Telekom Malaysia Splits


Economic News

22 Jul 2010
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Telekom Malaysia, the country's largest telecommunications provider, has announced that it will split its mobile and fixed line businesses into two separately listed companies.

The demerger will see Celcom, the company's domestic mobile arm, absorbed into TM International, creating a separate regional and mobile focused holding company called RegionCo that will be publicly listed in the first half of 2008.

The fixed line business of the company will be undertaken by an entity called FixedCo, which will serve the domestic Malaysian fixed line voice, data, and broadband markets.

The split entities will each have separate management teams, and details of the share distribution and capital structure will be revealed at the end of the year.

According to Telekom, RegionCo will be focused on becoming a regional mobile champion with strong exposure to high growth mobile markets while FixedCo will focus on growing the domestic broadband market.

Abdul Wahid Omar, Group CEO for Telekom, told OBG, "Mobile is growing very fast across the region. Malaysia is becoming saturated, with 80% penetration levels, so we are looking further abroad. International markets now account for 30% of our profits, and we expect even further growth and for these markets to account for 50% of our profits in the next three years."

TM International already has a total of 31.8m mobile subscribers across markets in Asia including Indonesia, Sri Lanka, Bangladesh, India, Cambodia and Singapore, with year-on-year international subscriber growth of 33.1%.

Wahid told OBG, "We will expand the presence in countries we are in, and spot new countries for entry. We have developed skill sets in Malaysia that can be applied overseas. For South and South East Asia especially, we have learned how to generate returns in low cost markets and can manage low margins."

Meanwhile, Telekom has a 95% market share in the fixed-line market in Malaysia with 4.4m fixed-line subscribers and a 96% share in broadband business with 1.1m broadband subscribers.

In Malaysia, the fixed line business has long passed its growth phase and broadband is considered the strongest growth opportunity considering the country's current household penetration level at just 12.8% and year-on-year growth of 66.8%.

Najib Tun Razak, the deputy prime minister, recently unveiled that an ambitious $4.2bn project to roll out high-speed broadband services across the country has been awarded to Telekom. Under the arrangement, two thirds of the financing will be provided by Telekom, with the remaining third provided by the government. The project is anticipated to take over 10 years to complete, and is part of a national government objective to have household broadband penetration reach 50% by 2010.

Telekom stated that the demerger makes sense given that each company will be involved in its own areas of business and each has its own capital management requirements. It said the demerger will provide RegionCo with a more attractive acquisition currency in the form of its own listed shares and greater access to equity markets and increased flexibility in funding. As Wahid told OBG, "Going overseas is about timing. You have to get in when the price is right."

The morning following the announcement of the split, Telekom saw its share price jump by 11%, the biggest gain in over a decade.

According to analysts, RegionCo is considered to be the more appealing of the two companies in terms of earnings growth potential. Broadband service, which is FixedCo's most promising project, has yet to bring in a significant contribution and currently supplies only 5% of overall revenue. Some time is expected before it adds significantly to the company's profits. As such, analysts have labeled RegionCo a growth stock and FixedCo a dividend stock.

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