After two years of speculation, an alliance between Malaysian communications providers DiGi and TIME dotCom (TdC) has finally come to fruition. Under the agreement to share resources, DiGi gains access to TdC's 3G spectrum while TdC will be able to expand its services by using DiGi's wireless infrastructure and distribution networks.
The deal will see DiGi issue TdC 50.25m new shares, a 6.5% stake in the company valued at $327m. The new shares bring TdC's overall stake in DiGi to 10%.
DiGi, currently owned by Norwegian telecoms group Telenor, has operated in Malaysia since 1999. In 2001, Telenor received government approval to increase its stake in the company from 32.9% to 61%, making it the first telecoms provider in Malaysia to be majority foreign owned. A recent ruling, however, has required Telenor to reduce its stake in DiGi to 49% by end of the year. The stake offered to TdC is part of a move to comply with the foreign ownership regulations.
TdC, while debt-free, has accumulated losses currently totalling $590mn. Khazanah Nasional, the investment holding arm of the government, which holds a 65% equity stake in the company, has made it clear that it wanted to restructure the company by year end. The restructure is one of a number of government linked company (GLC) transformations being encouraged by Khazanah, with recent success stories such as Malaysia Airlines and the construction group Gamuda. TdC should greatly benefit from the new partnership, as DiGi's parent company Telenor has a proven track record in the broadband and fixed line markets overseas.
Analysts have said that TdC is sitting on an underutilised fibre optic system, and suggest that a strategic tie up with DiGi will bring in the resources and capacity required to effectively roll out its 3G services.
DiGi is the newest and fastest growing player in the mobile market, having increased its number of mobile subscribers from 1.1m to 6.1m over the past five years - an increase in market share from 16% to 28%. However, two years ago DiGi failed on its bids to secure 3G and Wimax licences, and is the only Malaysian mobile operator without a 3G concession. Maxis and Celcom, its two main rivals in the mobile market, both have 3G licenses, which they secured in 2002.
The company has stated in the past that not having a 3G license has put a constraint on new subscriber volumes, as it loses out on potential new subscribers who want services such as such as video calls and internet browsing. In addition, by not being able to offer 3G-related postpaid services, DiGi currently has the smallest postpaid average revenue per user (ARPU) in the market.
DiGi has announced that it will now be launching its 3G services by mid-2008 and will be investing $237mn over a three-year period towards a full roll out.
Overall, DiGi has proven itself to be an aggressive player and trendsetter in the market, and analysts believe that its entry into the fixed line and broadband sectors will bring a welcomed increase in competition. The Malaysian government has stated that it would like household broadband penetration to reach 50% by 2010, a significant increase over the current level of 13%.
Morten Lundal, CEO of DiGi, told local press, "DiGi's entry into the broadband market will drive competition and expansion [...] Broadband growth is seen as important by all."
The benefits of competition were underscored by other key players in the sector. Zainal Amanshah, Group CEO of REDtone, a Malaysian start-up telecoms provider, told OBG, "More competition in the market overall is a good thing, as it brings in innovation, customer service, healthy pricing and other benefits."
DiGi has stated it is looking forward to the introduction of mobile number portability (MNP) in 2009. MNP allows customers to switch networks while still being able to keep their existing mobile number, the lack of which has been a strong deterrent for customers considering switching providers in the past. As DiGi is considered to offer some of the more attractive packages and pricing in the market, analysts believe it is the best positioned to win migrating customers once the ruling comes into effect.