Lee Hsien Yang, CEO of Singapore Telecommunications Ltd., could have been forgiven for his visible smugness during a videoconference from Sydney on Mar. 26. The deal he was gloating over, the purchase of a 20% stake in Australian cellular operator Cable & Wireless Optus from its British parent Cable & Wireless PLC, was historic by regional standards simply because of its size. SingTel hopes that the purchase will be the first step in a full-scale takeover of Optus, which SingTel values at $8.2 billion. If so, it will mark the end of an arduous, accident-prone search for an acquisition that had the potential to set the Singapore government-linked company on a regional expansion path.
Lee's most luscious victory was left entirely unmentioned: The 44-year-old son of Singapore's founding father, Lee Kuan Yew, hopes he can finally shake the image that SingTel can't cut a deal overseas unless he resigns or the government sells off its interest in the company. "As in any M&A transaction, it had its ups and downs," he said during the videoconference. "We believe the outcome is one we're happy with."
But in the six cruel days of trading that followed, stock markets passed a merciless judgment on the deal -- raising the question of whether it will even hold together. "People believe there is a risk that the deal won't go through," says Tjandra Kartika, telecom analyst at brokerage G.K. Goh in Singapore. SingTel's stock has lost about one-quarter of its value, reducing its market capitalization by $5.25 billion in just six days.
And because SingTel's offer for the stake was partly in stock, the deal may have to be reconfigured before it goes ahead. Then SingTel may have to part with more of its nearly $4 billion cash pile than originally intended. The other possibility: SingTel's controlling shareholder, state-owned Temasek Holdings, may have to give up more of its 78% stake in SingTel than planned.
Why have the markets given a thumbs down? Investors quickly concluded that the 15% premium over Optus' recent share price is too much. The fear is that SingTel was lured into overpaying to counter bids from Vodafone, which dropped out of the contest on Mar. 26. The Australian cellular market is mature, and investors are rattled by the idea that SingTel would now generate 50% of its revenue overseas -- rather than being able to rely almost entirely on its tiny but profitable home market.
SingTel also has a reputation for failing in cross-border acquisitions as a result of unsuccessful attempts in Hong Kong and Malaysia. One of the key stumbling blocks has been the government's role in SingTel's ownership and tight ties to its management. Another reason SingTel's stock is falling is that shareholders are selling it in order to purchase Optus stock, seizing an opportunity for arbitrage created by the differential in share prices.
Increasing the cash portion of the deal actually is provided for in the third of three alternative proposals described in SingTel's complex bid. That plan provides for a mix of SingTel stock, cash, and bonds. It values one Optus share at 0.54 SingTel shares, two Australian dollars in cash, and 45 Australian cents in U.S. dollar-denominated SingTel bonds. And if that doesn't work, SingTel may simply have to offer more cash to Optus' parent company, Cable & Wireless. "To the extent that there is volatility in the market, the cash will adjust as a result," says Koh Boon Hwee, chairman of SingTel.
All three companies involved are scrambling to reassure investors that the deal will go through. On Mar. 28, Cable & Wireless executives told reporters there was "no limit" and "no collar" attached to SingTel's stock in the valuation of the 20% Optus stake. But Optus also has been trounced, losing $688 million of its market capitalization since Mar. 26, giving some analysts the impression that the two stocks are now at parity. "Under current circumstances, [the deal is] likely to pull through," says Terence Tan, head of technology research at Vickers Ballas, a Singapore-based brokerage.
Much could yet go wrong in the six to eight months before the final details of the acquisition are presented to Optus and SingTel shareholders. SingTel plans to acquire all of Cable & Wireless' 52% stake in Optus and to eventually acquire all remaining shares from the public. But as arbitrage continues, it's not clear that many Optus shareholders would sell.
Still, the Singapore government badly wants this deal to work. It not only would erase the embarrassment of SingTel's ill-fated forays into Hong Kong and Malaysia but would radically expand the reach of the island nation's largest company.
By Michael Shari in Singapore
Edited by Thane Peterson