BUYING AUSTRALIA'S NO. 2 TELECOMMUNICATIONS COMPANY created an unexpected problem for Lee Hsien Yang, CEO of Singapore Telecommunications, Southeast Asia's biggest company. Now when he and his family visit their second home in Perth, Australia, Lee finds that he is recognized in public. "I've lost my anonymity," he confides. "I have to wear sunglasses and a hat."
Lee might want to consider wearing a disguise back home in Singapore as well -- at least when meeting with SingTel shareholders. On March 26, 2001, he bid 16 billion Australian dollars ($8.7 billion) for Cable & Wireless Optus, or fully five times the book value of the loss-making Sydney-based telecom. In the week that followed, disgruntled investors wiped out 4.5 billion Singapore dollars ($2.5 billion) -- or 25 percent -- of SingTel's market value. And in the 18 months since announcing the Optus deal, SingTel has seen its share price plunge a further 57 percent; in late October the stock was trading at S$1.45, or 81 U.S. cents.
At the company's annual meeting in late August, shareholder Lim Cheng spoke for many present when he lamented that "from a blue chip, SingTel has become a penny stock." One Singapore telecom analyst, who wishes to remain anonymous, says that the fund managers he deals with are "once bitten, twice shy: At the extreme end, some investors say they won't touch SingTel again."
Luckily for Lee, SingTel's dominant shareholder -- at 67.5 percent -- is the government of Singapore, and it appears to have remarkable patience. But should the company's minority shareholders also give Lee the benefit of the doubt?
A former brigadier general with an honors degree in engineering from Cambridge University and a master's in management from Stanford University, Lee boasts a pedigree as sparkling as his résumé. He is the son of Singapore's founding father, Lee Kuan Yew, and the brother of Finance Minister and Deputy Prime Minister Lee Hsien Loong, and he shares one Lee family trait in abundance: self-confidence. SingTel's bright red annual report and ubiquitous advertisements proclaim it "Asia's leading communications company."
Lee defends the Optus deal as "significantly transforming SingTel" and dismisses analysts and portfolio managers fixated on next quarter's profits as shortsighted. "It is very easy if you want to show a short-term number just to cut some of these longer-term projects," he told Institutional Investor during an interview (see box) in his 27th-floor office at SingTel's impressive headquarters. "I'm not sure that the shareholders really want management to act in that manner, either."
Certainly, SingTel's dominant shareholder doesn't object to focusing on the far horizon. Investors suspect that the Optus acquisition and a string of telecom takeovers preceding it ultimately derive from efforts by the government to enlist SingTel in its ongoing campaign to transform Singapore Inc. into Singapore International by building an external wing onto the country's increasingly constrictive economy. Government officials deny that SingTel is an agent of public policy. Moreover, Lee points out that some time ago SingTel concluded on its own that it needed to break out of its tiny home market, where growth is cramped by a population of just 4 million and virtual saturation of the telecom market.
SingTel's foreign expansion policy, as guided by Lee, calls for setting up telecom operations throughout South and Southeast Asia, where market penetration of mobile phones and cable and the like is comparatively scant. Mobile phone penetration in India, for instance, is 0.7 percent; in Thailand, 20 percent; and in the Philippines, 15 percent.
Since 1993 SingTel has invested $12 billion overseas, mostly in Asia. It bought 29 percent of Globe Telecom in the Philippines for S$468 million in 1993. Six years later it paid S$870 million for 21.5 percent of Advanced Information Services in Thailand. Both were promising mobile phone network operators that SingTel figured it could help turn into market leaders. In 2000 SingTel bought 28.5 percent of Bharti Tele-Ventures in India, that country's top mobile phone operator, with a market share of 22 percent, for S$1.1 billion. Of course, in spring of last year, SingTel paid, or overpaid, the A$14 billion for Optus. And in late 2001 SingTel bought 35.4 percent of Indonesia's No. 1 telecom, Telekomunikasi Selular, for S$1.9 billion.
Singtel on one occasion bought outside Asia as well. In 1996 the company paid S$930 million for a 49 percent stake in Belgium's Belgacom, which has 4.8 million fixed lines and 22,296 employees, and in 2001 had a net profit of $439 million.
Not all of SingTel's foreign forays succeeded. In early 2000 it lost out to Pacific Century CyberWorks in an attempt to buy Hong Kong's dominant telecom, Cable & Wireless HKT. Pacific Century played on SingTel's government ownership to turn public opinion against the bid. And later in the year SingTel pulled out of an agreement to acquire a stake in Malaysia's Time Engineering, a mobile phone operator and owner of a fiber-optic cable network, because of a dispute over the price.
"SingTel is one of the Singapore companies that seems to feel a need to move out of its domestic market, and this has been done in rather an aggressive fashion," observes Devan Kaloo, a portfolio manager with Aberdeen Asset Management in Singapore. "Certainly, though, they have paid over the odds for a number of acquisitions, particularly Optus."
Lee has endured harsh criticism before. When Singapore's sweeping deregulation of telecommunications took place in 1997, skeptics wondered whether slow, stodgy SingTel could survive an onslaught of competition from fleeter-footed rivals. SingTel's robust defense of its home turf surprised everyone but Lee. "Look at analysts' reports two years ago and what they thought would happen," he says. "You can't find a single analyst who was bullish enough to come close to the numbers we are at today."
Indeed, SingTel holds an impressive 50 percent share of Singapore's mobile phone market postderegulation, despite stiff new competition from StarHub, a local company, and M1, a consortium that includes the U.K.'s Cable & Wireless and Hong Kong's Pacific Century CyberWorks (a 30 percent share) as well as Keppel Telecommunications & Transportation (35 percent) and Singapore Press Holdings (35 percent), both owned by the Singapore government. Most impressive, SingTel's margin on domestic earnings before interest, taxes, depreciation and amortization is an astounding 54 percent.
LEE IS SURPRISINGLY SHY, NOT AT ALL LIKE HIS charismatic, headmasterly father. Nor has he as forceful a personality as his brother. He is uncomfortable being photographed and dislikes talking about his private life. Lee is married with three children. After Cambridge (class of '79), Lee joined the army, taking a year off to earn his MS in management science at Stanford in '89. Lee spent 15 years in the military; his last post before joining SingTel in 1994 was as director of the joint operations and planning directorate.
Lee's first job at SingTel was executive vice president of local services; a year later he was named CEO. Lee Kuan Yew wrote in his memoirs, From Third World to First: The Singapore Story 19652000, that Hsien Yang had "the potential to be head of the civil service but preferred the challenge of the private sector."
The younger Lee has found challenges in profusion: the deregulation of Singapore's telecom market five years ago, the Asian financial crisis starting that same year, the dot-com implosion beginning in 2000, the surge of negative sentiment toward telecom companies generally and, now, the battle to make Optus pay off.
SingTel is not unscathed, as its battered share price attests. But it appears to have emerged in better shape than many of its global peers. For one thing, SingTel resisted getting caught up in the bidding frenzy for 3G telecom licenses in Europe, which has left other telecoms buried in debt. Lee reasoned that he needed to keep SingTel tightly focused on its Asian expansion strategy.
Like virtually every major telecom, SingTel has seen its earnings eroded sharply in the global downturn. Analysts' consensus forecast for earnings per share for the current fiscal year is half what it was a year ago, largely because of the drag from Optus-related expenses. In SingTel's fiscal first quarter, which ended in June, earnings slumped 37.3 percent, to S$377 million, as interest costs and goodwill charges from the purchase of the Australian telecom pushed down performance. Still, SingTel easily beat the consensus forecast of S$331 million, because earnings from core operations remained solid while costs were tightly controlled and earnings from overseas affiliates surged. Asia, SingTel's stomping ground, continues to rebound. And as Lee is quick to note, while the MSCI telecom index is down more than one third this year through late October, SingTel's share price has fallen less than 20 percent.
It may not qualify as a glowing endorsement, but even skeptical telecom analysts now allow that SingTel's shares have fallen so far in the past five years (from S$2.70 in October 1997 to S$1.45 late last month) that the downside risk is limited. In an August report, Morgan Stanley & Co., which advised SingTel on the Optus purchase, concluded that "the bad news seems to be priced in, leaving room for optimism."
SingTel's better-than-anticipated financials for the fiscal first quarter prompted other analysts to at least entertain the possibility of improved prospects. "An end to disappointments?" asked UBS Warburg's Singapore-based telecom analyst Keith Neruda in a moderately positive report in August. "SingTel's core telephone revenues rose 2.2 percent quarter-on-quarter against our expectations of flat or falling numbers," wrote Neruda. "These results confirm that SingTel's operations are stable and that careful cost controls can mitigate any weakness in revenue growth going forward." Salomon Smith Barney analyst Anand Ramachandran praised SingTel's results and gave it an outperform rating.
"Look at what SingTel has," urges one contrarian fund manager at a major international investment firm. "It has a cash-generating domestic business and a very attractive portfolio of high-growth entities and an attractive portfolio of modest-growth entities. It's classic investment portfolio theory." The high-growth entities he refers to are Telekomunikasi Selular and Bharti; those of modest growth are Optus, Belgacom and SingTel's own domestic operation.
Lee regards Optus as the key to building SingTel into a regional telecom powerhouse with diversified, and sustainable, growth. Australia is the company's "second hub," he says. Eighteen months after the merger, Lee notes, SingTel's revenues from mobile and data services -- activities where Optus is strong -- account for 51 percent of SingTel's total sales, up from 27 percent four years ago. Buying the struggling Optus was also a rare opportunity, Lee says, for SingTel to gain control of a major telecom in a country that limits foreign participation.
But if Lee is to avoid having to wear his disguise around investors, he will need to get Optus to start making bigger installment payments on its potential. To those who voice doubts, he argues with quiet vehemence that SingTel has consistently delivered on its investments. Lee notes that in the fiscal first quarter, SingTel's overseas affiliates saw their earnings rocket 88 percent, to S$162 million, or almost half of the company's total. J.P. Morgan Hong Kong telecom analyst Edison Lee estimates that SingTel will more than triple its overseas earnings this year, to in excess of S$736 million, and grow abroad at double-digit rates over the next two years.
Few analysts or portfolio managers dispute that SingTel needs to expand outside of Singapore to keep growing. Their chief complaint is that the company has seemingly chosen to carry out this strategy by becoming the last of the big spenders in telecom.
SingTel's acquisition record to date, however, is in fact better than many critics suppose. Take Globe Telecom in the Philippines. SingTel bought its nearly one third stake in this start-up in a country of 75 million potential customers nine years ago, and for the first five years, Globe ran up relentless losses. A scandal over fraudulent subscriptions contributed to a disastrous $40.8 million loss in 1996. But SingTel, under Lee, dug in, providing Globe with technical and infrastructure expertise and helping it sharpen its marketing and customer services. Globe's ranks of mobile phone subscribers swelled from 43,000 at the end of 1996 to 5.4 million at the end of this June, a 42 percent market share. The company edged into the black in 1998 and in the first half of this year deposited $58.3 million in jangly profits into SingTel's cash box. "In terms of market cap, in terms of profit and in terms of the rating by the credit rating agencies [AA by Standard & Poor's], you'd be hard put to conclude anything except that Globe was a huge success," brags Lee.
SingTel chief financial officer Chua Sock Koong recalls that when the company bought about one fifth of Thai mobile phone operator AIS three years ago, "people said we were mad" because Thailand's economy was still so deep in the doldrums. But SingTel provided AIS with management, technical and infrastructure expertise and helped it sharpen marketing and customer service. AIS has boosted subscribers from 970,000 in 1999 to 7.8 million today and controls 62 percent of the Thai mobile market. The company's net profits in the first six months of this year were up 3.2 percent, to 4.73 billion baht ($108.5 million), compared with the same period a year earlier.
SingTel's purchase of about one third of Telekomunikasi Selular -- at a moderate 8.5 times earnings -- won almost universal approval from analysts. The potential for growth in Indonesia's mobile telecom market is huge: Penetration is just 3.7 percent. And Telekomunikasi Selular already serves half of all mobile phone users. "That is going to be the greatest acquisition that has been made in Asia this decade," says the fund manager who bought SingTel following its Optus acquisition. "It is a gold mine."
Many critics see the Optus purchase, by contrast, as just a black hole. The prevailing view is that it offers too little growth at too high a price: With penetration in the Australian mobile market at 60 percent, skeptics say the easy money in telecoms has already been made Down Under. The growth that attracted Lee has turned sluggish. SingTel-Optus CEO Christopher Anderson recently warned of more moderate growth in Australia in the next three quarters.
"It is very difficult for Optus as a No. 2 player, particularly in a market geographically as large as Australia, to generate attractive returns. They do not have the scale of the incumbent Telstra," says UBS Warburg's Neruda, referring to Australia's dominant telecom player.
Adding to the critics' misgivings, SingTel restated Optus's earnings after the takeover to bring them into line with its conservative accounting procedures. The result: A$431 million in profit evaporated, leaving an A$34.6 million loss.
Lee nevertheless promises that Optus will achieve breakeven in free cash flow by fiscal 2004. And the Australian telecom has made a good start: Its cash flow for SingTel's fiscal first quarter was negative A$28 million, down from negative A$991 million in the preceding quarter. Under SingTel's prodding, Optus reduced its capital expenditures from A$630 million in the fourth quarter to A$236 million in the first quarter.
Optus's bottom line caught analysts off guard. In its first quarter the company reduced its aftertax loss to A$42 million, down from A$75 million in the fourth quarter. Optus's operational ebitda margin rose 2 percentage points, to 22 percent.
"The turnaround is starting to surprise," declares SingTel-Optus CEO Anderson. "For the last 11 quarters, we have taken market share from our major rivals, and we're still growing at twice the industry average."
Optus's 34 percent share of Australia's mobile market (versus Telstra's 48 percent and Vodafone Group's 18 percent) contributes 51 percent of its revenues; corporate voice, data and wholesale businesses account for 27 percent; and pay television and multimedia represent the remaining 22 percent.
A drag on Optus's near-term performance has been its loss-making pay television operation. The company is awaiting a decision from the Australian Competition and Consumer Commission on a proposed alliance with rival Foxtel (owned 50 percent by Telstra and 25 percent by Rupert Murdoch's News Corp.) that would enable it to transfer liability for A$619 million in movie contracts to Foxtel, Australia's leading subscription television provider. This would add about A$30 million to Optus's annual ebitda. In turn, Optus would buy back content from Foxtel. SingTel has warned that if the commission blocks the deal, it will pull out of pay television, which would mean significant exit costs and a psychological blow to Lee's master plan. But most analysts expect the ACCC to approve the alliance.
Optus may be making progress. But did Lee nevertheless pay too much for the company? That impression lingers, and it's one of the biggest hurdles that the CEO must clear to reassure investors that SingTel is committed to building shareholder value, not carrying out government policy. As Aberdeen Asset Management's Kaloo puts it, there's an absence "of comfort levels that they're not going to go out and do something silly."
Lee objects to the idea that SingTel overpaid in the first place. "It's always easy to criticize with 20-20 hindsight," he says, arguing that the acquisition ought to be assessed on the basis of information available at the time. He points out that after SingTel's bid, Optus's share price traded fractionally down, not up.
"Is that consistent with the hypothesis that we massively overpaid to acquire Optus?" he asks. "If I did pay a massive control premium, would not the share price have traded up 20 to 30 percent in line with that control premium? What I suggest is that rather than look at what analysts say, look at where the share price traded in Optus."
Lee adds, with an unexpected hint of sarcasm, that at the time of the bid the very investors now so critical of SingTel for overpaying were "trading Optus at prices not dissimilar from what we paid for it, and it was a fairly widely held stock among institutions."
Nor is Lee content to rest his defense there. He charges that analysts who faulted SingTel for paying more than five times book for Optus fail to understand the telecommunications business. Telecoms aren't commonly valued by assets, Lee notes, because their value lies in their franchise, their customer base and their brand. He says SingTel judged Optus on a discounted cash flow analysis.
After SingTel made its initial bid of A$16 billion in cash and stock, Optus's independent directors commissioned a report from Sydney-based boutique investment bank Grant Samuel that concluded that the offer was merely "reasonable," not excessive. And SingTel actually ended up paying less for Optus (about A$14 billion) because of a decline in the share prices of both companies. "There are advantages and opportunities that come by, and you decide at that point in time whether that is an opportunity that you go for," says Lee.
Opportunity doesn't always come cheap, of course, and SingTel has amassed a fair amount of debt in its foreign push. In August Standard & Poor's downgraded the company's credit outlook to negative. S&P analyst Yasmin Wirjawan expressed worries that the merger of StarHub with cable television company Singapore Cable Vision would heighten competitive pressures on SingTel in its domestic mobile and data businesses, which generated 29 percent of the company's revenues in fiscal 2002. And in Australia's uncertain economy, she saw potentially slower sales growth crimping improvements in Optus's profit margins and delaying the telecom's turnaround.
But S&P's most ominous criticism was that SingTel's consolidated financial profile had significantly weakened following the Optus acquisition. "With consolidated net debt of S$10.1 billion at the end of fiscal year 2002, SingTel's adjusted net debt to ebitda has increased to 3.1 times from a net cash position," the rating agency warned.
SingTel is committed to maintaining its AA bond rating, and it has some financial flexibility. For instance, Lee is mulling the disposal of Singapore Post, the nation's postal service, and SingTel Yellow Pages, businesses that together are worth $1 billion. But some investors fear that SingTel may need to cut its 4 percent dividend and use the cash to pay down debt.
Lee, characteristically, dismisses the views of the rating agencies as "almost completely academic." He notes that SingTel's debt has an average maturity of eight years and that the company doesn't have to raise significant funds in the near future. "Bear in mind that some equity investors tell us that we are undergeared," says Lee. "The market will make its own judgment, and in the recent S&P downgrade, the market moved 1 or 2 basis points, which is a day-to-day fluctuation in the marketplace anyway."
Indeed, if SingTel were to be downgraded another notch, it would not be a fatal blow. "I'm sure the bondholders wouldn't like to see it, but if SingTel went from AA to A+ or from A+ to A, it's still one of the best balance sheets in the industry today," says Gokul Laroia, a Singapore-based investment banker with Morgan Stanley. "To my mind it would have no material impact on the way they can continue to run the business and the way they deploy free cash flow. Arguably, a lot of people would say a single-A rated telco is a more optimal [financial] structure than a double-AA rated telecom in any case."
Investors may take some persuading to accept this thesis. "In an environment where fear is ruling, it is harder for an investor to make a decision to buy SingTel, which has taken on more debt than it would like," says Scott Maddock, a fund manager with Sydney's Sagitta Wealth Management. "We need to see them first work through some of the issues with Optus."
One investor who is unabashedly bullish on SingTel is Lee. In April he increased his personal stake in the company from a nominal holding by buying 200,000 shares at S$1.595 each. He won't comment directly on the purchase but notes that he believes in "value." He might have added "long-term value." Says Lee, "Many investors tell you that they are long-term investors, but I guess not so many of them really have the stomach to actually put that into effect."
One investor that would appear to practice forbearance toward SingTel is Temasek Holdings, the giant government holding company that is the telecom's largest shareholder (and is headed by Lee's sister-in-law, Ho Ching). Temasek has a substantial say in selecting CEOs and board members but otherwise professes to keep out of the day-to-day management of companies it owns. Still, it recently hired a former banker, Chris Matten, to, as he puts it, "get Temasek group companies to understand that they exist to create long-term wealth for their shareholders." The issue for SingTel's minority shareholders is how long a term it is likely to be before they see that wealth in a share price recovery.
Lee on his biggest shareholder
When Lee Hsien Yang became CEO of Singapore Telecommunications in 1995, it was a stodgy, ultraconservative government telephone and cable monopoly that knew little about competing at home, much less in the wider world. Lee transformed it into a sophisticated multinational telecom operation with an unparalleled franchise in Asia and well-honed commercial instincts.
Although SingTel had poked a toe into the Philippines in 1993 before Lee arrived, under his stewardship the company has expanded into Belgium, India, Indonesia, Thailand and, most controversially, Australia (story).
Yet even now SingTel is troubled both as an acquirer and as an investment by its government ownership. When it tried to acquire Cable & Wireless HKT in Hong Kong in early 2000 and then Optus in Australia in 2001, competing bidders used the company's majority control by Singapore to fan public opposition (unsuccessfully in the case of Optus).
As the son of Singapore founding father Lee Kuan Yew and brother of Deputy Prime Minister and Finance Minister Lee Hsien Loong, Lee can't help but reinforce the perception that SingTel is an arm of the government simply by his presence in the CEO's seat. Nonetheless, he has been able to fashion the company into an entity capable of holding its own with the world's best telecoms outside of Singapore, where his home connections don't count for much.
A former brigadier general in Singapore's armed forces -- Lee told colleagues to stop referring to him as "BG" last year and instead call him by his given name -- Lee enjoyed parachuting in the military but as a civilian has given that up in favor of scuba diving.
He recently discussed SingTel's government ownership and other issues with Institutional Investor Hong Kong Bureau Chief Kevin Hamlin.
Institutional Investor: Does being owned by the government hamper your efforts to expand abroad?
Lee: Judge that by the outcome not by the perceived handicap. Today we have the most successful regional presence in Asia. Even when [Britain's] Vodafone wanted to acquire Mannesman in Germany, the Germans had a huge outcry about foreign invasion of a German company. Vodafone is a completely privately owned company. For various reasons people invoke all kinds of bogeymen in the course of takeover battles.
Then shouldn't you be more sensitive to your government ownership and not have such people as chief of the Singapore armed forces Lim Chuan Poh on your board?
But it is not inappropriate for a majority shareholder in a company to have some representation on the board, and all our directors are very conscious of their fiduciary duties to act in the best interests of the company. Lim Chuan Poh is a senior government official. Yes, he's chief of the armed forces. But he has an MBA from Cornell University. He has a degree from Cambridge University. I mean, he's not exactly a career soldier who understands how to plan military strategy and nothing else.
Ho Ching, head of your holding-company parent, Temasek Holdings [and Lee's sister-in-law], recently said that group companies that do not perform will become "lunch." SingTel's share performance would make it among the worst-performing companies in the Temasek stable. Do you fear ending up on Ho's lunch menu?
All of us have to look at performance. There are many measures for performance. Share price is just one of them; share price vis-à-vis our peers in the industry and in the local market would be another. [SingTel's stock price was down less than 20 percent for the year through late October, while the MSCI world telecommunication services index was off 34.5 percent and Singapore's Straits Times industrial index had fallen 23 percent.] Certainly, the operating performance has to be a factor. You have to be reasonably prejudiced not to acknowledge that our operating performance in the Singapore market has been sterling and that overall we remain the most profitable company in the whole Singapore stock exchange.
Do you see light at the end of the tunnel for the telecom industry?
It's very hard to tell. Crystal ball gazing is a hazardous exercise, and I really don't want to speculate on it. But I'd say if any of the players in the industry today are well positioned to benefit from the turbulence, SingTel is one of them. We have the balance sheet to do it with, and we have diversified our business mix so that we are much less risky than we were three, four, five years ago.
