Three’s a good crowd in Indonesia telecoms deal

Hutchison’s local 3 unit will make up roughly a third of the newly named Indosat Ooredoo Hutchison

  
A worker adjusts a Base Transceiver Station (BTS) on the building of PT Indosat in Jakarta May 7, 2010. REUTERS/Crack Palinggi

A worker adjusts a Base Transceiver Station (BTS) on the building of PT Indosat in Jakarta May 7, 2010. REUTERS/Crack Palinggi

REUTERS/Crack Palinggi

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

HONG KONG - Sometimes it’s good to share, even with rivals. Qatar’s Ooredoo and Hong Kong conglomerate CK Hutchison on Thursday agreed a deal to combine their Indonesian mobile carriers, forming a $6 billion number two player with about $3 billion in revenue and significant synergies. If past industry deals in similar markets are a guide, this combination will lift rivals’ revenue and cut their costs too.

Hutchison’s local 3 unit will make up roughly a third of the newly named Indosat Ooredoo Hutchison. The Hong Kong group will pay $387 million on top to end up with a 50% stake in Ooredoo Asia alongside its Qatari partner. Ooredoo Asia will in turn hold 65.6% of the still-listed mobile carrier.

The deal reduces to three the number of Indonesia’s mobile carriers with a double-digit market share: Telkomsel, part of state-backed Telkom Indonesia, will have about 45%, the expanded Indosat 31%, and XL Axiata 15%, estimates Citi analysts. Smartfren brings up the rear. The confidence gained from fewer players helps those remaining be more rational in their spending plans, lowering costs.

The market share figures don’t however reflect any potential shifts in share following the merger. The sale of pre-paid SIM cards in Indonesia far outstrips the number of handsets, suggesting a high degree of SIM swapping and a risk that some Indosat and Hutchison customers turn to a rival for their second provider. Citi reckons that could cut revenue at the new Number Two by up to 11% over two years, based on past tie-ups in similar markets including the Philippines, India and Indonesia itself.

Any top-line struggles will be compensated to a large degree if the new operator can live up to its punchy synergy forecasts, with annual savings estimated to reach between $300 million and $400 million in the next five years. Double the combined company’s first-half EBITDA for a 12-month run-rate of $1.7 billion, and that implies a material boost is coming. Past telecoms combinations have shaved more than a third off the operating costs of those businesses, according to Daiwa analysts, so it may not be a stretch.

Indosat’s shares slipped on Friday, perhaps reflecting the scale of their 166% rise since a combination with Hutchison was first mooted in December. Rivals were trading slightly higher. This could be one of those rare deals where everyone wins something.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Antony Currie and Katrina Hamlin) ((For previous columns by the author, Reuters customers can click on HUGHES/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | jennifer.hughes@thomsonreuters.com; Reuters Messaging: jennifer.hughes.thomsonreuters.com@reuters.net))


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