Talks about mergers and consolidations have been swirling around. What are the possible scenarios and is there a case for pursuing the move?
Over two decades ago, consolidation in Singapore’s banking industry strengthened the remaining three local banks, enabling them to compete with larger foreign banks. Industry talk suggests that the local telecom sector will soon undergo a similar consolidation, potentially renewing investor interest and improving consumer offerings.
The market is now crowded with four telcos, Singapore Telecommunications Z74 (Singtel), StarHub CC3 , M1 and Simba Telecom as well as a dozen mobile virtual network operators (MVNO) ranging from MyRepublic to Circles.Life to even Changi Mobile, part of the consumer services unit of Changi Airport Group. The MVNOs included sub-brands created by existing players to go head-on with potential competitors or reach out to previously neglected market segments. For example, Singtel introduced Gomo and StarHub launched Giga! All in all, these operators are going after a market of 6 million people, where, based on a total of 9.2 million mobile subscriptions as of February, the only way to grow the business is to have each subscriber carry more than one mobile line.
Competition in the telco space started when M1 launched its operations in 1997, gaining 35,000 subscribers in its first month. It became the second mobile operator after Singtel, with StarHub joining in April 2000. The three operators then competed fiercely, painting the town red, orange and green as they wooed new subscribers and poached from rivals.
However, the competitive pressure eased off after the two new competitors gained a certain level of scale and gradually settled into an oligopoly of sorts, as shown by their healthy margins and steady market share. Along the way, their respective shareholders — including the ultimate common controlling entity Temasek Holdings — enjoyed capital appreciation and, more importantly, attractive dividend yields of more than 5% easily when interest rates were ultra-low.
As the value of the price plans offered in other markets such as Hong Kong became significantly more attractive, the government in 2016 allowed a fourth player to bid for the spectrum rights. The winner was Australia-based TPG Telecom, which subsequently structured its Singapore operations into another Australian Securities Exchange-listed firm, Tuas, and now markets itself as the brand Simba.
See also: Optus and NCS bring better 1HFY2025 for Singtel; raises ebit guidance and interim dividend
The three incumbents were initially unfazed, with management dismissing TPG as focusing only on low-end price-sensitive users and saying that they could maintain their hold over their existing user base that is dominantly built on the regular upgrading cycles, where in return for discounts on the latest iPhone or Samsung Galaxy, they tie themselves to contracts lasting up to two years.
Simba has gained a certain market share, nearly doubling its subscriber base from 487,000 as of January 2022 to 938,000 as of January this year. According to the industry regulator, the Infocomm Development Authority of Singapore, there was a total mobile subscription base of 9.8 million in January.
If measured in terms of revenue market share, the three incumbents, especially Singtel, are still domineering. According to DBS Group Research, Singtel has a 50% share, StarHub has 32%, M1 has 17% and Simba 1% as at the end of last year. Regardless, the operators are fighting it out in an increasingly less profitable market. Average revenue per user (ARPU) across the industry has dropped 30% in the last five years while return on invested capital (ROIC) dipped five percentage points. The mobile business of the three incumbents is no longer growing at a double-digit pace. Simba is, however, bucking the trend. It halved its losses in 1HFY2024 ended January to $3.5 million on the back of a 17.6% y-o-y jump in revenue to $54.7 million.
As the trend of declining margins and ARPU is already discernible in recent years, there have been occasional talks of an industry consolidation although nothing of note has taken place — except for StarHub’s acquisition of the majority stake in the Singapore broadband business of MyRepublic. The main arena of mobile remains as fragmented as ever.
If recent chatter by certain people in the know comes true, the wheels of M&A have started to turn. StarHub and M1 are said to be back at the table exploring a potential merger of their businesses, according to a May 8 report by UK-based trade publication TMT Finance, citing five sources familiar with the matter, although the discussion was said to be in early stages and thus no guarantee a deal will be inked.
In response to queries from The Edge Singapore, a StarHub spokesperson says that the company is executing “an ambitious multi-year” organic transformation, which refers to revamping its own tech platforms and systems to run more efficiently. “In addition, we continue to evaluate acquisitions to enhance shareholder value. If and when any definitive agreement or material event relating to such opportunities occurs, we will make disclosures in accordance with our listing obligations.”
All three incumbent telcos count Temasek Holdings as a controlling shareholder. Singtel is 50.32%-held, while StarHub is 56.3%-owned by various Temasek portfolios, including ST Telemedia and STT Communications. Keppel, 21.3%-owned by Temasek, holds the majority stake in M1 with Cuscaden Peak, a consortium comprising Mapletree Investments, CLA Real Estate and Hotel Properties H15 holding the minority share. Cuscaden Peak landed this role after buying over non-media, predominantly property assets of the former Singapore Press Holdings, which was a founding shareholder of M1.
The Edge Singapore contacted Temasek Holdings, who declined to comment on the matter as it is speculative. The sovereign fund’s annual report, Temasek Review, states that “the day-to-day management and business decisions of companies in our portfolio are the responsibility of their respective boards and management. Temasek does not direct their business decisions or operations”.
On his part, Keppel CEO Loh Chin Hua has kept his cards close to his chest despite numerous attempts by shareholders and analysts to get a clearer idea of his stance on the potential consolidation over the past year or so.
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For example, at Keppel’s 1QFY2023 business update briefing last April, he was asked if “pricing” was key for him to consider merger talks or if M1 is a business Keppel wants to keep for its much-talked-about Vision 2030 plan. “There is no comment that we can make, obviously, on these speculative questions that you have posed,” said Loh then.
Half a year later, at the company’s 3QFY2023 results briefing on Oct 19, 2023, when asked a similar question, Loh said: “I think we will not speculate on things that we are not in a position to speculate on. Maybe we can talk a bit more about the transformation journey that M1 has gone through and the latest updates”. Most recently, at Keppel’s AGM on April 19, Loh’s response to a shareholder’s question on whether Keppel intends to divest M1, was that the company “cannot respond to deal speculation”, minutes of the meeting read.
Overdue
Analysts covering this sector all agree that consolidation is the best option as there are several good reasons for this. “Consolidation in a sector is typically driven by weakening profitability. In the case of the telco industry, ARPU is the tea leaf that signals that shake-up is likely,” says Matthias Chan, head of equities research at SAC Capital. “It is reasonable to expect the mobile price war to persist. This further exacerbates declining ARPUs. That can only go on till a certain point … then consolidation has to be a serious consideration,” says Chan, referring to the one-third drop in ARPU over the last five years.
Saifee Hussaini, analyst at Maybank Securities Singapore, observes that the telco sectors of many Asian markets, including those much bigger than Singapore, have undergone consolidation in the past four to five years. Most are now down to two to three operators commanding a certain scale. While several markets have a fourth operator, it is often a struggling player. Such fourth operators are typically government-owned or part of a larger conglomerate.
This regional trend is still in progress. For instance, Malaysia-based Axiata Group had on May 15 announced it has entered a non-binding MOU to explore a merger between XL Axiata, Axiata’s mobile subsidiary in Indonesia, and Smartfren Telecom. Discussions are still at an early stage.
Earlier in December 2022, Celcom, Axiata’s carrier in Malaysia, consolidated with Digi.com, which was 49% owned by Norway’s Telenor. Both the second- and third-largest telcos in Malaysia — with market shares of 26% and 22% respectively — merged to create a new national leader with over 20 million customers.
Before the merger, Maxis was the market leader with 28% market share. Post-merger, the number of players in Malaysia reduced to three from four. This includes U Mobile with a 19% market share.
Saifee believes the main driver behind the broader consolidation trend is slower topline growth in mature markets and the ongoing need for significant technological investments. For over two decades, telcos have been compelled to constantly invest heavily in new generations of mobile networks. Even before new-generation networks are fully installed or amortised, equipment makers are already promoting the next “G”. Additionally, high spectrum costs, auctioned by governments, have added to the financial burden. Saifee notes that regulators, having introduced competition, are now open to the opposite approach. “They want telcos to generate a decent ROIC so they can invest in futuristic technologies,” he adds.
Echoing the same sentiments, RHB Bank Singapore says the current industry make-up is not sustainable, given the structural cost pressures on one hand and already high mobile and fibre broadband penetration on the other. “Consolidation could be a way to address these challenges for all players.”
UOB Kay Hian’s Chong Lee Len and Llelleythan Tan agree that over the short to medium term, the industry is “crowded” and, therefore, should consolidate. “Although competition from MVNOs and Simba were aimed primarily at the lower-value prepaid market, existing customers from the three incumbent mobile operators have progressively traded down, resulting in the incumbents ceding market share,” they point out.
The natural assumption is that with consolidation, there will be less push to compete, and consumers will get a shorter end of the stick than before. Maybank’s Saifee does not see this as necessarily the case. He observes that competition following the previous instances of consolidation has improved. “We also see a limited risk of competition worsening as well. Assuming Starhub acquires M1, we don’t see it dropping the M1 brand, and as such, M1 could remain an aggressive challenger in the low- and mid-end market that Simba is targeting,” he says.
Consolidation contender
Most commentators suggest that StarHub is the most likely and eager candidate to initiate consolidation, as it seeks new growth opportunities after one of its key pillars, cable TV, was overtaken by new viewing habits and business models. Nikhil Eapen, who became CEO in January 2021 amid industry challenges, is described on the company profile page as a former Citigroup investment banker who has “worked with senior executive teams to make synergistic investments in infrastructure, enterprise communications, and technology.”
StarHub has often signalled to the investment community it is “ready and able” to do deals, as seen most recently at its 1QFY2024 results briefing. While no deals are known to be imminent or finalised, M1 is the most likely entity to be combined with StarHub.
Maybank’s Saifee says a StarHub-M1 combination is the most logical. “They are of decent size, each with 20%–25% market share, and have an extended network footprint to drive capex and opex synergies.” Given the strategic fit, RHB similarly likes a merger between StarHub and M1, as both companies already share their 5G networks. “Assuming StarHub acquires M1 and factoring in targeted synergies at half that of regional telco consolidation experiences, we see 23%–43% earnings accretion in FY2025 to FY2027,” Saifee adds.
Despite Keppel’s careful stance of not saying much more, DBS’s Sachin Mittal and Ho Pei Hwa believe Keppel could be interested in selling. They note that M1’s earnings recovery from mobile roaming following the pandemic is almost complete so Keppel can ask for a higher valuation. Also, M1’s strategic shift to the enterprise market has already borne fruit with revenues nearly tripling since it was privatised in February 2019. The overall trend is that Keppel has embarked on an asset-light strategy to monetise non-core assets; M1 can be considered as non-core to Keppel’s transformation to become a global asset manager.
In their scenario analysis, the DBS analysts assume that StarHub can acquire M1 at a 7–8 times EV/Ebitda using 100% debt financing. “M1’s present book value is estimated to be slightly over $1.3 billion after divestment of its network assets. Hence, Keppel could seek a minimum enterprise value of $1.7 billion, including M1’s debt,” estimate Mittal and Ho in their May 14 report.
For the merger, they assume a revenue uplift of 0.5%–1.0% for StarHub in FY2025–FY2027 from cross-selling fixed broadband, cybersecurity, and other solutions. “We estimate consolidated opex savings of 3%–5% in FY2025-2027. Both companies have overlapping enterprise business units with significant room to cut costs. The number of retail shops in adjoining areas will also be reduced while headquarters and other fixed costs will also be reduced considerably,” they note.
UOB Kay Hian analysts Chong and Tan agree that StarHub-M1 is the likeliest scenario, given existing capex and operating cost synergies. The combined mobile market share of 46% in Singapore will not face regulatory risks, unlike any merger deal with the number one domestic mobile operator Singtel, which already commands 46% of the domestic mobile market share.
Analysts also agree that StarHub has the financial muscle to do a deal. “With a Net debt/Ebitda ratio of around 1.4 times and StarHub management’s stated comfort with this level increasing to around 2.5 times if the right investment opportunity comes along, we believe StarHub could be a consolidator,” says Dan Baker, analyst at Morningstar. “By balance sheet size, it is logical that Starhub will be the leading contender for M1 and other peers from a business standpoint,” says SAC Capital’s Chan.
Other possibilities
There are differing views, though. In Morningstar’s Baker’s view, Simba, the fourth mobile operator, would be the most likely target for StarHub, although its strong share price appreciation, up 138.1% over the past 12 months to change hands at A$4 as of May 21, would make such a deal expensive.
While he sees Simba’s spectrum assets as attractive for StarHub, he is less excited about its customer base, which is seen as more price-sensitive and the comprehensiveness of its installed network. “We expect the customer base will potentially have a higher churn, and the network may not be easy to integrate with StarHub’s existing mobile networks,” says Baker.
Given how hard the Singapore regulators worked to get a fourth entrant into the market back then, it is unclear how they would react to such a merger proposal if it came about. “As a general rule, we think the other non-consolidator market players are more certain beneficiaries of market consolidation as it usually leads to a less competitive pricing environment, and they get that for free,” says Baker.
Common business sense might suggest that Singtel, the market leader, won’t sit still and let its competitors unite and become stronger. However, analysts point out that Singtel is more focused on new growth areas, such as its regional data centres and reaping dividends from its investments in the faster-growing regional associates. Singtel is hampered by its domestic mobile market of nearly 50%, and any acquisition would be an open season for regulators to breathe down hard. “Any further entrenchment of its market share may involve closer scrutiny,” says SAC’s Chan.
Singtel may deem it unnecessary to acquire a less profitable business and weigh down its existing franchise just for the sake of bulking up. DBS points out that Singtel’s mobile in Singapore commands an ebitda margin of 37%, versus 20% managed by the competition. “Admittedly, Singtel commands higher-end consumer and enterprise customers but it also reflects the sub-optimal scale of StarHub’s & M1’s business,” says the DBS analysts. On the flip side, a StarHub-M1 combination will have room to improve its profitability.
In an interview with The Edge Singapore, Singtel’s CFO Arthur Lang candidly says that his company will not be able to participate in any consolidation here, given that it is already the largest player. “But, what we can do, is prepare for a potentially larger number two player. We’re increasing our agility and we want to keep our cost structure lean so that we can have better margins if the competition comes together. If it doesn’t, it’s ok, we are stronger, leaner.”
Hold the call
If consolidation does not happen, analysts expect the industry to find it harder to reignite investors’ excitement. At their peaks, Singtel traded at $4.43 in April 2015, while StarHub changed hands at $4.62 in May 2013. They closed at $2.40 and $1.25, respectively, on May 21. “We see overall telco revenue growth to remain relatively subdued in Singapore owing to high market maturity and elevated competition at the lower end of the market. We expect top-line growth at low single-digit,” says Maybank’s Saifee.
Yet, he has “buy” calls on Singtel and StarHub for different reasons. For Singtel, he sees the potential Optus makeover as a catalyst, as elevated investments and negative incidents suffered by the company’s Australia unit in the last one and a half years weighed heavily on Singtel’s stock. Optus had already announced an active network partnership with TPG, which Saifee deems as positive.
“We also see a rational competition in various SingTel exposed markets (Australia, Indonesia, Thailand and the Philippines),” says Saifee, who expects Singtel’s earnings to grow at a CAGR of 16% over FY2024–FY2026,” says Saifee.
For StarHub, he sees steady earnings growth of 10% over FY2024–FY2026. StarHub is approaching the tail end of its DARE+ investment cycle so Saifee believes this should allow for “superior” earnings growth to resume starting in FY2025.
See more:
M1 in state of constant flux to stay nimble amid intense competition
More profitable FY2025 seen for StarHub on earlier completion of revamp
Singtel shifts from transformation to growth; seeks better dividend generation
