Telstra-San Miguel venture a bumpy, costly ride – think tank
MANILA, Philippines – The anticipation over a possible joint venture between Australia’s largest telecommunications firm Telstra Corporation and the country’s diversified conglomerate San Miguel Corporation might turn out to be a letdown due to a dragging dispute on 700 megahertz (MHz) spectrum and an expected large cash burn.
It was in August when Telstra (led by its CEO Andrew Penn), disclosed that it is eyeing a partnership with San Miguel to provide 4G mobile broadband services.
San Miguel’s Ramon Ang even announced at the Forbes Global CEO Conference in October that his company will launch a third major telecommunications player in the country by 2016.
But for Australian telecommunications think tank Creator Tech Pty Ltd, Telstra’s possible joint venture with San Miguel could result in a costly failure.
The Australian firm said, previous attempts by Telstra to move into offshore markets have resulted in costly failure, allegations of corrupt payments, and ignorance of endemic business practices in target countries.
"The Philippines move, based on our preliminary study, looks like it could suffer the same fate," Creator Tech Principal Steve Mackay said in a statement on Tuesday, December 15.
Large cash burn
The possible wireless joint venture does not appear to be underpinned by sound analysis of the huge costs as well as logistical and cultural hurdles, according to Creator Tech’s Mackay.
Telstra in October told the Australian Securities Exchange that it has set aside $1.5 billion in capital for mergers and acquisitions for the rest of 2015. The bulk of the capital may reach the Philippines through a possible joint venture with San Miguel, Telstra said.
Mackay said that based on his report, Telstra’s announced budget of around $1.4 billion for a 40% share in a possible joint venture with San Miguel could blow out to 3 times that estimate.
Ongoing 700 MHz dispute
Mackay said in his more detailed analysis that neither San Miguel nor Telstra have disclosed the value of the 700 MHz (megahertz) spectrum whose ownership, currently with San Miguel, is in dispute.
"The spectrum is important because without spectrum, there is no 4G service,” Mackay said. (READ: 700 MHz band to aid smartphone penetration uptake – Ericsson)
Based on current exchange rates, Mackay said his firm estimates the possible value of this asset to be in a range of $912.45 million to $2.75 billion.
"Spectrum cost alone could wipe out the $1.4 billion that Telstra has in its Philippines war chest," he said.
Mackay said he was concerned that Telstra shareholders had not been made aware of two major factors that could impact on the telco’s planning.
One of these is the possible legal action of Philippines Long Distance Telephone Company (PLDT) and Globe Telecom Incorporated against National Telecommunications Commission (NTC) seeking for the regulator to order San Miguel to re-allocate ownership of critical 700MHz spectrum and to put it to public auction.
Another is that the foreshadowed legal action will be lengthy and costly and is likely to overlap the national elections in May 2016, Mackay said.
"Telstra could be facing a whole new set of case law and government regulations covering telecommunications in the country after the court case and the national election," Mackay added.
San Miguel holds most of the 700 MHz in addition to its 800,1800, 2300,and 2500 frequency bands.
PLDT, meanwhile, has rights to 800 MHz, 900 MHz, 1,800 MHz, and 2,100 MHz bands. Globe holds 900 MHz, 1,800 MHz, and 2,100 MHz bands.
PLDT regulatory affairs and policy head Ray Espinosa earlier said they are considering legal action against an NTC official, following his published statements on the state of the 700 MHz radio frequency.
No spectrum, no joint venture
"The challenge is that without [the] spectrum, there is no mobile business possible so it is a uniquely important input for the mobile infrastructure operator," an analysis report from Creator Tech stated.
Rappler tried to reach NTC for comment on the re-allocation of the 700 MHz, but to no avail yet as of press time.
As early as 2005, PLDT and Globe wrote the NTC requesting for an allocation and assignment of frequencies within the 700 Mhz and 800 MHz for their broadband wireless network. They have not received a reply from NTC yet, Globe and PLDT said.
For think tank Creator Tech, Telstra had clearly been attracted to the Philippines market because of the undoubted growth potential in the relatively unsophisticated market.
However, Mackay said there are many traps waiting for the unwary outsider – "including a very different regulatory regime and the sometimes ‘creative’ way in which business is conducted."
"Telstra directors bear ultimate responsibility for management’s actions which can seriously sully the reputation of the business enterprise concerned in any corrupt activity – witness the fallout from the Australian Wheat Board’s corrupt payments to Saddam Hussein’s regime in Iraq," Mackay said.
Since the announcement in August, there has been no progress disclosed by both Telstra and San Miguel on the possible wireless mobile venture yet. – Rappler.com
Andrew Penn photo from Telstra website