Merger on the cards in telecom sector

The long expected merger or acquisition in Pakistan’s cellular mobile services sector may finally materialise as Ufone’s parent company has sought proposals for advisory role for possible amalgamation or merger with another telecom operator.

“As per our channel checks, Pakistan Telecommunication Company Limited (PTCL) has issued a request for proposal (RFP) for advisory role to various financial institutions for possible amalgamation or merger of Ufone with other telecom operators,” said Topline Securities’ Deputy Head of Research Shankar Talreja.

After a long delay, Ufone finally bought 4G spectrum in 2019, which massively impacted its competitiveness, said a source in the telecom sector.

“Since eight out of 10 internet users in Pakistan access the service through mobile phones, a company which fell behind in the 4G race was long expected to be merged or acquired by another cellular operator in the country,” he said.

The source added that Pakistan also had one of the lowest ARPU (average revenue per user) in the world, which discouraged other cellular companies from expanding services in the country.

Earlier in 2015, a share swap agreement between Warid and Mobilink took place, after which Warid shareholders received a 15% chunk in the joint entity, which was rebranded as Jazz.

The acquisition of Warid by Mobilink was aimed at strengthening the latter’s position in Pakistan’s market as well as to achieve synergies through the use of a common platform.

According to a Veon report, the joint company achieved annual synergies of Rs8.2 billion through interconnections, site sharing and marketing. It also led to declaration of a dividend of Rs5 billion for shareholders after 11 years.

“Taking cue from historic transactions and globally listed peers, we believe if the transaction in question sails through, then Ufone can be valued at enterprise value to sales (EV/sales) of around 2.5 times,” said Talreja. “This translates into an enterprise value of Rs152 billion (close to $1 billion).”

After subtracting liabilities, the equity value of the company would come at around Rs76 billion or Rs15 per share, he said.

The analyst estimated the sum of parts analysis (SOTP) value of PTCL at around Rs29, a discount of 63% to the current market price, he said.

He added that the calculated SOTP value did not include any upside from property valuation of the company.

Holding companies in Pakistan were trading at an average discount of 35-40% to their SOTP value, he pointed out.

“Whether it’s merger or acquisition, we believe synergies will provide a respite to PTCL’s balance sheet,” he said.

PTCL had been injecting liquidity into Ufone due to its ever increasing working capital requirement and deteriorating balance sheet, the analyst said.

Citing figures, he said loans and advances given to Ufone by PTCL had touched Rs7.5 billion.

If Telenor and Ufone join forces, the entity will enjoy 40% of all subscribers in Pakistan.

Published in The Express Tribune, September 18^th, 2020.

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