Business

Saturday September 19, 2009

Who will be U Mobile’s new strategic partner?

By B.K. SIDHU


An investor with deep pockets and solid technology background can help the firm use its spectrum to its fullest.

THIS week, U Mobile Sdn Bhd made headlines when Japan’s NTT DoCoMo said it is calling it a day as an investor in the smallish Malaysian celco. It is the second time this year that U Mobile (formerly known as MiTV Networks Sdn Bhd) is in the spotlight because of a shareholder exit.

In April, U Mobile’s other foreign investor, KT Corp (via KT Freetel), announced that it would sell its shares in U Mobile.

U Mobile needs a lot of funding for expansion. A few million ringgit is just the beginning if it is to build a network that can turn it into a meaningful player in the cellular market.

These are big names in the global telecoms industry. DoCoMo is Japan’s largest mobile company, while KT Corp is a major player in South Korea. When they inked a deal to take a 16.5% stake each in U Mobile, it was seen as a major coup.

Reports attribute the foreign investors’ departure to disagreement with other shareholders over management, and the failure of U Mobile to grab significant market share from rivals.

It appears that Malaysia’s mobile market is not appealing enough for these foreign operators. Or could it be that U Mobile is not cut out to compete head on with the three established local players – Maxis Communications Bhd, Celcom (M) Bhd and DiGi.Com Bhd?

At over 30%, margins earned by the celcos here are the highest in the region. Although recent research reports suggest that mobile growth may be screeching to a halt, it is unlikely to happen in the near term.

Growth for the sector will likely be in the single digit, but that has been the case the past few years and the celcos are still enjoying high margins.

Tan Sri Vincent Tan has put in place a new management team.

There are growth opportunities in mobile broadband despite analysts suggesting that the venture into this segment may dilute margins. For example, video is a huge area that has yet to be fully exploited.

To make it worse for U Mobile, a newcomer to the mobile sector has made much headway in a short time. Tune Talk has signed up over 20,000 mobile subscribers in less than a month. It is doing whatever it takes to shake up the market to gain a decent market share.

It is no surprise that in a recent report, an analyst wrote: “Tune Talk will emerge as the strongest MVNO (mobile virtual network operator) and a strong fourth player given its strong association with the well-known budget brands – AirAsia, Tune Hotels and Tune Money.

“While it is targeting a wide swathe of market segments – youth, casual users, travellers and migrant workers, we think it could impact DiGi and Maxis the most. Celcom is hedged by a cannibalisation clause and its equity stake in the MNVO.’’

This is the kind of player U Mobile has to be to make a difference in the marketplace. No amount of investment or foreign shareholding will help if it does not get its business plan right.

Datuk Surin Upatkoon

U Mobile controls less than 1% of a market that has 28.5 million mobile subscribers and penetration levels of 100.4%. The industry regulator expects penetration levels to reach 104% by year’s end.

Tune Talk does not even have a network; it rides on another operator’s network. In comparison, U Mobile has a prized 3G spectrum since the end of 2006. Of course, U Mobile’s investments eclipse those of Tune Talk, and in this sector, gestation periods are long.

Management team revamp

There is now a leadership revamp at U Mobile. It is learnt that the senior management team comprised three South Koreans, a Japanese and a Malaysian. The CEO, chief marketing officer and chief technology officer were representatives of KT. The chief strategy officer was from DoCoMo and the Malaysian was the chief financial officer.

At mid management, there is a large local presence, plus two from South Korea and three from Japan. The South Koreans and Japanese are leaving. In an email response, U Mobile said Tan Sri Vincent Tan has put in place a new management team. No further information was given.

Tan controls U Television Sdn Bhd (UTV), which owns 96.1% of U Mobile after buying back the shares from DoCoMo and KT.

As the two giants made their exit, Multi-Purpose Holdings Bhd (MPHB) entered the scene with a 3.9% stake in U Mobile and a put option from AmBank (M) Bhd to buy an additional 41.6% for RM280mil.

DoCoMo and KT sold back their shares to UTV for US$100mil each, which is what they had paid for the 16.5% stake each.

That means UTV paid about RM700mil for the combined 33% shareholding, which is significantly higher than the RM280mil for the put option’s 41.6% stake.

The reason for the difference is unclear, but RM280mil is the loan that UTV took to partly pay the foreign players. The bank wanted a guarantor for the collateral, which is the U Mobile shares. MPHB is the guarantor.

It is not known who will be the new U Mobile CEO as UTV is trying to get a strategic investor to replace the Japanese and South Koreans. A Singapore telecoms company is a likely candidate but there may be other candidates. Knowing how Tan works, he may be talking to several parties.

He managed to get Swisscom to take a stake in DiGi in 1995. When Swisscom exited, Telenor entered the picture. Hopefully, this time, U Mobile will have a long-term investor who can do what Telenor has done at DiGi to make it a very important investment in Asia.

Enter MPHB

MPHB’s emergence in U Mobile surprised many, including its own shareholders. There was some selling pressure on its shares on Wednesday, when the price fell 3.6%, or seven sen, to RM1.88. It shed a further two sen on Thursday. Yesterday, it inched back up to RM1.88.

MPHB is likely to call analysts in for a briefing mid next week to explain the rationale for its venture into telecommunications.

Managing director Datuk Surin Upatkoon has made it known that the company is purely an investor in U Mobile and has no desire to be in the driving seat. Nor is it going to be a big-time investor, as it does not want to fork out millions to help build infrastructure.

“It is an investment to us. MPHB is into a lot of businesses from gaming, property, stockbroking and insurance. We see U Mobile as a growth company and margins in the telecoms sector are still good. But we are not going to manage the company,’’ he told StarBiz.

Both Tan and Surin are friends. A month ago, Tan asked Surin if he was interested in U Mobile, and the transaction was announced on Tuesday.

It is a friendly deal and hopefully, it will not cost MPHB RM280mil to exercise the put option. Surin said the chances of a default was slim.

“For me, Tan will never default. It is only RM280mil but I wish he would, as we can then sell the shares for, say, RM500mil or even more. Everyone knows there is a value out there. This is a friendly deal,’’ Surin added.

What MPHB would like to see is the entry of a strategic investor with sound technological background, preferably a telecommunications company, to drive U Mobile.

The challenge ahead

The onus is on Tan to secure the entry of a strategic investor quickly because U Mobile needs a lot of funding for expansion. A few million ringgit is just the beginning if it is to build a network that can turn it into a meaningful player in the cellular market.

It has over 1,000 sites currently, but for decent coverage, over 2,500 are necessary.

U Mobile also needs to spend a lot to build its brand. A sound strategic investor with deep pockets and solid technology background can help this company use its spectrum to its fullest.

The entry of MPHB is a positive, but if Tan can get Singapore’s StarHub, then he can smile all the way to the bank as that will get the other celcos in the local scene worked up.

For now, U Mobile is seen as no threat to the established players, but with StarHub as its ally, there may well be a shake up, which is necessary if Malaysia is to increase its broadband penetration.

Amid all this, are the regulators keeping tabs on whether U Mobile is keeping to its timeline of deliveries as per its business plan? It has been a while since it got the 3G spectrum.

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