This article first appeared in The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

EIGHTEEN months after its decision to abandon the single wholesale network (SWN) structure and transition to a dual 5G network, Malaysia sprang yet another surprise by selecting U Mobile Sdn Bhd, the third and smallest of the three bidders that qualified, for the coveted second 5G spectrum bid on Nov 1.

The decision that was announced on the late Friday evening — which snubs larger rivals Maxis Bhd (KL:MAXIS) and CelcomDigi Bhd, (KL:CDB) the country’s two largest mobile network operators (MNOs) that openly resisted the SWN and were seen as the leading players lobbying for a second 5G network in Malaysia — sparked spirited conversations about the reasons behind the selection and cast a spotlight on U Mobile’s top three shareholders, including His Majesty Sultan Ibrahim, King of Malaysia, who acquired a 10% stake in 2014 but now has 22.3%.

On Saturday morning (Nov 2), U Mobile emphasised its “proven track record spanning more than 17 years” and said it would reduce its foreign majority shareholding to 20% to ensure greater Malaysian control. That means a 28.3% block — which could be worth RM2.83 billion at the RM10 billion valuation that U Mobile was said to be eyeing — could soon become available, given that Singapore’s sovereign wealth fund Temasek Holdings Pte Ltd-backed ST Telemedia Pte Ltd (STT) owns a 48.3% stake in U Mobile, according to CTOS data.

STT did not immediately state the size of its investment in U Mobile or how much it thinks its stake in the telco is worth.

Neither STT nor U Mobile had responded to questions from The Edge at press time, including whether STT had offered to sell down its stake in U Mobile as part of the 5G bid, or whether there is a deadline to reduce the foreign equity to 20%, given that Malaysia allows up to 49% foreign shareholding in telcos, a fact that Minister of Communications Fahmi Fadzil admitted last week.

The Malaysian Communications and Multimedia Commission (MCMC), which announced the selection of U Mobile, comes under Fahmi’s purview. However, he told reporters last Friday (Nov 8) that the MCMC made the award independently after a tender process and that he accepted (using the Malay word “akur”) the decision.

At the press conference, which was also live streamed via Facebook, Fahmi noted that U Mobile were among three MNOs that qualified to bid, having completed the equity subscription and shareholder advance for the SWN operator Digital Nasional Bhd (DNB).

“CelcomDigi has 18,000 towers, Maxis 12,000 towers and U Mobile around 10,000 towers — they’re around the same size,” added Fahmi, who earlier in the week had told fellow parliamentarians that U Mobile’s selection was based on several factors, including its business and technical plan, track record on complains and customer satisfaction, and performance in implementing infrastructure initiatives such as Phase 1 of Jendela and 4G network upgrades.

As he mentioned U Mobile would be getting a 3.6GHz spectrum, it is likely that the telco will be allotted 100MHz of spectrum at the 3500 to 3600 MHz frequency band. That would be half of the 200MHz of spectrum in the 3.5GHz band (3400 to 3600 MHz) that DNB was given exclusive access to when it was set up to be Malaysia’s SWN, leaving DNB with 100MHz (3400 to 3500 MHz).

Fahmi made no mention of the 700MHz (758 to 778 MHz) spectrum or the so-called millimetre wave high-band 5G spectrum (26.5 to 28.1 GHz), which DNB was also given as the independent 5G wholesale network provider.

It is understood that at least one of the larger MNOs had asked to be allowed to roll out a third 5G network.

“There is excess spectrum that the MCMC can ‘clean up’ and reassign for 5G,” says an industry insider, without confirming or denying any lobbying for a third 5G network.

“All we have is the announcement,” says a separate source, when asked for details on the conditions attached to the second 5G network awarded to U Mobile.

“We will just have to wait and see,” another source adds, corroborating the notion that “much is still fluid” and will depend on the outcomes of “successive discussions in the coming weeks, perhaps months”.

Fahmi affirmed that many details will need to be hammered out between the government, MCMC and industry players.

When asked about the conditions attached to U Mobile’s 5G spectrum award, the minister told reporters on the evening of Nov 8 that “there will undoubtedly be specific conditions” set for U Mobile but “as to what those conditions are, we need to go through the process first”.

Asked how the government will equalise or level the playing field between DNB (Entity A) and U Mobile (Entity B), Fahmi told reporters “that has not been decided yet”, adding that DNB’s board of directors, which consists of its shareholders, will decide on the process and details such as the exit price when they meet.

The government, which has a 34.88% stake in DNB via Minister of Finance Incorporated (MoF Inc), currently has two seats on the DNB board, including the chairman. Treasury secretary-general Datuk Johan Mahmood Merican was appointed as DNB’s non-executive chairman of the board effective May 20, 2024. The other board seat is filled by Ma Sivanesan, the deputy secretary-general (digital development) at the Ministry of Digital.

DNB’s remaining four board members are representatives of the MNOs that have a 16.28% stake each — namely, CelcomDigi’s chief transformation officer Datuk Kamal Khalid, Maxis Bhd’s independent non-executive director Uthaya Kumar Vivekananda, U Mobile’s founding director Kenneth Chang Yit Fei (who is executive director of U Telemedia Sdn Bhd, a shareholder of U Mobile), and YTL Power International Bhd (KL:YTLPOWR) and YTL Communications Sdn Bhd managing director Datuk Seri Yeoh Seok Hong.

There would have been five MNOs on DNB’s board with a 14% stake each — with MoF Inc holding 30% — if Telekom Malaysia Bhd (KL:TM) had completed the equity subscription and shareholder advance in August.

“We expect [U Mobile] to exit DNB, but has anyone specifically said they are required to sell DNB shares and give up their DNB board seat to be given the second 5G spectrum?” an observer asks.

It is not immediately certain if MoF Inc will be able to exit DNB without incurring any cost. It is understood that MoF Inc can exercise a put option to sell its equity in DNB and relinquish its chairmanship since a second 5G network has been awarded. There would have been no taxpayer money involved if DNB had remained as the SWN, given that MNOs would have no choice but to buy wholesale capacity from DNB to offer 5G services.

Given that telecoms is a highly regulated industry, observers agree that the government should still have the ability to find the right exit price that does not cost taxpayers money if policymakers play their cards right.

But first, industry players say there has to be something like an “equalisation price” to compensate the MNO or MNOs that remain with DNB “because Entity A (DNB) and Entity B (U Mobile) are not equal”.

“DNB has taken on debt, so someone needs to pay the bridging loan, right? The second 5G network does not have existing and committed financial obligations and there is no 5G network to integrate with [an MNO’s existing network]. There are multiple MNOs in DNB, so who is going to call the shots?” an industry player points out.

More than one source has confirmed that MCMC had been asked to conduct “an auction scheme”, essentially a price discovery process to determine the right equalisation price between DNB (Entity A) and the second 5G network (Entity B).

The process is also to determine “a clearer ownership and governance structure” as well as a “more optimal” spectrum allocation level, says a source. “The MNOs have a different number of subscribers, so a 50:50 split may not be optimal,” he adds, noting that while two 100MHz of 5G spectrum may seem ideal, an MNO serving more subscribers would need more spectrum.

According to the source, this price discovery process is “even more complicated” now that “an unlisted MNO” has been named the winner of the second 5G spectrum.

While the 5G spectrum win is “definitely a plus point” to bring other MNOs to the negotiation table, he reckons that U Mobile would not be any closer to getting the “RM10 billion or more” valuation it is said to be eyeing or an initial public offering (IPO) without a stronger MNO as its partner.

“Telco investors want yield. If U Mobile can pay good dividends, they would have already gone for IPO by now, don’t you think? Which investor will say, ‘Okay, I give you money to build a 5G network and no dividend in the near term?’” an observer asks. “Everyone is talking about one particular merger partner … It [boils down to] whether that ideal merger partner will pay the price U Mobile wants.”

Both CelcomDigi and Maxis declined further comment when approached last week, pointing to statements they had released over the weekend in response to questions sent.

“We have no more to add to the statement made last Sunday, given that we are in the closed period,” says a CelcomDigi spokesperson.

Maxis, which on Nov 8 released earnings for the third quarter ended Sept 30, would only say “We refer to our statement on Nov 3” to a list of questions, which include whether the telco is looking at or has been offered equity in U Mobile that is being sold by its foreign shareholder.

Industry observers, who had widely expected Maxis to work with U Mobile if it had been awarded the second 5G spectrum, noted that U Mobile “mentioned everyone else but made no mention of Maxis” in its Nov 2 statement after winning the 5G bid.

Indeed, U Mobile said: “We are excited to collaborate with various stakeholders, including MCMC and other telecommunications companies such as CelcomDigi and Telekom Malaysia to deliver world-class 5G-Advanced services to consumers. U Mobile has been proactively engaging with leading global technology providers, including Huawei, with whom we have had a long and enduring partnership. U Mobile will also be working with DNB to ensure consumers continue to enjoy the best 5G experience.”

While MCMC has yet to provide details on its selection of U Mobile, observers note that it did say that U Mobile “subject to the approval of MCMC, is allowed to collaborate with other MNOs in the implementation of Malaysia’s second 5G network”.

“Does that not sound like MCMC has to approve U Mobile’s 5G partner?” says a source. “If so, do you think it is easier to convince MCMC why it should allow U Mobile with nine million subscribers to merge with CelcomDigi with 20 million users or Maxis with 12 million users?”

Industry analysts agree that a merger of Maxis and U Mobile would create an entity of a similar size to CelcomDigi, which is still going through merger integration works. Still, they concurred that it all boils down to pricing. “There was previous talk of Maxis walking away because it disagreed with U Mobile’s asking price,” says an analyst.

In a statement on Sunday, Nov 3, CelcomDigi said it was “considering several options at hand” without mentioning whether it is more likely to remain with the first 5G network under DNB or seek to take up equity in U Mobile which will soon be up for grabs. Either way, CelcomDigi said subscribers will continue to have 5G connectivity while it derives more merger synergies that leapfrogged it ahead of Maxis to be Malaysia’s largest MNO with just over 20 million subscribers, or 40% of Malaysia’s 50.2 million mobile subscribers, as at end-June.

That evening, Maxis — with 12.6 million subscribers or around 25% market share — emphasised the fact that 77% of its shares are owned by Malaysians and said it would “engage with MCMC to understand the rationale for their decision and [it] will consider [its] options after discussions with all stakeholders”.

Perhaps partly due to a lack of details, market watchers noted that MCMC had announced its decision just two days before Prime Minister Datuk Seri Anwar Ibrahim made his third working visit to China in two years (Nov 4 to 7), where he not only paid a courtesy call on President Xi Jinping and delivered a talk on Asean’s centrality at the prestigious Peking University but also included a visit to the Huawei Executive Briefing Centre in Beijing on Nov 7. Anwar had mentioned Malaysia’s transition to a dual 5G network when tabling Budget 2025 on Oct 18, without providing details.

MCMC also declined comment on questions sent by The Edge, even on whether U Mobile would be required to cut its foreign shareholding to 20% before the 5G spectrum is given.

“Perhaps MCMC reckons it would be best not to comment before speaking to the minister and industry players,” says an observer.

Professor Ong Kian Ming, pro vice-chancellor for external engagement at Taylor’s University, however, did not mince his words.

“MCMC has done a very poor job in ensuring transparency in the terms and conditions of the tender for the second 5G network via the so-called ‘beauty contest’ and in explaining the award of the second network to U Mobile, the smallest telco player out of the three bidders,” he tells The Edge.

“Without this transparency, questions about the rollout of the second network, the impact on the first network, the potential of another player coming in to buy U Mobile will all be the subject of continued speculation that will send the wrong signal to consumers, potential users of 5G enterprise solutions and the larger investor community,” adds Ong, who is a former member of parliament and former deputy minister of international trade and industry. 

There is no doubt that there are currently more questions than answers to what lies ahead. The current conundrum is perhaps best surmised by the headline of a research note — ‘U [mobile network operators] asked for it, and U [mobile] got it’ — pun intended. Now, all the relevant parties will need to come together to do the maths that would allow Malaysia to move forward and encourage investments in improving the quality of 5G and beyond. 

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