims that its decision to withdraw support to the pay-TV business of PTDV has been responded with a threat from its Indonesian partner to make a substantial claim against the company.

“If we receive notice of any proceedings, we will make the appropriate disclosures,” Astro says, adding that the company is closely monitoring the situation and will only take the necessary action to safeguard its interest.

“Legal proceedings would be costly and this could drag sentiment towards Astro’s stock,” says an industry observer.

Too little too much

“Astro’s investment in Indonesia has been trying and difficult from the start. From regulatory issues to problems in its current partnership, it has never been an enjoyable journey for Astro there,” says the observer.

And much to the disappointment of the investing community, Astro has not achieved much out of the four years and an investment of more than RM500mil that it had spent on its Indonesian venture.

Subscriber growth there has not been encouraging. From 145,000 as at the end of January this year, it dropped to 133,000 as at the end of April.

And the huge operational cost of RM68mil incurred by its Indonesian venture for the first quarter (1Q) ended April 30, 2008, dragged down its financial performance. The company sank into the red with a net loss of RM2.6mil for 1QFY2009, compared with a net profit of RM32mil in the previous year, despite recording a growth of 22% year-on-year in group revenue to RM710mil.

Nevertheless, some investors believe it would be a waste for Astro to exit Indonesia considering its lucrative market and the significant amount of money, time and effort that the company has already poured in there to build its presence.

Still attractive

Astro discloses that no matter how things turn out for its current venture in Indonesia, it remains committed to supporting the development and aggregation of local content for the market there.

“The growth potential is still there, and the situation could turn positive for Astro in the future,” says an analyst.

“Perhaps what the company needs is just a new strategic partner to turn things around,” he adds.

Some believe that Astro has already begun searching for a new potential partner, but the company has declined to confirm such a speculation.

An industry observer, however, believes that it would be difficult for Astro to find a potential partner so soon unless and until the company settles its issues with the Lippo group.

Meanwhile, Astro has already prepared to fork out further costs totalling RM200mil in relation to specific commitments made to PTDV operations even as it breaks off from its alliance with the Lippo group.

The company is expected to announce its financial results for the second quarter ended July 31 on the coming Thursday, and this will be closely watched by investors.

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