Mobiles wait to consolidate

[PHNOM PENH POST]

The domestic mobile telecommunications sector is overcrowded, but roadblocks are preventing rapid consolidation among the Kingdom’s eight active players, according to industry insiders.

Although Smart and Star-Cell merged at the beginning of the year, further mergers and acquisitions may take longer than many expect, as insiders point to too-high valuations and a lack of synergy among some market players.

“I’m not sure it’s going to look any different by the end of this year,” Hello Chief Executive Officer Simon Perkins said of the country’s mobile telecoms sector.

“People think that the businesses are valued much more than they really are,” he said.

That sentiment has been echoed by others in the industry. Some CEOs have told The Post that until those valuations come down, consolidation is less likely to happen.

Smart Mobile CEO Thomas Hundt wrote that given the present market environment in Cambodia, the real valuations of many companies may be below their shareholders’ original investment.

Consolidation in these circumstances would then lead to write-offs, according to Hundt.

“That is likely the biggest obstacle for further consolidation,” he said.

But at the same time, some Cambodian telecoms have the backing of deep-pocketed shareholders, which allows them to wait for better prices or forego an acquisition entirely, Hello’s Perkins said.

For Hello, that shareholder is Malaysia’s Axiata Group, while Viettel, a subsidiary of the Vietnamese military, owns Metfone, Thaicom controls Mfone, and Vimpelcom runs Beeline.

Cambodian conglomerate Royal Group owns CamGSM, which operates under the Cellcard brand, though Telkom Indonesia officials said earlier this month it intended to buy a 51 percent stake in the company. No deadline has yet been given for the deal.

Perkins said the industry was closely watching a potential deal for CamGSM.

Marc Einstein, a telecoms analyst with Frost & Sullivan in Tokyo, agreed that valuations weighed on Cambodia’s mergers and acquisitions market, but he also stressed it would be some time before the industry shrunk as expected.

He said the Kingdom’s high level of competition reduces a company’s earnings visibility, leaving buyers wary of making a move. Volatility in subscriber numbers and revenues per user adds to that concern, he said.

Einstein also said most companies entering the market have a medium- to long-term outlook, which further slows any short-term M&A activity.

He predicted it would take five to 10 years before three to four “sustainably-profitable operators” were left in the market.

“Consolidation in telecom is something that takes years, not months,” he said.

Mark Hanna, Chief Financial Officer at Royal Group, the owner of CamGSM, said there may come a point where some investors stop putting money into their companies, as some of them continue to operate at a loss.

As a result, he said the case for consolidation was less compelling then the possibility a number of Cambodian telecoms may simply close their doors.

“There might be one or two deals,” Hanna said, “But companies will fold.”

Smaller firms lack the critical mass of subscribers that would make them attractive takeover targets, limiting possible mergers, Hanna said.

Also, many companies’ market shares overlap, he said.

Different telecoms’ cell-phone towers and other infrastructure already operate in the same areas, meaning the buying company wouldn’t gain any additional coverage with an acquisition.

Hanna said gaining another company’s frequency is one of the only positives from a merger right now, such as if a second-generation wireless operator bought a company that operated a third-generation network.

That was the case in the Smart-Star Cell merger, where Smart gained a 3G license, while taking a 75 percent stake in the merged company.

But Smart CEO Hundt also said that the two companies’ market footprints were complementary, creating “an immediate substantial coverage add-on.”

“Both companies were relatively young with limited legacy, which supported a fast and swift integration,” he said, adding: “Smart sees itself ready for further consolidation as an active participant.”