Green Packet Bhd’s recent tie-up with South Korea’s largest mobile phone operator, SK Telecom Co Ltd, goes beyond boosting expertise at Malaysia’s largest WiMAX operator in the broadband market. The strong endorsement from SK Telecom could also open new markets to Green Packet.
Last week, SK Telecom signed a share subscription agreement to take up a 25.8% stake in Green Packet’s subsidiary and WiMAX arm, Packet One Networks (Malaysia) Sdn Bhd (P1), via the issuance of 979,474 irredeemable convertible preference shares (ICPS) of 10 sen each for US$100 million (roughly RM322.91 million). This would make SK Telecom the second-largest shareholder in P1 after Green Packet.
Puan Chan Cheong, Green Packet group managing director and CEO, is excited about the prospects of the new strategic alliance.
In an email reply to The Edge, Puan says: “It is a beginning that will definitely [act as a springboard to] P1’s plan to offer the fastest wireless broadband and best user experience in Malaysia.
“However, having partnered with South Korea’s leading telco, we do not dismiss the wonderful opportunity that has opened up for our solutions business to gain access to the South Korean market.”
SK Telecom is South Korea’s leading telco, with more than 25 million subscribers, and accounts for more than half of the local market. The company is listed on the Korea Stock Exchange, the New York Stock Exchange and the London Stock Exchange.
South Korea is perhaps the most advanced broadband market in the world, with a high broadband-penetration level of about 94% and quality high-speed broadband. SK Telecom is a unit of the SK Group, one of South Korea’s largest conglomerates, and implemented the WiMAX technology in 2006. This could present a new OEM market for Green Packet as SK Telecom’s WiBro services is a variant of the WiMAX technology.
While the finer details of the collaboration are still being worked out, Puan says the focus will be on improving network performance, innovation of new products and services, operational efficiency and aggressively capturing local and regional markets.
“P1 will also collaborate with SK Telecom for 4G wireless broadband opportunities in the Southeast Asia region. With SK Telecom, we will be more active in seeking 4G wireless broadband opportunities in Southeast Asia as part of the collaboration,” he says.
Apart from a strong presence in South Korea, SK Telecom is also looking at expanding its footprint overseas and Green Packet could ride on its expansion plan.
SK Telecom is eyeing Southeast Asia’s huge population and Puan notes that the tie-up with SK Telecom would be a win-win situation, as SK Telecom sees P1 as the gateway to the Southeast Asia market, which has good growth potential, considering the region’s broadband penetration by population averages only 3.2%.
“In return, SK Telecom’s expertise and scale will be P1’s springboard to achieve our longer-term aim to be the leading 4G WiMAX telco in Malaysia and the region,” he says.
While SK Telecom’s venture in China and the US has borne few results, the telco is still actively looking for more opportunities from abroad to widen its revenue stream. The telco’s previous foray into the US did not pan out well, with its US$400 million investment in Helio eventually being sold to Virgin Mobile USA(VMUSA) for only US$39 million in equity after a three-year struggle. SK Telecom now owns a 17% stake in VMUSA.
SK Telecom also sold back its 3.8% stake in China Unicom and has reportedly suspended additional investment in its Vietnam joint venture, S-Fone.
The telco’s acquisition of P1’s stake dilutes Green Packet’s effective stake in P1 to 57% from 75% previously. Nonetheless, the US$100 million injection by SK Telecom will give Green Packet a much-needed boost in terms of fresh capital to accelerate its network expansion and win more subscribers in Malaysia’s underserved broadband market, which is estimated to comprise only 35% of the country’s population.
HwangDBS Vickers Research maintains a “buy” call on Green Packet, but at a lower target price of RM1.60 from RM1.75 previously, owing to its diluted stake in P1. Green Packet added half a sen to 98 sen last Thursday. The research house also notes that the price of the P1 stake was 6% below its fair value, and the purchase price implies a valuation of US$389 million for P1.
“We do not expect to raise any more capital, with the new equity investment by SK Telecom. However, over a longer term, P1 may undertake more equity fund raising for future network and business expansion. In strategic tie-ups, we now have in place a strong triangle of partners to optimise and support the P1 business,” Puan says, adding that plans to take P1 public in the future are still intact, though the most appropriate timing has yet to be decided.
However, P1’s continuing losses remain a concern. For FY2009 ended Dec 31, P1 group of companies posted a loss after tax of RM138 million. Green Packet’s net loss for 1Q2010 ended March 31 widened to RM44.4 million from a net loss of RM22.2 million a year earlier.
Puan is still hopeful that Green Packet will be able to break even in Ebitda by year-end. However, he notes that initial discussions with its South Korean partner suggest that P1 should focus on aggressive expansion and network improvement, optimising the end-to-end user experience.
The aggressive advertising and promotion plan to capture market share could affect its goal to break even by year-end.
Says Puan, “Sometimes, people forget that P1 is just one year and 10 months old. We are still going through the gestation period required of any infrastructure business before the profit comes in. We have to balance the needs of the business in the short term and what’s best for the business and our shareholders in the longer term.
“SK Telecom’s investment in P1, with the post-money equity valuation of RM1.3 billion, is a strong affirmation of Green Packet’s WiMAX business plan and strategy.”
This article appeared in Corporate page of The Edge Malaysia, Issue 813, July 5-11, 2010