In-depth: GULF likely able to acquire and consolidate INTUCH into a stronger investment

The surprise tender offer by energy giant Gulf Energy Development Plc (GULF) for the shares of telecommunication giant Intouch Plc (INTUCH) is likely to be successful, industry sources say.

GULF on Monday morning surprised the market when it announced a tender offer for all the shares it does not own in INTUCH at 11.11 per cent higher than the 58.50 baht closing price on Friday.

Industry sources said there is every likelihood that GULF’s tender offer could be successful even though INUTCH’s major shareholder Singapore Telecommunication (SINGTEL) stated that it views the Thai business under INUTCH to be “strategic”.

The offer price of 65 baht is relatively in line with some brokers’ target price of INTUCH at around 66 baht, including the one by Maybank Kim Eng in a recent note to clients. TISCO Securities issued a 12-month target price of 68 baht a piece.

But not all analysts see GULF’s bid as a fair price for INTUCH. Prasit Sujiravorakul, analyst for the telecom sector at Bualuang Securities, said his 12-month price objective of INTUCH stands at 89 baht a share, a 37-per-cent premium to the tender offer price by GULF.

But the reason for the bidding by GULF is not just offering fair price to retail investors who own INTUCH shares, but more to do with the financing cost for the acquisition by GULF.

“I would say that there is a reason for the 65-baht offer from GULF, and the reason is that INTUCH is a cash cow that has been churning out dividends,” an industry source said.

“At 65 baht a share the dividend yield is about 3 per cent and the cost of bridging the loan for GULF for one year is about that level and it would be the reason why the price has been set at 65 baht.”

INTUCH has been paying dividends in the range of 2.50 to 2.70 baht annually and has one of the better dividend-payout ratio of more than 70 per cent annually. A bulk of their dividends are derived from the subsidiary Advanced Info Services Plc (ADVANC), the country’s largest mobile phone operator.

Balance sheet shoring up

The move to acquire the cash-rich INTUCH is like killing two birds with one stone, industry insiders say.

Firstly is the fact that debt-free INTUCH (total debts as of end 2020 stood at 8.5 billion) would be consolidated into the highly indebted GULF (173 billion baht in the red as of end of 2020). If GULF is able to get 50.01 per cent of INTUCH it would be able to consolidate the books and it would be “like two giants joining hands to become a bigger giant,” one source said.

Bualuang Securities estimates that GULF’s total liabilities are likely to rise to 197 billion baht during this year, whereas it estimates INTUCH’s debts will fall to 8.1 billion baht in 2021.

A consolidation of the books would also mean that GULF would be able to lower its debt-to-equity ratio and also help it leverage for building on more debts to be able to pursue expansion, which has recently seen a slowdown.

Analysts have said that in their view the key reason for the acquisition of INTUCH by GULF is purely for “decorating” its balance sheet, and other sales pitches are purely “add-ons” that may or may not happen.

GULF has also been pitching its ability to use more than 50 million customers of ADVANC (40.45-per-cent owned by INTUCH) to be its possible customers, when the electricity distribution becomes goes from being B2G to B2C.

B2G is business-to-government, which means selling to government-linked organizations. Currently all electricity generation within Thailand and the electricity supply that Thailand buys from the neighboring countries are sold to the Electricity Generating Authority of Thailand (EGAT) which then uses the Metropolitan Electricity Authority (MEA) or Provincial Electricity Authority (PAE) to send it to the consumers or the so-called last mile transmission.

B2C is the business-to-consumer model, which is the way things have gone globally. Thailand is set to have a liberalization of electricity in the years ahead although no concrete plan has been laid out on exactly how or even when.

In a conference call to analysts on Monday, GULF’s chief executive officer Sarath Ratanavadi stated that he foresees INTUCH to be the digital platform for GULF and hopes to create a future synergy, although he did not provide details.

CLSA Securities in a note to clients said that another key point is that INTUCH has a database of around 40-50 million clients, which is deemed very valuable for GULF once the electricity market goes into the B2C form or towards a greater use of renewables and batteries.

The broker said that during the conference call GULF’s Sarath “truly believes that the retail consumer market will help offset long term no growth in the enterprise power plant business + other traditional company that relies only on the adder which is a frontend loader.”

Replicating regional models

Although Thailand has never seen a joint effort by a utilities company and a mobile telephony firm, GULF wants to replicate the business model seen in other countries, notably Singapore.

Utilities and mobile companies in Singapore have been using the so-called ‘synergy’ model to tap into the business of consumers. CCompanies such as SINGTEL have a collaboration with Tuas Power under the so called ‘Singtel Power’, and M1, another mobile phone operator owned by Keppel Corp., is collaborating with Keppel Power.

This is something that could help the company expand its ability to bundle packages for utilities and mobile along with broadband to household going into the future.

CGS-CIMB, a broker, said that having a digital platform could help GULF reach retail clients in the electricity business more easily. This is where INTUCH may be able to offer synergy or business enhancement in the future since INTUCH invests in a variety of tech start-ups and ADVANC has a large client base.

GULF’s Sarath has categorically said that his firm was not interested in acquiring ADVANC or the loss-making THCOM and that the tender offer was just for INTUCH shares. That is the reason why the tender offer for the shares of ADVANC and THCOM were at an unattractive price, far below the market valuation. GULF has to bid for ADVANC as the rules of the bourse which stipulates due to the chain principle given their big size.

The tender offer price for ADVANC is 122.86 baht a share while on April 16 the shares of ADVANC closed at 168 baht per share. The 122.86 baht is the 2020 book value of ADVANC on the books of INTUCH.

Financing the acquisition

GULF has said that the tender offer will be financed by debt. It will be financed by a one-year bridging loan and then bond issuance or bank loans thereafter (expected interest rate of 2-3 per cent). GULF claims that it has room to borrow 120-170 billion baht more debt (based on debt covenant of 3.5x D/E).

Brokers say that assuming SINGTEL won’t sell its stake (21 per cent), GULF, in the worst case, could end up with 70-79 per cent of INTUCH shares that may cost GULF 146-165 billion baht.

SINGTEL has already come out to say that it views the Thai business as “strategic investments and we believe in the long-term outlook of the businesses.” It added that it would not sell at the 65 baht offer price and that the offer price is a mere 7 per cent higher than its cost of 60.83 baht a share.

GULF has said that this acquisition would not require the firm to raise capital and all things should be cleared by July 2021.

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