All eyes on U Mobile

This week, significant developments took place at U Mobile Sdn Bhd that will change the dynamics of this company and possibly the whole local telecommunications industry.

U Mobile’s two major shareholders, namely, Tan Sri Vincent Tan Chee Yioun and Tunku Tun Aminah Sultan Ibrahim, got the green light for loans from two local banks to the tune of RM3.8bil to buy a controlling stake in U Mobile from Singapore’s Straits Mobile Investments Pte Ltd, an entity that is ultimately owned by Temasek Holdings (Private) Ltd.

Following that, Telekom Malaysia Bhd (TM) said it would terminate its 5G access agreement with Digital Nasional Bhd (DNB), and instead access 5G services through U Mobile.

These developments are significant.

It signifies that the two major local shareholders of U Mobile are going for broke to take U Mobile to the next level.

It does reduce the likeliness of these majors selling U Mobile to another telecommunications company (telco), which seems to have been the theme for some time now.

And with TM poised to become U Mobile’s key 5G access customer, the latter’s business model as both a mobile operator and a second 5G network operator, could just work out.

This is notwithstanding the challenges that the incumbent 5G network operator, DNB, has been facing.

Market observers are keen to figure out the valuation of U Mobile when the Singaporean stake is sold to the Malaysian parties.

The joint press statement by the two banks agreeing to provide the loan, namely, Affin Group and MBSB Bank Bhd merely states that their syndicated facility will “support Mawar Setia Sdn Bhd’s (the vehicle of Tan and Tunku Tun Aminah) acquisition of over a 50% controlling stake in U Mobile” and that “proceeds from the facility will part-finance Mawar Setia’s purchase of shares from Straits Mobile Investments”.

At present, U Mobile’s key shareholders are Straits Mobile Investments (48.26%), His Majesty Sultan Ibrahim, King of Malaysia and Tunku Tun Aminah (22.31%) and Tan (13.66%).

Hence, it is difficult to pinpoint exactly how many of U Mobile shares are being sold by the Singapore party to the Malaysians, and in fact, the debt from the banks could be only part-financing the equity transaction.

Be that as it may, it has been reported that U Mobile was being offered to Maxis Bhd at a price tag of some RM14bil, for which the latter was not willing to pay.

Telcos are valued on the basis of their enterprise value to their earnings before interest, taxes, depreciation and amortisation (EV/Ebitda), as this takes into account things like the huge upfront capital investments, the long asset lives and the high usage of debt, as well as the cash flows that they generate.

In Malaysia’s case, the main telcos of Maxis and CelcomDigi Bhd trade at an EV/Ebitda of between seven and nine times.

It is likely that the supposed RM14bil price tag of U Mobile was at an EV/Ebitda valuation that was higher than the incumbent telcos.

Valuations are also a sticky point when it comes to listings.

Investors may not be willing to pay more than current telco offerings on the local stock market.

But perhaps the U Mobile business model is different.

Perhaps, it will be successful in building out the second 5G network in a cost-efficient way, and that its own mobile offerings, already dubbed an aggressive disrupter in the market, will help it nudge its prospects and valuations up.

And this is where the TM involvement comes into play.

TM and U Mobile are more like challenger mobile operators in a market dominated by Maxis and CelcomDigi.

The writing was on the wall when it came to TM’s exit from DNB and entry into access agreements with U Mobile.

Last year, U Mobile signed a RM2.4bil, 10-year deal with TM to use the latter’s infrastructure for the 5G rollout.

Also, TM in DNB, had to sit among bigger mobile operators.

Why not join another challenger player? Both can help each other fight the bigger boys.

At its press conference this week, TM’s group chief executive officer Amar Huzaimi Md Deris made it clear that the decision to opt out of DNB and go with U Mobile was based on a plan that best fitted its long-term competitiveness, adding that he believes U Mobile has been performing well.

But TM’s move to leave DNB is being questioned by some quarters. (Incidentally, TM will be forfeiting some RM127mil of prepaid capacity charges it had paid to DNB).

As DNB had been a government-led initiative for the country’s rollout of 5G infrastructure, why should another government-owned entity be allowed to ditch it?

TM remains a government-linked company by virtue of Khazanah Nasional Bhd being its major shareholder.

Others wonder if TM was instructed by some higher powers to leave DNB and go with U Mobile.

But TM is also a publicly listed entity that needs to operate in the most commercially viable way for the benefit of all its shareholders. Perhaps, its management thinks that it will do better by joining forces with U Mobile.

Incidentally, TM is still a big beneficiary of 5G, as it leases out its infrastructure to both DNB and U Mobile, in a perfect makan dual kali scenario.

TM has a small mobile offering in terms of market share but that fits into its converged strategy and this is why it is pursuing 5G access.

As for U Mobile, Tan and Tunku Tun Aminah’s plan to buy more of Temasek’s stake is also to fulfill regulations that require local ownership for key infrastructure assets such as 5G.

Temasek had long been a shareholder in U Mobile, having also injected a lot of capital into building the telco up.

It is left to be seen if the price it is getting for its shares will afford it any significant profits or at best merely getting its capital back.

It is also likely that Temasek will continue to ride along with U Mobile as a minority shareholder following the sale of the bulk of its shares.

It does seem that U Mobile, which is not well known to Malaysian investors as it has remained privately owned all this while, is having a new lease of life.

Tycoon Tan’s comments when announcing the bank funding deal sums that enthusiasm up: “Malaysia’s next phase of growth will be defined by execution – building digital infrastructure that is reliable, scalable and delivered on time.

“Our focus is to strengthen governance and long-term funding support, so the management team can accelerate rollout and meet the coverage expectations set for the country’s second 5G network.

“We intend to back this with sustained investment discipline and operational focus as U Mobile advances its next stage of development.

“U Mobile has been progressing well and is ahead of the deployment schedule.”