Published March 3, 2009

Telekom split helps neither of the entities

TM and TMI's total market cap is nearly halved; TMI shares fall on profit fears

By S JAYASANKARAN
IN KUALA LUMPUR

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WHEN international consulting firm McKinsey proposed to Khazanah Holdings a year ago that the trick to enhancing shareholder value in Telekom Malaysia, the national telecommunications utility, was a 'demerger' between its fixed-line business and the more rapidly growing mobile business, it seemed like a good idea at the time.

Gone haywire: Telekom Malaysia (TM) was supposed to be the 'sunset' firm while TM International (TMI), with its rapidly growing wireless business, was the proverbial bee's knees. It's all gone topsy-turvy now

Not any more. The global financial crisis undoubtedly didn't help things, but the wealth destruction over at Malaysia's national telecommunications firm has been massive.

The combined market capitalisation of both firms is now around RM23 billion (S$9.6 billion), from more than RM40 billion when they were one entity.

There's more. Last year's restructuring created Telekom Malaysia (TM), which held the fixed line and broadband business, and TM International (TMI), which took over the mobile and international businesses. TM was supposed to be the 'sunset' firm while TMI, with its rapidly growing wireless business, was the proverbial bee's knees.

It's all gone topsy-turvy now. While TM has held its own with its share price underpinned by strong dividend payouts and a domestic broadband business growing at double-digit levels, TMI has slipped inexorably into losses amid a market value that has declined by RM20.5 billion over the year. Khazanah, the national investment agency, owns 35 per cent of TM and nearly 44 per cent of TMI.

The surreal finances of what was once one of Malaysia's largest firms illustrate how the best-laid plans can come to naught in the face of a hostile global environment. Indeed, global telecoms policy may be actually reversing with consolidation more the norm as companies move to shield their fixed-line businesses.

'Its (Khazanah's) strategy may have been right a year ago,' said a senior industry executive in a competitor firm. 'But the timing really sucked.'

TMI ran into fresh woes yesterday after announcing a RM5.25 billion rights issue to help prune its RM10.45 billion debt load. Its shares fell nearly 10 per cent to RM2.75 on fears of earnings' dilution. Incidentally, its initial public offering last year was priced at around RM8.50.

Khazanah has said it will subscribe to its full entitlement while underwriting some portion of the issue, but some analysts were unimpressed. They point to the 'cycle of cash' between the three firms as an issue of discord.

'TM pays out dividends and Khazanah uses that to take up its rights in TMI,' said one foreign head of research in a Kuala Lumpur-based securities house.

Indeed, TMI is due to pay RM4 billion to TM by April 2009, money that will presumably flow out as some part of a dividend later.

It hasn't escaped the notice of lawmakers. Indeed, Khazanah recently came under fire in Parliament for the lacklustre performance of its government-linked companies (GLCs).

Anifah Aman, a lawmaker from Sabah, blamed Khazanah for appointing inexperienced managers to GLCs such as Telekom while at least two other lawmakers have called for greater transparency in its accounts.