SINGAPORE - While Singtel's investments in Intouch Holdings and Advanced Info Service (AIS) hold long-term strategic value, the takeover offer from Thai power producer Gulf Energy Development would provide the Singapore telco with the financial flexibility to fund its 5G investment priorities and ease pressure on free cash flow, said Fitch Ratings.
On Monday, Gulf Energy, which is controlled by Thai billionaire Sarath Ratanavadi, launched a 169 billion baht (S$7.2 billion) takeover bid for Intouch, which controls AIS, Thailand's largest mobile operator. Singtel is the biggest shareholder of Intouch with a 21 per cent stake, while also holding about 23 per cent of AIS.
Singtel's Intouch and AIS holdings offer it a stable source of cash flow, in light of AIS' entrenched position as the largest Thai mobile operator and the stabilising competition in Thailand, Fitch said. The two companies contribute 20 per cent to Singtel's total dividends received and 5-6 per cent of adjusted group earnings before interest, taxes depreciation and amortisation (Ebitda), inclusive of associate dividends, it said.
However, the ratings agency noted: "Singtel faces intense rivalry in other key markets like Singapore, Australia, Indonesia, the Philippines and India, contributing to slow recovery prospects over the next 12-18 months amid Covid-19 restrictions and structural challenges in the Australian fixed-line business."
Singtel's other capital-raising options include a potential tower sale by Singtel Optus, minority stakes in Singapore Post and Netlink Trust, and longer-term plans to monetise digital assets. "However, we have not taken these into consideration in our ratings due to the uncertainty over the timing and transaction value," Fitch said in a report on Monday (April 19).
"A disciplined financial policy remains a key driver of our 'stable outlook' on Singtel's ratings due to the low rating headroom," said Fitch.
Fitch also said that the Gulf Energy offer casts uncertainty over the shareholding structure of AIS, and it is likely to place AIS' ratings on watch should the deal lead to AIS' eventual buyout. The tender offer for all shares in AIS depends on Gulf Energy acquiring at least 50 per cent of Intouch, from 19 per cent currently.
The transaction is still at its early stage, pending various approvals, and it remains unclear how Gulf Energy intends to fund the substantial deal, and the ultimate equity interest which it will obtain in both Thai companies, said Fitch.
It added that the acquisition of Intouch and AIS would provide Gulf Energy with more diversified cash flow and a larger income base, although a debt-funded structure is likely to put additional pressure on its stretched balance sheet.
In 2020, Gulf Energy generated an Ebitda of 13.5 billion baht (S$574 million), a fraction of AIS's 76.6 billion baht. However, Gulf Energy's net debt-to-Ebitda ratio was 8.8 times compared with AIS' 1.0 time.