MAXIS/Astro/Measat ... Jun 09

Maxis Communications Bhd has denied reports that the company is to be relisted this year (2009) after going private two years ago. “It was just rumours,” chief executive officer Sandip Das said without elaborating.

RAM Rating Services Bhd had placed a negative outlook on Binariang GSM’s RM19bil Islamic medium-term notes programme, RM2bil Islamic commercial papers programme and RM3bil cumulative non-convertible Islamic junior sukuk due to growing concerns over the performance of Aircel. Binariang GSM is an investment holding company that had facilitated the privatisation of Maxis.

We are concerned that intensifying competitive pressures will continue to erode Aircel’s profitability and cash flows in the short to medium term, particularly as it accelerates its capital expansion programme in a bid to expand its market reach.

The accelerated rollout plan was expected to be funded with a considerable amount of debt (beyond RAM Rating’ initial expectations), which would affect the group’s debt protection level in the short to medium term.

RAM Rating also said efforts were being made by the management to get cash injection from shareholders on a staggered basis.

Speculation on the relisting of Maxis Communications Bhd, which was taken private two years ago (2007), persisted.
Industry sources indicate that Maxis may be seeking a relisting, possibly as early as September 2009.

There was a “high likelihood” that Maxis would be relisted soon, citing funding requirements at its Indian operations, Aircel Ltd, which reportedly needs some US$5 billion (RM17.5 billion) over the next three years.

Maxis will position itself as a “high-dividend yielding stock” and be listed without its operations in India and Indonesia that are still incurring start-up losses. Estimates that Maxis’ market capitalisation could potentially be between RM32 billion and RM40 billion, making it one of the five largest on Bursa Malaysia.

Both the boards of Maxis and Astro denied merger talks, describing reports of Maxis being injected into Astro as “unfounded”, “totally without basis” and “highly speculative”.

Both CIMB and Macquarie do not see Maxis’ relisting to take place via a merger with Astro.

Meanwhile, Maxis’ relisting could cap the upside for both Axiata Group Bhd and DiGi.Com Bhd as institutions are likely to reallocate funds to Maxis.. On the other hand, Maxis’ re-emergence may be negative for DiGi, due to its poor trading liquidity, and Telekom Malaysia Bhd (TM), which has the smallest market capitalisation among listed telecommunications operators.

Going Forward …

Maxis Bhd’s Indian mobile operations need fresh capital infusion from its shareholders to achieve its pan-Indian ambition, the question is, what will billionaire Ananda Krishnan choose to do next?

Management has represented that efforts are underway to obtain equity support in the form of cash injection from shareholders that would be available to the group on a staggered basis over a few years.

RAM said when it put the debt papers of Maxis’ holding company, Binariang GSM Sdn Bhd, on negative rating watch on concerns that its near term cash flow could be strained as it accelerates spending to expand its market reach in India.

Based on Indian news reports, Aircel Ltd will need US$5 billion for investment over the next three years (2010 – 2012). In March 2009, Maxis’s group CEO said that half of the US$10 billion worth of investments earmarked for Aircel had been spent thus far.

At present, Ananda controls 75% of Binariang GSM, which owns 100% of MAXIS and 49% of PT Natrindo telepon Selular. Maxis owns 74% of Aircel, while the rest is held by the Chennai based Reddy family, which controls Apollo Hospitals Enterprises Ltd and owns stakes in private power companies.

Binariang GSM has about Rm24 billion worth of debt while Maxis was relatively ungeared upoin its privatization in 2007.

It is not immediately known if the US$5 billion earmarked investment includes potential spending on a 3G spectrum. It was reported that Aircel is interested in bidding when the auction takes place. Aircel might need the 3G spectrum, given that most of its spectrum is on the GSM 1800 band.

Is there enough evidence to support rumours that Maxis will soon be refloated? Is the timing right for Maxis to be refloated in 2009? Would refloating Maxis via a merger with Astro or Measat enhance the attraction of the enlarged entity to investors?

Currently, Measat’s earnings are bogged down by high finance costs and depreciation charges, while a merger with Maxis will mean that Astro could rule itself out of a partnership with Maxis’ rivals.

Consider the mismatch in the three companies’ market capitalization: Masat, which has a market cap of just under Rm800 million. Astro’s marker cap stood at Rm6.2 billion as a June 2009. Maxis could command a market cap of between Rm28 billion and RM40 billion, but the numbers could vary, depending on the amount of debt Maxis would be carrying in its books.

Could the rational be as simple as aiming to be the largest capitalization stock on Bursa.

Does it actually make sense for Ananda to float Maxis’ Malaysian operations at this juncture when its cash flow it the only source supporting the financial obligations of some Rm24 billion of debt Binariang GSM Sdn Bhd took on to finance Maxis’ privatization in 2007

Then, there is also the possibility that more debt may be taken as some US$5 billion is needed to fund its 74% owned Indian unit, Aircel unit, over the next three years (2010-2012).

What would happen to Binariang GSM Sdn Bhd debt rating, which was put on negative rating watch on June 4, 2009, should Maxis Malaysia be floated?

If only Maxis’ domestic operations are floated and the entity is positioned as a high dividend yielding stock at a time when Aircel still needs substantial funding, does it not defeat the purpose of its privatization in 2007. Maxis was using over Rm1 billion cash a year to pay dividends in FY2005 and FY2006, almost half of the RM2 billion in annual operational free cash flow it was generating that could be used to help fund Aircel.

The largest tranche of Binariang GSM’s debt is a Rm19 billion IMTN maturing on Dec 28, 2027. The debt paper’s financing terms do not allow consolidated debt to equity ratio to exceed two times and finance service cover ratio needs to be kept at least 1.75 times for the first five years (end 2012). This may be why fresh capital needs to be injected by its shareholders. RAM says efforts are being made to get Binariang GSM shareholders to provide staggered basis cash injections over several years to preserve the entity’s debt protection ratio even as Aircel continues expanding in India.

In 2007, RAM expects cash flow from Maxis’s Malaysia operations to continue anchoring Binariang GSM’s cash flow through the year ended Dec 2012, although the acceleration in Aircel’s expansion could mean India could begin contributing positively sooner than expected.

Assuming Maxis Malaysia is able to command a Rm40 billion market ca[ its owners would need to divest 40% of Maxis to raise Rm16 billion, the same amount with which Ananda bought out Maxis’ minorities in July 2007.

No doubt, Saudi Telecom Company Ltd, which now owns 25% of Binariang GSM and 51% of PT Natrindo Telepon Selular, did chip in US$3.05 billion. But with the additional stakeholder and the time and hard work that had been put in Maxis, as a group, would nee to command a much higher valuation when it is eventually floated.

Moreover, Maxis has not been behaving like a company that is going for an IPO. It keeps information on its performance close to its chest.