Identifier
Created
Classification
Origin
06BANGKOK3435
2006-06-07 08:57:00
UNCLASSIFIED
Embassy Bangkok
Cable title:  

THAI TELECOM ROUNDUP: MERGE OR DIE?

Tags:  ECON ETRD ECPS EINT TH 
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FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 9348
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UNCLAS BANGKOK 003435 

SIPDIS

SIPDIS

STATE PASS TO USTR JMCHALE

E.O. 12958: N/A
TAGS: ECON ETRD ECPS EINT TH
SUBJECT: THAI TELECOM ROUNDUP: MERGE OR DIE?

REF: A. 05 BANGKOK 6901 (Telenor Buys out UCOM and TAC)

B. 06 BANGKOK 583 (Deal of the Century)

C. 06 BANGKOK 1549 (Shin Corp Deal is Legal: So What?)

D. 05 BANGKOK 7124 (Court Suspends Privatization of EGAT)

E. 06 BANGKOK 115 (Licenses without Concession Conversion)

UNCLAS BANGKOK 003435

SIPDIS

SIPDIS

STATE PASS TO USTR JMCHALE

E.O. 12958: N/A
TAGS: ECON ETRD ECPS EINT TH
SUBJECT: THAI TELECOM ROUNDUP: MERGE OR DIE?

REF: A. 05 BANGKOK 6901 (Telenor Buys out UCOM and TAC)

B. 06 BANGKOK 583 (Deal of the Century)

C. 06 BANGKOK 1549 (Shin Corp Deal is Legal: So What?)

D. 05 BANGKOK 7124 (Court Suspends Privatization of EGAT)

E. 06 BANGKOK 115 (Licenses without Concession Conversion)


1. SUMMARY: The takeover of Thailand's two leading mobile phone
providers by foreign companies and the political crisis unleashed by
the prime minister's family's sale of its stake in Shin Corporation
to Temasek of Singapore has fundamentally altered the context of
both the telecom business and regulatory policy. The National
Telecommunications Commission faces political protest against the
sale of national assets to foreigners and consumer impatience with a
deterioration in the quality of mobile phone services. Prime
Minister Thaksin's policies of privatization of state-owned
enterprises (SOEs) and trade liberalization are stalled and the
government's "caretaker" status has led to a shift in power in favor
of SOEs TOT Plc and Cat Telecom Plc. Dashed expectations of
conversion of the concessions previously granted by the SOEs to
private companies, of the rollout of third-generation (3G) services,
and of allocation of new frequencies have forced a reassessment of
where the sector is headed. A leading telecom analyst offers a
solution in the form of merges between SOEs and listed companies
that is useful for identifying the issues at stake. In response to
the above environment, the regulator is drafting regulations on
foreign business control and interconnection, among others. While
unlikely to be of great consequence either to telecom companies or
the sector as a whole, the Embassy thinks that the regulations on
foreign business control will have a net negative effect on
shareholder rights and investment opportunity in Thailand's telecom
sector. END SUMMARY

NEW ENVIRONMENT FOR THE THAI TELECOM SECTOR


2. AFTERMATH OF THE SHIN AND TELENOR DEALS: The exit of the
Shinawatra and Bencharonkul families from the Thai telecom sector
has fundamentally altered the context within which all players in
the industry now operate. As set out in REFs A and B, the two

largest mobile telecom services providers, Advanced Info Service Plc
(AIS) and DTAC, although still legally Thai-owned, are effectively
foreign-controlled entities as a result of the takeover of Shin
Corporation by Singapore's Temasek Holdings and the buyout of both
UCOM and Total Access Communications (TAC) by Norway's Telenor. The
takeover of Shin, the parent company of AIS and the larger of the
two, has sparked a political crisis in which economic nationalism
has flourished. Popular protest against both the foreign purchase
of Thai assets and Prime Minister Thaksin's policies of sectoral and
trade liberalization has become a staple of Thai political life (REF
C). Ironically, the self-proclaimed reformers such as Rosana
Tositrakul, now Bangkok senator-elect, who criticize Prime Minister
Thaksin and his "cronies" from reaping ill-gotten gain from RTG
policies, have emerged as defenders of Thailand's monopolistic and
inefficient SOEs.


3. PRIVATIZATION ON THE ROPES: The Thaksin government's own
missteps in privatizing SOEs in other sectors have spilled over into
the telecom arena. The March 2005 court-ordered annulment of the
RTG's corporatization of the Electric Generating Authority of
Thailand (EGAT),the principal state-owned electric power utility,
in conjunction with a November 2005 ruling suspending the initial
public offering of shares of the corporatized entity further reduce
the likelihood that the government will proceed with the
privatization of either TOT Plc or CAT Telecom Plc in the near
future (REF D).


4. RTG POLICY ON HOLD: Reinforcing this unexpected political
rehabilitation of Thailand's state-owned enterprises has been a
shift in bureaucratic power in favor of the TOT and CAT Telecom.
While the RTG is in "caretaker" status, policy initiatives have been
on hold because the bureaucrats are hesitant to act on anything
other than routine business. With no exit from the current
political crisis in view, private investors have likewise decided to
postpone major decisions. Additionally, the Ministry of Information
and Communications Technology (MICT) is headed by an acting
caretaker minister. Mr. Sora-at Klingpratoom, who had advocated
listing both TOT and CAT, has stepped down as minister in a move in
the factional politics within the ruling Thai Rak Thai Party.


5. CHANGING OF THE GUARD AT TOT: Within TOT, the old guard has
similarly rebounded. The TOT board of directors dismissed President
Teerawit Charuwat effective May 12, ostensibly for financial
underperformance and the failure to effect an initial public
offering of shares. Mr. Teerawit was formerly finance chief at the
state broadcaster MCOT Plc. He was chosen in 2005 over several
senior TOT executives for the position. In his defense, Mr.
Teerawit claimed that the extra expenditures of 1.14 billion baht
last year that cut into profitability were for one-off items such as
licenses. Without them, net profit would have risen 9.4 percent to
10.57 billion baht. He also attributed problems he experienced to
political interference and lack of cooperation from the senior
executives. Chamras Tantrisukorn, a senior executive, was named
acting president.

THE NEW POLITICAL LANDSCAPE FOR THE NTC . . .


6. THE NTC IN THE SPOTLIGHT: With this shift in the balance of
power, the challenges facing the National Telecommunications
Commission (NTC),the sector's regulator, have changed. The exit of
the prime minister's family from the sector has removed an
incalculable political weight from the NTC's shoulders, and thereby
changed the dynamics of the interaction among the commissioners and
the private telecom companies. At the same time, the popular
political outcry over the foreign purchase of the Shinawatra
family's assets has put the NTC on the spot, particularly its
administration of the provisions of the 2001 Telecommunications
Business Act (TBA) concerning foreign ownership, which were recently
amended to lift the 25 percent cap on foreign ownership specified in
the original law to effectively 49.9 percent as provided by the
Foreign Business Act (FBA). Given recent calls by anti-Thaksin
activists to abolish independent bodies established by the 1997
Constitution that have "failed to carry out their duty in providing
checks and balances," the commissioners must consider their actions
in terms of the NTC's own institutional position in the current
political environment.


7. UNHAPPY CONSUMERS: New practical and highly visible problems
also require attention, including especially interconnection and
number portability. Most important, the sharp increase in
subscribers resulting from a price war between AIS and DTAC this
year has forced the NTC to grapple with challenge of establishing
neutral interconnection charge rules for operators. During peak
hours, success rates in completing a connection have fallen to
single digits requiring users to make multiple attempts before they
can connect. Newspapers publish frequent stories about mobile phone
"traffic jams" and cite polls showing that the overwhelming majority
of mobile phone users are dissatisfied. A May ABAC poll of AIS,
DTAC, and TrueMove (formerly True) customers, for example, found
that 77 percent feel they are being "treated shoddily by their
service provider." No provider fared particularly well, and 46
percent of respondents said they were dissatisfied with the role of
the NTC (38 percent were satisfied and the rest did not know).


8. THE INTERCONNECTION ISSUE AND TOT: Each major mobile phone
provider maintains its own network. In the absence of rules
obliging operators to accept incoming calls from other networks in
exchange for a portion of the revenue, operators have had limited
incentive to build out their switching capacity. Under the current
system, unlike in many other countries, the caller's cellular
service provider earns money when a call is made, but the receiving
network does not earn anything for taking the call. When call
volume exceeds interconnection capacity, the default response has
been for private operators, particularly the CAT Telecom
concessionaires DTAC, TrueMove, and Digital Phone Company (DPC),to
route calls through state-owned TOT, which collects monthly fees
from them (through CAT Telecom). The recent rise in number of
callers and call volume has overwhelmed existing interconnection
infrastructure and forced the regulator to act. While the private
operators will need to make significant investments to ensure
adequate coverage, the elephant in the room is TOT's dependence on
the revenue stream from the access fees paid by CAT concessionaires.
According to a Phatra Securities estimate, the net access charges
TOT received from DTAC and TrueMove alone made up 11 percent of its
2005 revenue of 60.2 billion baht.


9. MORE CONFUSION LIKELY: While the NTC is currently drafting
regulations to provide for a new interconnection regime, its
approach is to request that the operators prepare offers.
Contradictory language in the draft regulations raises the question
of whether just the SOEs or all players should prepare offers.
Embassy contacts familiar with the drafting process agree that the
regulations will allow for TOT to continue to receive the access
fees for calls routed through TOT by the private operators. They
also think that new regulations providing for revenue sharing should
eventually encourage buildout of the infrastructure to facilitate
interconnection, which promises to ease the traffic jam. But
introducing the new regulations will likely introduce a second
accounting system for tracking interconnection charges, thereby
adding to the complexity of the regulatory framework.

. . . AND INVESTORS


10. SHARE PRICE CHANGES: Investors have taken a hard look at their
holdings of listed company shares and adjusted accordingly. As of
June 7, Shin Corp had lost nearly 35 percent of its market
capitalization since January 23. Shares of AIS closed at 90 baht on
June 7, as against a 52-week high of 114 baht and a low of 85 baht.



11. CONCESSION NON-CONVERSION: Investors and industry players are
also casting aside the familiar conceptual frameworks for
understanding the development of the telecom sector going forward.
The reality that concession conversion is not on the horizon has
finally sunk in. As one foreign analyst expressed the point, "the
concessions aren't going to go away until they get CAT and TOT to
agree to end them. Otherwise they'll have to wait for another seven
or eight years," at which point the SOEs will retain the network
assets. More players now expect that the TOT and CAT Telecom will
hold out until the concessions terminate. (Note: a list of the
principal concessions is set out in REF E. End note.)


12. 3G ON HOLD: Last year's hope that NTC-issued licenses for
third-generation (3G) technology services offer a regulatory
mechanism for the concessionaires to get out of the concession
agreements has faded. Service providers have hesitated to go
forward in face of the large amount of capital investment required
to roll out 3G services, particularly in view of uncertain consumer
demand for them, a concern we identified in REF E.


13. SPECTRUM NON-ALLOCATION: Although Thai Mobile, a TOT-CAT
Telecom joint venture has reportedly been allocated bandwidth in the
1900-2000 MHz range for 3G services under a 2004 (i.e., pre-NTC)
agreement with the then (i.e., pre-CAT Telecom) Communications
Authority of Thailand, the basic fact weighing on the sector is that
the regulatory structure required for allocation of spectrum is not
yet in place. Current law set forth in the Radio and Television
Frequency Allocation Act provides that both the NTC and the National
Broadcast Commission (NBC) must approve new allocation of spectrum,
including frequencies required for 3G. The NBC, however, has yet to
be formed. In November 2005 the Central Administrative Court ruled
to invalidate the final seven candidates named to the NBC when it
considered a petition by an unsuccessful candidate protesting
irregularities in the selection process. The candidates had been
approved by the Senate but had not yet received royal endorsement.
The Prime Minister's Office decided to challenge the decision rather
than push for amending the law to give the NTC full authority. The
case is pending before the Supreme Administrative Court (SAC). In
the unlikely event that the SAC reverses the lower court decision,
no one expects the NBC to form in the political environment.

SEARCHING FOR A NEW PARADIGM


14. MERGE OR DIE?: In a February 2006 research report entitled
"Merge or Die," Richard Moe, the senior telecom analyst at Macquarie
Securities, advanced a new framework for the sector. He also
radically revised the firm's investment recommendations, identifying
TAC rather than AIS as the listed player with the greatest upside
potential. Moe is a longtime observer of the Thai telecom scene
whose views are widely read, so his change of mind merits attention.
His vision of a market duopoly organized around a TOT/AIS axis and
a CAT Telecom/DTAC/TrueMove axis has put the idea of mergers into
the public domain, where it is a subject of discussion, including at
the NTC. A full duopoly model along the lines set out below, he
contends, would create moderate competition and ensure strong cash
flows and balance sheets. Two strong telecom operators would be in
position to aggressively expand networks, increase quality and range
of services, and provide an economic return on investment.


15. MERGERS WOULD SOLVE CURRENT PROBLEMS: Beginning with the
assumption that the concessions will not be converted, Moe casts
aside the article of faith that the private operators will inherit
the SOEs telecom networks. Despite their technical and marketing
expertise, private telecom concessionaires enjoy limited upside
because the terminal values belong to TOT and CAT Telecom. With the
right to take over the networks, the SOEs possess assets with real
value that could be priced by the market in conjunction with public
offerings of TOT and CAT Telecom shares. In this context, mergers
of the listed telecom operators with the TOT and CAT Telecom
(subsequent to their IPOs) would resolve the concession issues and
provide the listed telcos with an indefinite operating life. The
problems of life after the concessions, interconnection charges, and
over-indebtedness all disappear.


16. AND RE-ESTABLISH THAI MAJORITY OWNERSHIP: In Moe's view, some
configuration of mergers between the foreign-controlled private
operators and the SOEs would also re-establish bonafide Thai
majority ownership (he outlines several options),thereby
eliminating the political risk for AIS and DTAC stemming from the
perceived control of spectrum by foreign government entities, and
the foreign control of Thai assets more generally. Politically, he
emphasizes, it is difficult to imagine the RTG asking the TOT and
CAT Telecom to take a bullet for foreigners, which is the way any
effort to strip the SOEs of their revenue under the concessions
could be portrayed. Telenor and Temasek are in a weak position to
protest termination of the concessions because the contracts were 15
years old and known to them (lenders have always looked at the
letter of the contracts rather than assuming that the
concessionaires will inherit the assets) and they arguably violated
the spirit of the Thai Foreign Business Act. Additionally, the
point at which the NTC issues (or does not issue) licenses for 3G
services affords the RTG the opportunity to pose a choice between
merger and status quo with existing concessions.


17. ADDITIONAL BENEFITS: Moe adds that creation of two full-service
operators would also provide for more socially equitable
reallocation of frequencies. If TOT gave up fixed line concessions,
for example, and CAT Telecom gave up DPC and 25MHz of spectrum in an
effort to unwind the cross-holdings between the two groups, CAT
Telecom would be able to provide cellular service in rural areas and
facilitate greater competition there.


18. NOT UNPRECEDENTED: While radical in today's environment, Moe's
vision is not unprecedented. In 2004, Shin Corp CEO Boonklee
Plangsiri said that AIS is a takeover target and TOT is a potential
buyer, as Moe is the first to point out. While the idea may be
hypothetical for most industry players, for Mr. Boonklee a TOT/AIS
merger has an obvious practical value: it opens up the possibility
of a new job.


19. BUT NOT A SURE THING EITHER: Moe admits the obstacles:
distrust among the concerned parties, nationalism, risk of
bureaucratization of the private telcos, and stubborn investor hope
for a concession conversion windfall. It is widely known that TOT
and CAT Telecom--especially their employee unions--do not trust the
private companies, and do not have much use for each other either.
Particularly in the current political environment, it is reasonable
to expect opposition to the listing of the SOEs on the grounds that
they are "national assets". While the unions may over-estimate the
long-term financial health of TOT and CAT Telecom, their thinking is
a political fact. Additionally, the market is still in denial.
Despite Cabinet and NTC statements that the RTG will not force
concession conversion, share prices of listed telcos still indicate
that some investors expect conversion. Moe readily admits that there
may be no mergers, particularly in the absence of someone within
government or one of the other entities who champions the idea. His
analytical point is that in the absence of mergers, the Thai telecom
market structure will remain sub-optimal, with too many players and
too much redundant network leading to lower returns on capital.
There also exists the temptation to resort to a premature rollout of
3G as a means of unwinding the concessions, which would be wasteful
of capital.

DRAFT REGULATIONS ON FOREIGN BUSINESS CONTROL


20. MAIN PROVISIONS: The issue of greatest interest to foreign
investors that the NTC is presently considering is the draft
regulations on foreign business control. First proposed in March,
they have undergone several revisions and are still pending. The
draft regulations ostensibly constitute the implementing regulations
for the revision in the TBA that raised the cap on foreign
investment in telecom firms from 25 percent limit in the original
TBA to the equivalent of 49.9 percent prescribed by the FBA. They
set out standards for what constitutes foreign business control or
tendency toward foreign business control and require holders of type
2 and type 3 licenses to report to the NTC. In the case of
violations, the telcos are to propose corrective measures. If there
is any question of "national security" (the example most commonly
discussed, for example, is where an entity owned by a foreign
government controls radio spectrum) then the NTC would refer the
issue to the competent agency. Sanctions in the case of violation go
as far as revocation of a license, but no draft to date has set out
a clear schedule of sanctions and in all drafts to date the NTC
reserves considerable discretion on how to handle cases of
violation. The Commissioners have said, and the Ministry of Foreign
Affairs has also confirmed, that the forthcoming draft will include
safe harbor provisions that ensure the regulations do not contradict
any international commitments undertaken by the RTG, including under
the World Trade Organization and in free trade agreements.


21. CLOSING A LOOPHOLE? In practice, the FBA has restricted foreign
ownership of firms in certain sectors to a minority share, but has
allowed foreign control (through such mechanisms as nominee
structures and preferential voting arrangements). Telenor and
Temasek structured their buyouts of UCOM/TAC and Shin Corp/AIS
respectively in such manner. By setting out criteria for what
constitutes control, the draft regulations propose to close a
loophole that has long existed in Thai business practice. NTC
commissioners emphasize that the purpose of the regulations is to
put in place a legal process whereby concerns about issues such as
"national security" may be evaluated rather than being left to the
political process.


22. OR SQUARING THE CIRCLE? Industry observers agree and RTG
officials privately admit that the regulations are a response to the
political furor over the Temasek buyout of Shin. On the one hand,
the NTC is responding to domestic political concern about foreign
control of what many Thais see as national assets. Hence the
specification of criteria for foreign control, and the visible
display that the NTC is doing its job. On the other hand, the
Commissioners wish to avoid discouraging foreign investment. Thus,
the letter of the draft regulations notwithstanding, Dr. Sudharma
Yoonaidharma, the Commissioner who drafted the regulations, told
foreign diplomats in April, "the regulations seem to be
life-threatening things, but they are not. They just trigger
disclosure (i.e., to clarify ownership),and the disclosure is the
same as required by other agencies." Embassy contacts agree that
the reason why it has taken the NTC so long to draft the regulations
is the inherent conflict between these two objectives.


23. IMPACT UNCERTAIN: Industry observers are divided on the likely
impact of the proposed regulations, because it is unclear whether
their effect will be to calm the political firestorm over foreign
buyouts in the telecom sector without substantive change or to force
DTAC and AIS to become "Thai" companies again through divestiture or
other means. An attorney who has worked for both Temasek and
Telenor emphasized to econoff that the provisions of the
regulations, if enforced, would have a negative effect on basic
shareholder rights. Other attorneys, also with long experience in
Thailand, are more sanguine. If the RTG were seriously interested
in limiting foreign control of companies, one emphasized, the NTC
regulations would spell out specific thresholds for action on voting
rights. They do not. Parliament has had the opportunity to tighten
up the law on this issue, and has chosen not to act. The most
common opinion among knowledgeable observers expressed to econoffs
is that companies will turn to lawyers and advisors to devise new
legal solutions to ensure compliance with the letter but not the
spirit of the law (i.e., structures that are more sophisticated than
the now discredited nominee arrangements but achieve essentially the
same end). The Embassy has also confirmed that DTAC, for example,
is adjusting some of its positions in advance of the release of the
regulations.


24. BROADER APPLICATION? A common question among non-Thais is
whether the regulations on foreign business control in the telecom
sector will set a precedent for similar restriction in other
sectors. Legal experts agree that because the telecom sector has
its own regulator, its own basic law, and industry and government
alike see the draft regulations as being limited in application
accordingly, that the direct effect on other sectors will be
negligible. Legally speaking, they do not expect any effect until
the regulations are tested in court. Several attorneys also
indicated to econoff that the RTG authorities can pursue action
against a foreign-dominated firm if they so desire under the
provisions of the FBA already. Equity analysts, however, see more
risk. As one Bangkok-based analyst explained, for investors the
problem is not the specific legal content or precedent of the
telecom regulations but the broader political environment that
prompted the NTC to draft the regulations on foreign control in the
first place.

COMMENT:


25. The Embassy agrees that the political and regulatory environment
in the Thai telecom sector has changed fundamentally as a result of
the Shin deal, the political crisis it sparked, and the halt in
progress on the Thaksin government's policies of sectoral and trade
liberalization. While no one can predict whether the telecom sector
will adapt by way of mergers as suggested, we think that the major
players need to come to terms with the reality that concession
conversion is effectively dead, that the rollout of 3G will be
slower and more expensive than envisioned, and that the formation of
the NBC and allocation of new frequencies remain on hold.
Similarly, the ubiquity of mobile phones in Thailand ensures that
the NTC will remain in the political spotlight even in the absence
of controversy over deals involving foreign players.


26. We also think that, collectively, recent developments represent
a net deterioration in the investment and business climate in
Thailand's telecom sector. In attempting simultaneously to respond
to economic nationalists at home seeking to restrict foreign
business activity and to reassure foreign investors, the NTC's draft
regulations on foreign business control have rendered Thai policy
more, not less, ambiguous. At the very least they promise to have a
negative effect on basic shareholder rights. In the current context
of political crisis and policymaking paralysis, we expect the RTG to
reaffirm its WTO commitment to liberalize the Thai telecom market
this year, but to do so in a way that minimizes the change required,
most likely by asserting that mobile services are not covered.
BOYCE