This article first appeared in The Edge Malaysia Weekly on November 14, 2022 - November 20, 2022

TUNE Talk Sdn Bhd was incorporated in 2006 by Tan Sri Tony Fernandes and a group of friends to be a mobile virtual network operator (MVNO). A MVNO is a mobile service provider that does not have its own spectrum and has to rent from a mobile network operator (MNO).

In 2008, MNO Celcom (Malaysia) Bhd was invited and took up a 35% stake in Tune Talk. Having Celcom in Tune Talk was supposed to be a win-win for all shareholders. For Celcom, it meant Tune Talk would use its spectrum and this would be guaranteed revenue. For the other shareholders, it meant their investments in Tune Talk would have a better chance of doing well with a MNO as co-shareholder.

But things have since turned sour between the two groups of founding shareholders, and Celcom is caught in the middle. In its multibillion ringgit merger proposal with DiGi.Com Bhd, Celcom had included its 35% stake in Tune Talk in the calculation of valuation. That is now caught in the crossfire of lawsuits.

On one side of the dispute sits Fernandes, his long-time partners Datuk Kamarudin Meranun, Datuk Lim Kian Onn, Datuk Seri Kalimullah Hassan, Jason Lo and Mark Lankaster. On the opposite side are two well-heeled foreign investors, former Credit Suisse banker Dennis Melka and Indian-born Padda Gurtaj Singh and Tune Strategic Investments Ltd.

Fernandes and Kamarudin have a 25.14% stake in Tune Talk via Tune Group Sdn Bhd, while Lim, Kalimullah, Lo and Lankaster collectively hold 9.83%. Added up, this group has 34.97% of Tune Talk.

Melka owns 5.85% via East Pacific Capital Pte Ltd while Padda Gurtaj held 9.77% directly and Tune Strategic (founded by Datuk Mohd Aqliff Shane Abdullah) with 14.4%. Together, they have 30.02%.

Celcom with 35% is the single biggest shareholder.

The problem among shareholders unravelled publicly in October 2021, when Padda Gurtaj, East Pacific and Tune Strategic sought a court injunction to stop the sale of Celcom’s 35% stake in Tune Talk as part of the merger. The injunction was granted in March this year. (The remaining 75% stake in Tune Talk held by others was not included in the merger, partly because of an earlier separate dispute.)

According to court documents, the plaintiffs contend that changes in the control over Celcom will allow DiGi, which was named as a competitor in Tune Talk’s 2008 shareholders’ agreement, to gain an indirect shareholding in the latter. This, the plaintiffs say, goes against Tune Talk’s 2008 shareholders’ agreement.

The plaintiffs also argue that the deal will significantly reduce Tune Talk’s total addressable market, of which 50% will be co-owned by the merged Celcom-DiGi entity. They also sought to seek an injunction against Celcom or its agents from amending, varying or otherwise changing the terms on which Celcom provides network services to Tune Talk.

Interestingly, Melka, Padda Gurtaj and Tune Strategic also named Fernandes’ Tune Group, Lim, Kalimullah, Lo and Lankester as defendants, although they have not publicly declared any intention to sell their shares to Celcom.

Sources say since the lawsuit, Celcom has tried to resolve the matter and a deal has apparently been struck, whereby it will now sell its 35% stake in Tune Talk to Padda Gurtaj, Melka and Tune Strategic, possibly at RM1.10 per share, similar to what it paid to acquire the stake in 2008. In return, Padda Gurtaj and the other plaintiffs will withdraw the court case.

The original Tune Talk shareholders agreement is said to have two key clauses — any shareholder who wishes to sell its shares must first offer them to other shareholders and the price is fixed at RM1.10 unless otherwise agreed.

While Celcom may now be able to settle with Padda Gurtaj and friends, Fernandes and his group are not happy and may seek their own court injunction to block the agreement.

The two sides were already at loggerheads over a 2019 agreement for the Fernandes-led group to sell their shares to Padda Gurtaj for RM3 a share.

Under the deal, Padda Gurtaj was supposed to give a cheque (to the three parties) to close the deal within 30 days from the signing of the agreement. However, at the time, Celcom said it was against the RM3 offer and had wanted the sellers to come up with the fair market value of Tune Talk shares.

When the Covid-19 pandemic hit in early 2020, Celcom withdrew the request for the determination of fair market value. After that, Padda Gurtaj wanted to enforce the 2019 agreement, but Fernandes’ group refused, saying that Padda Gurtaj had failed to pay within 30 days from the point of signing the acceptance and the agreement had therefore been invalidated.

Padda Gurtaj has taken the matter to court to try and enforce the agreement.

Tune Talk’s filing with the Companies Commission of Malaysia (SSM) shows that the company turned profitable since the financial year ended Dec 31, 2018 (FY2018), posting a net profit of RM9.92 million on revenue of RM320.82 million. It posted a record net profit of RM62.24 million in FY2020, but this declined 39% year on year to RM38.21 million in FY2021. Revenue, however, was up 11% y-o-y to RM522.13 million in FY2021.

Tune Talk has an issued capital of 15 million shares. At RM3 a share, the company is valued at about RM45 million. Some observers say it could be worth more.

So why would Celcom agree to sell its shares to Padda Gurtaj, possibly at the original investment cost of RM1.10 a share and not include it in the merger with DiGi as originally planned?

Sources believe that Celcom is worried Tune Talk will stop using its spectrum. If that happens, Celcom could lose around RM250 million revenue a year, and this could impact how much Celcom is valued in the merger with DiGi.

As Celcom’s parent company, Axiata Group Bhd, has said it hopes to complete the merger by the end of the year, a resolution to the problem at Tune Talk has to be found quickly.

Asked to comment, an Axiata spokesperson said: “The merger remains on track and we are working to ensure all matters will be completed within the expected time period. We cannot comment further on ongoing legal matters.”

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