Deals

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Singapore's smallest telecom company has a ringtone loud enough to be heard in a coalmine in China's Shanxi province.

Shanxi Meijin Energy Co. is among bidders for M1 Ltd., which has a 24 percent share of Singapore's wireless market, roughly half of industry leader Singapore Telecommunications Ltd. China Broadband Capital is also in the race, according to a Bloomberg News report Thursday.

The telecom operator’s largest owners -- Axiata Group Bhd., Keppel Telecommunications & Transportation Ltd., and Singapore Press Holdings Ltd. -- disclosed last month that they had appointed Morgan Stanley to help with a strategic review, including a possible sale.

M1, which has a market value of S$2 billion ($1.4 billion), is on the block because it's the most vulnerable to the impending entry of a fourth player. A unit of Australia's TPG Telecom Ltd. won the bid in December to become Singapore's fourth telco.

More competition could put at risk a part of the S$69 to S$70 SingTel and its smaller rival StarHub Ltd. garner from each of their postpaid customers every month. But M1's average per-user revenue was only S$58 last year. Unlike its rivals, it neither has other telecom markets to run to, nor a pay TV business to cushion the fall. Further price erosion would be risky.

A Modest Service
M1 garners less revenue per customer, on average, than its bigger rivals
Source: Company reports

So why are Chinese bidders, as well as Bahrain Telecommunications Co. and private equity funds, circling? What M1 lacks in competitive standing, it more than makes up for with capital efficiency. SingTel uses 43 times more capital to earn 25 times as large a profit.

Small Is Beautiful
Singapore telco M1 is nearly twice as deft in using capital as its largest rival
Source: Bloomberg
*SingTel data are for financial years ending in March of following year; figure for 2016 is average of three quarters.

A sale would suit M1's owners. Axiata may be reluctant to pile on more debt to buttress its 29 percent stake. Meanwhile, Keppel T&T, which is controlled by rig builder Keppel Corp., could do with a decently priced disposal of its 19 percent holding. While Nomura Holdings Inc. says the funk in offshore drilling activity has run its course, crude oil prices aren't exactly surging.

Holding on to a non-core business that faces an uncertain future may not be prudent. Besides, Temasek Holdings Pte, Singapore's state investor, might want Keppel to get prepared for a long-drawn slump in oil rig demand by monetizing the telecom investment. 

M1's return on capital is among the highest in the developed world, according to Credit Suisse Group AG telecom analyst Varun Ahuja. That may not last, but an 80 percent dividend payout policy still gives it the ring of an attractive wealth-management product.

Or at least that's how it may sound from afar to Chinese coal investors.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net