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Boost seen for telco sector

Posted on March 31, 2011

BATTLE LINES have been redrawn in the country’s telecommunications sector, analysts yesterday said, with a takeover deal seen as having injected new life into a price-war hit industry.

Shares of the top two players soared after Tuesday’s announcement that Philippine Long Distance Telephone Co. (PLDT) was taking over third-ranked Digital Telecommunications Philippines, Inc. (Digitel), essentially leaving the market to the dominant telco and rival Globe Telecom, Inc.

"PLDT killed a competitor in a deal that basically injected new life into the Philippine telecom industry," said Jose Vistan, research head at AB Capital Securities.

"With less players, we will likely see more pricing power for both PLDT and Globe," Mr. Vistan said., in a report to clients, said PLDT was "strengthening the moat" in that the transaction would also hold off rival San Miguel Corp. -- the conglomerate that it has battled with for control of firms such as Manila Electric Co.

"[W]e can’t discount the fact that San Miguel, PLDT’s main rival in everything, could have secured a major foothold in telecoms if it gets to acquire DGTL (Digitel). So it is an anti-competition move, and probably a warranted one," the brokerage said.

Ramon S. Ang, chairman of San Miguel which has diversified into telecommunications, among other industries, told reporters in an e-mail that plans to build a new mobile network remained in "full swing."

"Konting tiis na lang (Be a little more patient), our services will soon make a huge difference," Mr. Ang said.

Gokongwei-owned Digitel’s cheap mobile offerings via its Sun Cellular brand had sparked a price war that eventually eroded telecom firms’ margins in the country’s saturated mobile market. Service revenue at both PLDT and Globe fell in 2010.

PLDT on Tuesday said it would be acquiring a 51.55% stake in Digitel from parent firm JG Summit Holdings, Inc. in a P69.2-billion transaction. A mandatory tender offer to minority investors, if fully taken up, would push the value to P74.1 billion.

The National Telecommunications Commision (NTC) yesterday said it would have to approve the deal since the ownership change involved a sale of more than 40%.

CitisecOnline estimated that the deal would give PLDT and its mobile unit Smart Communications Inc. 70% of the market, up from 51% previously, with Globe taking 30%.

After a brief trading halt yesterday, PLDT jumped as much as 17% to P2,380, a seven-week high, Second-ranked Globe climbed as much as 20.6% to its highest in nearly five months at P900 before closing at P842, a gain of almost 13%.

"Globe Telecom, without having to go through any form of dilution or spending a single peso, gets a free ride from the PLDT-Digitel transaction," AB Capital’s Mr. Vistan said.

RCBC Securities Inc., in its daily stock market guide, also used the "free ride" term, noting that Ayala-owned Globe will "also be relieved of the current price competition posed by DGTL’s Sun."

"We expect revenues to resume growth due to improved pricing flexibility going forward and profit margins to recover as a result," it added.

CitisecOnline said the PLDT-Digitel deal "can also be potentially positive for Globe, as it will also revert the industry back to a comfortable two-player market, albeit now heavily in favor of PLDT."

Globe, in a statement on Tuesday, said, "We stand ready to compete, and to defend and grow our market share."

Shares in Digitel, meanwhile, fell as much as 15.8% to P1.55 per share yesterday after PLDT offered to buy the rest of the firm from minority investors at P1.60 per share in a tender offer sometime in May or June.

RCBC Securities recommended that minority shareholders take the option of swapping their stakes for PLDT shares at premium of P2,500 per, noting that the the figure is a "realistically achievable price target."

Digitel’s parent JG Summit jumped as much as 12.2% before paring its gains to end 3.5% higher. JG Summit would hold 12% in PLDT after the deal and get one board seat.

CitisecOnline said JG Summit "got a very good price" noting that at P1.60 per share PLDT appears to be paying a premium for bonds and cash advances held by the parent firm that are convertible to Digitel equity.

San Miguel shares ended down yesterday at P160.20 from P161 previously while listed telecommunications arm Liberty Telecoms Holdings, Inc. ended the day unchanged at P43 per share.

Mediaquest Holdings, Inc., a unit of the Beneficial Trust Fund of PLDT, has a minority stake in BusinessWorld. -- from reports by Reuters and KAM