How the PLDT-Digitel deal rocks the telco industry

By Judith Balea, abs-cbnNEWS.com

Posted at Mar 31 2011 06:11 AM | Updated as of Apr 01 2011 07:41 PM

MANILA, Philippines - Philippine Long Distance Telephone Co. (PLDT) is taking control of rival Digital Telecommunications Philippines Inc. (Digitel), a move that analysts said would reduce the mature telecommunications market back to a duopoly.

PLDT, the country's top telecommunications firm, has agreed to buy 51.55% of Digitel in a P69.2 billion share swap that will be completed by end of June.

PLDT owns Smart Communications Inc. and Digitel operates the Sun Cellular brand.

The deal means PLDT is solidifying its position in a crowded industry where price wars have eroded profit margins.

It also means that PLDT will now be competing head-to-head with second-largest telco, Globe Telecom Inc., just like in the years before 2005, when only the two dominated the market.

"You go back to a duopolistic structure," noted Jody Santiago of UBS.

While analysts believe the transaction is win-win for both PLDT and Digitel, they said it still paints a murky picture for Globe.

Santiago said margins tend to be higher in a duopoly versus now, when price competition is intense. "Globe benefits without having to spend."

But another analyst, Jose Mari Lacson of Campos, Lanuza & Company Inc., said that while PLDT won't kill competition, "growth of Globe will be limited."

Share deal, mandatory offer 

The deal with Digitel includes a share swap and assumption of its debts as well as advances made by its parent JG Summit Holdings Inc.

PLDT will acquire 3.277 billion shares of Digitel and zero-coupon bonds issued to JG Summit convertible into 18.6 billion Digitel shares. It will also absorb P34.1 billion in advances made by JG Summit and other parties.
  
PLDT will swap one new PLDT share for every P2,500 worth of Digitel assets to be acquired.
  
The company will then make a mandatory offer to minority investors to buy the rest of Digitel, with shareholders given an option to sell at a discount to market at P1.60 apiece, or swap their holdings for PLDT shares at a premium of P2,500 per share.

PLDT closed flat at P2,036 on Tuesday while trading in Digitel was suspended at the firm's request. On Monday, Digitel had surged as much as 29% to a 4-year high before ending at P1.80. 

If fully taken up by shareholders, the tender offer would bring the total value of the deal to P74.1 billion.

JG Summit would hold about 12% in PLDT after the transaction, while stakes of existing PLDT shareholders would be diluted, PLDT chairman Manuel Pangilinan said.

PLDT always the dominant

Lacson said PLDT's mobile phone market is expected to rise to a whopping 70% at the completion of the deal. The firm's dominance, however, is nothing new.

The telco industry was a monopoly of PLDT until government deregulation in 1995 which allowed more companies to enter the market and compete.

Growing competition in the market forced consolidation among players, with the bigger ones like PLDT and Globe swallowing up smaller firms.

Smart was a different business until it was acquired by PLDT in 2000. The PLDT group also established Connectivity Unlimited Resource Enterprise, Inc. (CURE), which offers the Red Mobile brand, in 2008 to go head-to-head against Sun. The list goes on.

Globe, on the other hand, bought and merged operations with then Isla Communications Co. or Islacom, and later on, migrated the latter's wireless subsrcibers to its improved Touch Mobile service.

PLDT and Globe formed a formidable duopoly that cornered 96% of the market and raked in combined revenues of over P20 billion for how many years until Sun came in.

Sun shook the mobile phone industry with its cheap call and text packages, gaining a niche market and prompting PLDT and Globe to follow suit.

However, the bucket-priced strategy began eating into the duopoly's bottomlines.

Last year, PLDT reported that its net income was virtually flat, rising by just 1% to P40.2 billion, while Globe's fell 22% to P9.74 billion.

The PLDT-Digitel deal has again assured PLDT the top spot in the market.

Scale and costs

But more than the market share, the telco giant will dominate in terms of scale and cost efficiency.

"It's a win-win for both of them. It will make digitel and PLDT bigger in terms of network size and capacity, while reducing costs. If you have bigger capacity, you have benefit in terms of scale, you can give more value proposition to you customers," said William Padojinog an IT industry analyst and faculty at the University Asia and Pacific's economics department.

"PLDT has broadband, wireless, wireline, satellite, they are affiliated with media, they have content, it's completing the whole value chain of IT," he added.

PLDT said Digitel's fixed-line operations would complement its own in terms of both geographic and population reach. It added it can now quickly provide enhanced broadband services in Digitel's service areas.

PLDT has said it would spend more this year and in 2012 to grow its broadband business amid stiff competition.

Digitel subscribers are also expected to benefit from PLDT's extensive infrastructure of fiber optic network and international cable and satellite facilities.

PLDT said it expects "significant" cost efficiences from the deal through capital optimization, co-location of base stations, consolidation of overlapping systems and implementation of shared services, to name a few.

"Telco firms are like utilities now. The only basis for this kind of service to compete is through costs. The one who can offer the lowest price will make it. If you're small, you cannot enjoy lower costs and offer more competitive pricing," said Padojinog.

Collusion

The PLDT-Digitel deal will bring enhanced services to consumers. PLDT said their combined expertise will create a more capable telecommunications company that will provide higher quality and a wider range of services from voice, SMS to data and Internet as well as video.

However, consumers are worried that PLDT would withdraw bucket-priced packages, and less competition in the market may result in an increase in prices.

"I don't know if there will be anti-competitive behavior. As long as the big players don't collude, it's good for the customers," assured Padojinog.

PLDT said it is keeping its Smart and Sun operations separate, and will maintain Sun's popular "unlimited" promos.

"Though this initiative alters the country’s telecom landscape, we expect competition within the industry to remain very robust given that other operators, including new entrants, are formidable and well-funded," said Pangilinan.

Globe President Ernest Cu said the firm would stick to its strategy and was ready to compete "to defend and grow our market share."

"This industry has always been intensely competitive, and we have been a strong challenger to a dominant incumbent all this time. We will continue to focus on delivering relevant products to our retail and corporate customers, providing differentiated customer service, and enhancing our network to deliver the best experience possible to our subscribers," Cu added.

PLDT, partly owned by Hong Kong's First Pacific  Co. Ltd. and Japan's NTT Communications and NTT DoCoMo, currently has a market value of $8.9 billion against Digitel's $269 million.
  
Globe, owned by Ayala Corp. and Singapore Telecommunications, is valued at $2.1 billion. - With reports from Reuters, ANC