Recently what Genting SP/Genting Bhd/GenM, YTL/YTLE and MPHB/U-Mobile Have in Common?

1. YTLP/YTLE: Possibility Of Using YTLP As A Vehicle To Spearhead The Group Venture Into WIMAX Services (YTLE).
2.Genting SP/Genting Bhd/Genting Malaysia: Rights Issue By Genting SP!!! Its Purpose!!!
3. MPHB/U-Mobile: The Way The Deal Was Crafted Gvie Rise To Speculation That It Is One Friend Helping Another!!!

YTLP/YTLE
dated Sept 2009 ...

YTLP’s announcement on June 2009 that it had bought a 60% stake in YTL Communications Sdn Bhd for a mere RM300,000 from YTL E-Solutions Bhd (YTLE) barely made a blip on investors’ radar screen.

Indeed, the amount paid was a drop in the ocean when you take into account the sprawling size of the YTL empire. Thus, not many paused to think why Malaysia’s IPP was acquiring a subsidiary whose core business was wireless broadband.

So the question now is, what is the rationale for the acquisition? How does it fit into YTLP’s future plans? And of all the companies in the group’s stable, why YTLP and not YTL Corp Bhd. YTL currently holds 51% of YTLP and 74% stake in YTLE.

YTLP’s plans for its new subsidiary are still unknown and company officials were not available for comment. However, a widely held view among is that the move was to tap into YTLP’s strong cash reserves.

Industry observers were surprised by the possibility that YTLP may be used as a vehicle to spearhead the group’s venture into WIMAX services.

The biggest concern is that YTLP’s dividends may be at risk. YTLP is known for its good dividends, offering a yield of between 55 and 7% over the past two years (2007-2008).

Capex for WIMAX is still uncertain, but assuming RM500 million per annum as reported, this will reduce its free cash flow estimate by 50% to 70% as WIMAX is not immediately income generative.

*** To recap, YTLE was one of the four operators awarded WIMAX license by MCMC. YTLE has yet to roll out the service, but has plans to spend RM2.5 billion on WIMAX over then next five years, with RM1 billion to be spent in the first year alone ***

So why was YTLP picked over others in the YTL group?

Industry observes say YTLP is the most logical candidate after taking into account the cash positions of all the YTL companies. YTLE certainly does not posses the financial cloud to fund such venture at this point in time.

The reason YTLP was a favourite was its solid fundamentals, anchored by the only take or pay power purchase agreement in Malaysia. Aside from power YTLP is also the concession holder for Wessex Water in the UK.

For its FY2009 ended June 30, 2009, its deposits, cash and bank balances stood at rm5.97 billion. In comparison, its parent YTL’s cash pile was RM430 million while YTLE’s cash amounted to Rm1.13 million.

Despite a net gearing of 2.8 times, YTLP’s debts are mostly on a project financing basis serviced by the free cash flow of the respective IPPs and Wessex. Full conversion of warrants due in Jan 2010 will raise a further Rm980 million.

So YTLP definitely has the funds to drive the YTL group plans for WIMAX. However, will such a move go down well with YTLP’s shareholders and is it truly in the best interests of Malaysia.

But for YTLW, the sand in the its hour glass for rolling out WIMAX is fast running out. The MCMC has the right to take the spectrum back if the players are unable to meet the required 25% coverage by 2010.

Industry observers see this as a negative development as investors have viewed YTLP’s utilities earnings as defensive. Instead YTLP is extending from a business that provides recurring income streams to one with highly uncertain revenues – a new telecoms operation, which has yet to fully kick off even in the developed countries.

Genting SP/Genting Bhd/Genting Malaysia
dated Sept 2009 ...

The question weighing heavily on investors is its ultimate effect on parent Genting Bhd. Genting Bhd being the majority shareholder, how will Genting Bhd finance its portion of the rights issue?

Will there be more cash calls by its Singapore unit, given that the latter just had one two years ago?

Will it tap Genting Malaysia Bhd’s – more than RM5 billion cash hoard?

Most agree that Genting Bhd will have little problems in raising borrowings to answer the cash call.

However, other possibilities have also been bandied about. This includes Genting Bhd making its own cash call, but industry observers feel that this would be an unlikely move. But most seem to concur that 48.5% owned Genting Malaysia cluld end up playing a role.

This is because at company level, Genting Bhd holds only Rm310 million in cash, deposits and money market instruments as at end FY2008. Genting Malaysia in comparison held RM3.2 billion for the same corresponding period. As at end June 2009, Genting Malaysia’s cash holding amounted to Rm5.1 billion.

The notion of Genting Bhd tapping cash rich Genting Malaysia is an intriguing one, given that it can be done in a number of ways. There is always an intercompany loan or upstreaming cash in the form of dividends alternatively Genting Bhd could raise convertible bonds on its stake in Genting Malaysia.

Doing an interco with Genting Malaysia are unlikely to look into kindly on such an exercise.

But what could possibly appease Genting Bhd shareholders is if the company took the upstreaming cash route. As cash rich Genting Malaysia is, the one sticking point was Genting Malaysia’s dividend payout. Most agreed it was decent, but payout had been very little as Genting Malaysia is said to be hoarding cash for M&As opportunities. But it is unlikely that Genting Malaysia will suddenly give a bumper or special dividend.

Tapping Genting Malaysia’s cash hoard will not be the best use of funds, given management repeated intentions to undertake M&A that will likely generate a bigger earnings accretive effect.

However, industry observers do not rule out a combination of debt and tapping Genting Malaysia’s cash pile to cap Genting Bhd’s gearing ratio. If Genting Bhd chooses to fund the exercise purely by borrowings with a financing cost of 7%, forward earnings could be cut.

Another possible impact on Genting Malaysia from this exercise is not just monetary. To recap, Genting Singapore says in its statement to the SGX that it plans to use 60% of the funds from the rights issue for expansion. It would appear that Genting Malaysia’s role as the group’s flagship M&A vehicle is under threat as its related companies may be vying for similar assets.

By Moody’s Investor …
Moody’s Investors Service does not expect any immediate impact on GENTING BHD’s Baa1 issuer and senior unsecured debt ratings or on the stable outlook, following the announcement that its 54%-owned subsidiary, Genting Singapore plc, is to raise gross proceeds of up to S$1.63 billion (RM3.99 billion) through a rights issues.

The rights issue was fully underwritten by eight banks and the proceeds would be used by Genting Singapore for future investments and working capital requirements. Moody’s expects Genting will fund its portion of the investment, about S$840 million, by a combination of debt and internal reserves.

Expecting Genting will have to raise approximately S$600 million of debt to fund its portion of the rights. While this will increase its gross debt at the issuer level, the rights issue will improve Genting Singapore’s liquidity positions and to some extent reduce its near-term debt funding requirement.

On a consolidated basis, Genting’s net debt position will modestly improve as a result of the equity contribution from minority shareholders.While part of the proceeds from the rights issues were reserved for potential acquisitions, Moody’s learnt that there was no immediate investment target.

The core rating driver for Genting remains the successful execution of its business strategy and ramp-up of the integrated resort project at Sentosa, Singapore.Partly mitigating the concerns, construction risks associated with the Sentosa project have been lowered, as 60%-70% of the physical construction has been completed, while phase I of the project will likely open on time in 1Q 2010.Moody’s last rating action with regard to Genting occurred on Aug 20, 2007, when the company’s Baa1 issuer and debt ratings were affirmed with a stable outlook.

MPHB
Dated Sept 2009 ...

MPHB foray into the telecoms sector has raised many eyebrows. Skeptics wonder why a company with gaming as its forte is getting into the telecoms sector. More startling is that the entry is via smallish U Mobile Sdn Bhd at a time when giants such as Japan’s NTT DoCoMo and South Korea’s KT Corp are exiting.

What does MPHB see in U Mobile that KT and DoCoMo did not? Could MPHB have done it via another vehicle instead of exposing the company to risks?

The way the deal was crafted also gives rise to speculation that it could be one friend helping another.

MPHB was buying a 3.9% stake in U Mobile. It also has a “put’’ option from AmBank (M) Bhd to buy an additional 41.63% stake in U Mobile for RM280mil within 13 months should there be a default on a financing facility taken to part pay the Japanese and South Korean investors. MPHB declined to disclose the amount MPHB paid for the 3.9% stake.

If the put option is exercised, MPHB gets 45.53% stake in U Mobile for a song in comparison to the US$200mil (RM750mil) that U Television Sdn Bhd (UTV) has to pay the Japanese and South Koreans for their combined 33% stake.

U Mobile is one of four 3G spectrum holders in the country. It was assigned the spectrum in 2006 and April 2009 got two foreign investors – DoCoMo and KT – to take a combined 33% stake in the company. The remaining 67% in U Mobile is held by U Television Sdn Bhd (UTV), a company controlled by businessman Tan Sri Vincent Tan.

DoCoMo and KT each held a 16.5% stake and when exiting U Mobile, cited differences of opinion with other shareholders over management. The two are selling their U Mobile stakes to UTV for the original amount they paid, US$100mil each, or a total of US$200mil.

To pay the Japanese and South Korean investors, UTV took a financing facility from AmBank to part finance the payment and pledged U Mobile shares as collateral. MPHB’s entry into U Mobile is as a guarantor for the pledged shares; so if UTV defaults in repayment, MPHB can exercise the put option to buy the 41.63% stake in U Mobile for RM280mil.

If there is no default, MPHB will be left with a 3.9% stake in U Mobile, but ideally it would like to have about 10%-15% stake, the strategic investor about 30% and UTV the remaining 55%-60%.

The two friends here are Tan Sri Vincent Tan – who controls UTV, which in turn controls U Mobile – and Datuk Surin Upatkoon, the managing director of MPHB. Surin has an effective 34% stake in MPHB.

Tan asked Surin to take up the U Mobile shares. Surin agreed but not before getting the MPHB board’s nod. It is a friendly deal. A director of MPHB pointed out that “it is done at arm’s length.’’ MPHB views the deal as “not to help a friend, but an opportunity to get into the telecoms sector.’’

For MPHB it is a chance to get into a new business where the downside risk is minimal; U Mobile has a 3G spectrum whose potential has yet to be exploited; there is room for further growth in Malaysia’s celco sector and margins earned by celcos are the highest in the region; and this investment could be income generating even though there may be some hurdles in partnering U Mobile.

That is why MPHB took up the put option and being an investment holding company, took the plunge itself instead of using another vehicle. MPHB is also involved in the stockbroking, insurance and property sectors. So as Surin puts it, it is not solely a gaming company.

Surin is excited about the prospects the telecoms sector holds despite the huge capital expenditure needed and the long gestation periods. In fact, he has been involved in the sector via his effective 17% stake in Thailand’s Shin Corp.

Whatever the deal, what is clear is that U Mobile needs a strategic investor with telecoms expertise to drive the company forward. There have been preliminary talks and Surin has his own list of potential investors for this purpose.

The strategic investor should be given total control to develop U Mobile into a serious player in the cellular services market. Set up in 2007, U Mobile offers limited coverage and services, rendering it unable to steal market share away from the larger service providers. It currently has less than 1% of the cellular market that has more than 28 million subscribers.

With growing competition, celcos must keep their promises of quality services, cost-effective packaging and timely delivery or risk their customers switching service providers. Celcos should realise that if they cannot deliver, they should let someone else do the job. For U Mobile, the time has come for it to get its act together.

Meanwhile, preliminary talks are said to have taken place between U Mobile Sdn Bhd’s major shareholder and a Singapore telecommunications company for the latter to come in as a strategic investor with up to 30% equity stake in the former.

Names such as StarHub and SingTel have been bandied around and while the former seems a more likely candidate, the parties are not willing to confirm it. At this juncture, a lot depends on the direction of the talks and the due diligence that will be conducted on U Mobile.

But there is no denying that U Mobile needs a strong strategic investor to drive it forward to offer more than voice telephony. This is necessary since Japan’s NTT DoCoMo and South Korea’s KT Corp called it a day at U Mobile earlier Sept 2009.

U Mobile has declined comment on purported talks with any strategic investor. Multi-Purpose Holdings Bhd (MPHB), which this week bought 3.9% stake in U Mobile and has a “put” option to buy an additional 41.63% stake, also declined comment. At this stage MPHB is only involved in the put option.