SingTel's Connections May Be Costing It Plenty

Now deregulated, Singapore's former phone monopoly is struggling to reassure investors that its government ties aren't binding

By Eric Ellis

Has Lee Hsien Yang dodged a bullet by bringing in 27% higher profits for Singapore Telecommunications? The youthful CEO of Singapore's biggest company turned in an impressive result on Feb. 6, when SingTel announced that it earned $1.1 billion in the last nine months of 2000 -- not bad, considering that deregulation-happy Singapore is dismantling SingTel's cozy monopoly.

Trouble is, the overall figure is propped up by a handy $145 million, courtesy of the Singapore government's telecom regulator. The payment is billed as compensation for the loss of that long-held monopoly two years earlier than expected. But SingTel is 78% owned by the Singapore government, so it's a little like robbing Peter to pay Paul -- when they are part of the same family. Strip out the windfall, and SingTel's profit was still up 9.7%, at $945 million. But those staggeringly high margins will come under pressure as Singapore's telecom deregulation progresses and the island nation's painfully high phone rates start to come down. In the meantime, the carrier's overall revenues of $2.12 billion were only 2% better than in 1999.

What's worrisome longer term about this is that Singtel is already losing business in its bread-and-butter long-distance division with deregulation barely under way. The Singaporean government has granted scores of new licenses, but only a handful are thus far operating. To ensure continued growth as upstart rivals get up and running, SingTel must quickly make up for the lost business by boosting its data and networking revenues. Singapore is Asia's self-styled "wired island" and SingTel aims to be at the center of data and Internet traffic, both domestically and around the region, as Singapore becomes a data hub for the area.


  SingTel has made a solid start to secure that role. Lee says network services enjoyed robust growth, with revenues shooting up 41%, to $444.8 million. He says this segment now accounts for 21% of SingTel's turnover, up from 15% last year, and will soon outrun long distance as its biggest single money-earner. The company also is leading a $2 billion undersea regional cable network in which it has a 60% stake. As part of the deal, SingTel is paying $400 million for a 20% stake in India's Bharti Telecom, an Indian cable and network group, while joining Bharti in a $650 million cable venture to link Singapore with Bombay and Madras, and then with Europe.

The issue of SingTel's government ownership, however, remains vexing. Lee has tried to do two big career-making deals in the last year, a merger-cum-takeover of Hong Kong's monster telco Hong Kong Telecom and the purchase of the promising Malaysian broadband play Time Engineering. But both deals were scuppered by concerns about SingTel's government parentage. That was a major embarrassment for Lee, and there was even talk at the time that he might be shifted sideways or possibly leave the company altogether.

It actually seems to hurt SingTel's case that 44-year-old Lee is the youngest son of Singapore's globally recognized elder statesman, Lee Kuan Yew. Having such a well-connected CEO at the helm of SingTel makes other governments nervous. Remarks Michael Millar of the Singapore office of SG Securities: "The loss of HK Telecom in particular was a big wake-up call for SingTel that they had to do something about the roadblock."


  The Singapore government is planning to sell down its stake in SingTel. It gives no formal timeframe, but the 49% limit on foreign ownership on telco companies was recently removed, a change designed to make SingTel alluring to strategic suitors. Prime Minister Goh Chok Tong has admitted that "it's a perception problem. We have to convince people outside, over time, that there is no political agenda."

Such actions may improve the prospects for Lee's latest big deal. SingTel is currently a front-runner to take out the 53% controlling stake of Australia's second carrier Optus, which is owned by Britain's Cable & Wireless. So far, the Australian government hasn't raised any of the same ownership concerns about SingTel that were expressed earlier in Malaysia or Hong Kong. The company is sitting on some $3.7 billion in cash, which would be just about enough to buy the Optus stake outright.

Lee could use a win. After a glittering career in Singapore's armed forces, in which he attained the top rank of brigadier-general in his mid-30s, he took over the SingTel reins in 1995. Since then, the company's profits have largely been static. Its share price, currently $1.64, has fluctuated in the $1.20 to $2 range for several years -- and this at a time when telecoms and data stocks have been generally hot, hot, hot.

His pedigree is impressive, but Lee is the first to admit that he has to deliver, just like any CEO of any big company. Singapore Inc. says it wants to be judged not just by its own standards, or even in Asian terms, but by the world's best practices of both management and corporate governance. If anything, Lee's lineage puts him on the spot to be among the first to be so judged.

Ellis is a contributing correspondent for BusinessWeek Online, based in Singapore

Edited by Thane Peterson

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