Two years after taking Maxis private, low-profile tycoon Ananda Krishnan is relisting the leading cellular network operator. The exercise will potentially see the parent company Binariang GSM degear and leave it in a solid financial position to expand its international telecoms business. The key lies in the value that the market attaches to Maxis.

When none other than the prime minister announces the listing of a company, it will attract more than the normal attention.

That was the case when Datuk Seri Najib Tun Razak, during a visit to Saudi Arabia in July, expressed to top executives of Saudi Telecom Co (STC) his wish to have Maxis Communications relisted on Bursa Malaysia.
STC has a 25% stake in Binariang GSM Sdn Bhd, the parent company of Maxis.

This immediately got CIMB Investment Bank (the lead adviser for Maxis Bhd’s listing) working round the clock. The draft prospectus of Maxis’ initial public offering (IPO) was submitted to the Securities Commission Malaysia in record time — Sept 17.

On the face of it, it may appear that T Ananda Krishnan, the low-profile billionaire who is  controlling shareholder of Binariang and Maxis, was nudged by Najib to relist the company he took private just two years ago in a RM39 billion exercise.

After introducing a series of measures to liberalise the local stock market upon becoming prime minister in April, Najib needed a mega listing to give Bursa a boost. The problem was, there were not that many big and quality private Malaysian companies available for listing.

So, he turned to an old investor favourite — Maxis.

That said, Ananda will not lose out even though his original plan might not have factored in such an early relisting of Maxis. Indeed, he gains big time on three counts.

First, he is relisting only his Malaysian telco assets whereas the Maxis he took private in 2007 included international assets.

Second, through a series of deft pre-IPO restructuring, Binariang, which he controls privately, will raise billions in cash that will enable him to retire virtually all the debt he and Binariang had taken to privatise Maxis if he chose to. In short, Binariang will be able to pay the bulk of its debts and still end up controlling 70% of the relisted Maxis.

Third, Ananda will score brownie points with Najib, who is also finance minister and who wants to put Bursa back on the radar screen of international fund managers the way Malaysia was in the 1990s. To achieve this, Bursa needs more profitable big companies.

Sources familiar with Ananda’s companies, which include listed Tanjong plc, Astro All Asia Networks plc and Measat Global Bhd, say Najib expressed his wish about the same time there was a need for Binariang to restructure its debts.

Binariang has ringgit-denominated debts of RM21 billion and US dollar-denominated debt paper of US$900 million. Sources say Binariang needed to shore up its balance sheet to continue to enjoy a debt rating of AA (2) and A (3) respectively for the ringgit and US dollar debts.

They say Binariang needed to inject more money into its Indian telco Aircel Cellular Ltd (Aircel), but it would have been difficult for it to borrow unless it restructured its existing debt. They also say the global financial crisis meant bank borrowings had become more difficult and expensive.

Financing needs
Those close to the deal say the Najib factor was not the cause for Ananda’s early relisting of Maxis.

“[It was] a combination of the financial crisis, which made US dollar borrowing expensive, and Maxis’ Indian operations requiring capital to expand market share that led to the restructuring of Maxis and listing of its Malaysian arm,” says a banker.

The Indian operation is key to Ananda’s realising his dream to have a cellular mobile empire with strong presence across Asia. When Maxis was taken private in 2007, it was primarily because the listed company would incur massive debt due to its operations in India and Indonesia, something that would dampen its share price performance. Moreover, the cash being paid as dividends could be used to fund expansion.

Binariang later sold a 51% interest in its Indonesian arm PT Natrindo Telepon Seluler to STC, leaving it and Maxis with Aircel as its major overseas investment.

As at end-December 2008, Aircel is the seventh-largest mobile wireless service provider in India, with 16 million subscribers or 4.6% market share.

While Aircel is not in the big league in terms of market reach, it has been expanding since Maxis acquired it in 2006. In 2008 alone, Aircel added 6.65 million subscribers to its operations, which cover 10 of the 23 regions in India.

Aircel has set a target of 29 million subscribers, with operations in 18 regions, by end-2009, which seems to be too ambitious as it had only 18.5 million users in 15 regions as at end-March 2009.

Although the potential for growth in the Indian market is very high, competition is heating up. There are five players with bigger market share than Aircel in India. Bharti Airtel leads the pack.

To compete aggressively, Aircel needs more capital, an aspect not all shareholders of Binariang may be comfortable with.

The biggest shareholder of Binariang is Ananda, with a 37% stake via Usaha Tegas Sdn Bhd, followed by Harapan Nusantara Sdn Bhd, with 30%. STC holds a 25% equity stake while Shield Estate NV, a vehicle linked to Ananda, has 8%.

Among the directors of Harapan Nusantara are former inspector-general of police Tun Mohamed Hanif Omar and Astro chairman Datuk Badri Masri. Both men have been long-time bumiputera partners of Ananda.

According to Rating Agency Malaysia (RAM), Aircel’s capital expansion programme over the next four years is about RM16.4 billion and this is expected to be primarily financed via additional equity and/or debt.

“In line with Aircel’s funding needs, the group’s [Binariang] debt load is expected to balloon to around RM25 billion in 2010 [from RM21 billion as at end-December 2008],” RAM stated in a note in July.

It was the rating rationale that gave the market the first indication of the need for Binariang to undergo a restructuring to give Aircel additional funds to accelerate expansion.

RAM stated that on account of a ballooning debt load and a fairly saturated and mature operating environment in Malaysia, a strong uptick in Aircel’s cash-generating ability was imperative to sustain the group’s rating.

To this end, RAM said Binariang has provided a formal commitment to preserve the group’s debt-protection measures and balance sheet at levels that commensurate with the ratings via shareholders’ staggered equity injections or subordinated loans, either for Binariang or its subsidiaries.

That got the market talking of an impending relisting of Maxis.

OSK Research was the first to come out with a report speculating the possibility of Maxis being injected into Astro. Talk also surfaced that the group’s wide restructuring would include satellite operator Measat.

In the end, it turned out to be a straight-forward listing of Maxis’ Malaysian cellular business.

Meanwhile, Astro’s board is still evaluating proposals to optimise its capital and operating structure. No details have been announced at press time.

Pre-IPO restructuring
The restructuring and relisting of Maxis are being done in a manner that will solve Binariang’s balance sheet and funding woes and give the company the flexibility to expand in India and other countries without burdening shareholders.

According to the exposure draft IPO prospectus, Maxis Communications Bhd (MCB) will list its Malaysian arm Maxis Bhd by divesting 30% or 2.25 billion shares to investors. MCB is wholly owned by Binariang.

Assuming the sale is done at RM5 per share (the low end of analysts’ expectation, which is as high as RM6 a share), the divestment will net MCB some RM11.3 billion and value the Malaysian assets at RM37.7 billion. This compares with the RM39 billion valuation of Maxis that included its entire Malaysian and overseas assets when it was taken private.

Also, prior to the relisting, MCB is undergoing a restructuring that will see Maxis acquiring assets from the parent (MCB) for close to RM4 billion and also receiving a dividend payment amounting to RM4.03 billion.
According to the prospectus, as a result of the pre-listing restructuring, Maxis will owe MCB RM4.99 billion. Maxis will seek a RM5 billion long-term external debt to repay the debt.

Apart from that, four subsidiaries of MCB — Maxis Mobile Services, Maxis Broadband, Maxis Mobile and Maxis International — have declared dividends to MCB to the tune of RM4.03 billion before the upcoming listing.

Of this amount, some RM2.84 billion was paid in cash. The remaining RM1.18 billion will be settled by Maxis from the RM5 billion borrowing.

According to the prospectus, the dividends were declared by utilising the retained earnings of the four subsidiaries, which will come under the Malaysian arm of Maxis after the listing.

Apart from dividends from the four subsidiaries, Binariang also received dividends to the tune of RM290 million in respect of redeemable convertible preference shares in Maxis Broadband.

Ananda comes out tops
In a nutshell, even prior to the listing, MCB (which is 100% owned by Binariang) will receive RM7.84 billion in dividends and divestment of assets arising from the pre-listing restructuring. Together with the RM290 million that Binariang received for its preference shares, the total sum MCB will pay the holding company is more than RM8 billion.

Add the post-IPO proceeds of some RM11.3 billion (assuming the sale of 30% of Maxis is done at RM5 per share) to the RM8 billion and the total proceeds that Binariang will get are more than a whopping RM19 billion. That is not too far off the cost incurred by Ananda and Binariang when they took Maxis private.

Then, Binariang had piled on ringgit debt papers of RM21 billion that were used to buy out the old Maxis’ minority shareholders.

That being the case, what is the upside for Ananda and Binariang after Maxis Bhd is relisted?

Plenty.

“When Maxis was taken private, it had both the international and local businesses. Now, only the local arm is being relisted and the proceeds received will almost cover the debt incurred in taking Maxis private, if the shares are sold at RM5 and above,” says a banker.

Effectively, if the shares are sold at RM5, this will value the Malaysian operations at RM37.7 billion. When Maxis was privatised at RM15.60 per share, the company’s market capitalisation stood at RM39 billion.

Also, after taking Maxis private, STC invested a total of US$3.1 billion to take a 51% stake in Maxis’ Indonesian operations — which was the group’s Achilles’ heel — and a 25% stake in Binariang. This was done via an issue of new shares, which meant the money went to Binariang’s coffers, hence reducing its cost of taking the old Maxis private by some RM10 billion.

The funds from STC are said to have been channelled into Binariang’s overseas operations. Also, STC, together with Binariang, jointly underwrote a US$900 million loan for the Indian expansion.

“If Ananda can raise enough funds from the relisting to pay off the ringgit papers raised to fund the privatisation of Maxis, he will free Binariang from a substantial amount of debt and still end up owning 70% of a listed Maxis and 100% of MCB’s overseas arm,” says the banker.

Will Maxis fetch a good price?
But the question is, will Maxis be able to list at RM5 a share or more?

So far, based on investment analyst reports, the valuations given to Maxis range from RM4 to RM6, depending on the kind of valuation methodology applied.

According to merchant bankers, if Maxis is valued based on enterprise value/earnings before interest, tax, depreciation and amortisation (EV/Ebitda), a RM5 tag is too high as it would translate to more than nine times EV/Ebitda. (This is based on the Ebitda of RM4.4 billion Maxis registered for FY2008 ended Dec 31.)

By comparison, China Mobile, a hot favourite of fund managers, is trading at less than five times EV/Ebitda while Bharti Airtel  is trading at 8.3 times.

A more decent value, some say, will be closer to RM4 a share, which would bring down its EV/Ebitda valuation to less than seven times. This is about the valuation that Singapore’s Mobile One, which is essentially a low-growth cellular service provider, currently commands.

On the other hand, if Maxis is positioned as a dividend play, it can fetch a higher price of about RM5 a share, analysts say.

But then, they add, if an investor is looking at dividend play, there are other options available such as Axiata and DiGi (see separate story on Maxis valuations). So really, the  question that begs to be answered is, what’s the true value of Maxis?

Whatever the valuation, what will comfort investors is that Ananda has a record of creating value for his shareholders.

When he took Maxis private, it was at an EV/Ebitda of more than 10 times, a price- earnings multiple of 18.3 times and the offer price of RM15.60 was the highest the stock ever achieved after it was listed in 2002.

Many funds, such as the Employees Provident Fund (EPF) and Lembaga Tabung Haji, made respectable profits from their Maxis shares when it was taken private. So did retail investors.

Ananda, who is close to former premier Tun Mahathir Mohamad, was considered to have been generous with his Maxis privatisation offer to his shareholders.

The only blemish was that just a month later, he drew scrutiny when STC came into the picture, paying US$3.1 billion for stakes in Binariang and its Indonesian operations. Cynics had said Ananda had taken Maxis private to enable him to sell a stake in Binariang to STC at a premium.

But those close to him said STC did not come in at a premium. Observers also pointed out that without taking Maxis private, Ananda would not have been able to bring in STC as a partner without reducing his interest in Binariang and Maxis.

“That was why he had to take it private,” says a source.

So, with Maxis, albeit just its Malaysian assets, coming back to Bursa, will investors be willing to pay the price Ananda is seeking?

Ananda has shown from all his past deals, dating back to his takeover of the Selangor Turf Club land and its development into the Kuala Lumpur City Centre (KLCC) with the majestic Twin Towers, that he is able to get the price he wants for his assets. He sold his stake in KLCC to Petronas at an undisclosed price, but those close to him say he made a bundle.

Ananda may well get what he wants, even if Maxis is priced at a rather rich valuation.

Something that would help his cause is Bursa being hungry for a really big IPO. The last big one was the flotation of AirAsia Bhd in 2004.

And with Najib openly rooting for a Maxis listing, one can expect all the major local institutional funds to line up for its shares.

This article appeared in The Edge Malaysia, Issue 774, Sep 28-Oct 4, 2009.