The Challenge of Dealing with Malaysia Inc.

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001682

SIPDIS

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E.O. 12958: N/A
TAGS: ECON EFIN EINV ETEL MY
SUBJECT: The Challenge of Dealing with Malaysia Inc.



1. (SBU) Summary: Doing business in Malaysia can be a challenge for
foreign firms and the recent DiGi.com restructuring is a case in
point. DiGi.com, a mobile telephone service provider majority-owned
by Norway's Telenor ASA, needed to reduce its equity stake in the
firm this year to meet GOM requirements and it needed access to a
third generation (3G) license to continue to expand its business.
DiGi had lost bids to obtain the license in 2005 to two local mobile
phone companies, and again in 2006 to two local companies not
engaged in the mobile phone service industry, even though 3G
technology is specifically for mobile telephones. In what looks
very much like a government orchestrated set up, Telenor was herded
into resolving its equity and licensing problems by making a deal
with Time dotcom, an unprofitable company owned by the Government of
Malaysia (GOM) which just so happened to be the lucky recipient of a
3G license from the GOM in 2006. On November 15 Telenor sold a
10.2% stake in DiGi.Com to Time dotcom, reducing its stake to 49% as
required under GOM foreign equity ceilings. In return, Time dotcom
will transfer its 3G license to DiGi, according to press reports.
Essentially, Telenor is paying the GOM-owned firm a USD 188.7
million premium to gain access to the 3G license. That's easy money
for the government-owned firm but a bitter "cost of doing business
in Malaysia" pill for Telenor. End summary.

THE HISTORY
--------------


2. (SBU) In 2000, Norway's Telenor ASA bought a majority stake in
DiGi.com, a publicly listed Malaysian firm owned by politically
connected Malaysian businessman Vincent Tan. Over the next five
years, Telenor turned DiGi into Malaysia's second largest mobile
phone service provider. In 2005, the GOM announced that it would
issue three third generation (3G) licenses. [Note: 3G wireless
technology is designed to improve the speed and quality of mobile
telephone service and combine the functionality of a mobile phone
with that of a PC and a personal organizer/PDA. End note.] DiGi,
having the second-largest subscriber base in Malaysia, was expected
to be granted one of the three licenses. However, when the awards
were announced in August 2005, only two licenses were granted: one
to Maxis Communications and the other to government-owned Telecom
Malaysia, the country's largest and third-largest mobile phone
service providers, respectively. [Note: Maxis Communications is
owned by politically influential billionaire Ananda Krishnan. End
note.]


3. (SBU) DiGi was told more licenses would be issued the following
year and in March 2006 the GOM issued two more licenses, but not to
DiGi. Instead, one was given to Time dotcom, an unprofitable
government-owned fiber-optic company, and the other to MiTV, a
failing pay-TV operator owned by none other than Vincent Tan, the
man who sold his stake in DiGi to Telenor back in 2000. The GOM
issued licenses to Time dotcom and MiTV for the 3G mobile phone
technology, despite the fact that neither company was a mobile
telephone service provider. In his press statement announcing the
awards, Minister of Energy, Water and Communications Dr. Lim Keng
Yaik said, "To achieve a win-win situation, the successful
applicants have been directed to work with DiGi and other service
providers as a mobile virtual network operator."

THE DEAL
--------------


4. (SBU) In a move to comply with Malaysia's equity regulations on
foreign investors in the telecommunication industry, Telenor ASA
reduced its controlling equity stake in Malaysia's mobile phone
operator DiGi.com to 49% on November 15, 2007. The deal involved
the sale of a 10.2% stake comprising 76.5 million DiGi shares to
government linked corporation Time dotCom for RM 1.61 billion (USD
480 million),at a cost of RM 21.05 per share.


5. (SBU) As part of the agreement, DiGi will gain access to Time
dotcom's 3G license until April 2018 in exchange for issuing 27.5
million new DiGi shares (equivalent to a 3.5% stake in DiGi). At
its current share price of RM 24.80, this is worth RM 682 million
(USD 203.6 million). The government awarded the 3G license to Time
dotcom in 2006 for RM 50 million (USD 15 million). DiGi Chief
Executive Officer Morten Lundal told reporters that DiGi.Com would
invest up to RM 800 million (USD 238 million) over the next three
years in the 3G spectrum following Time dotCom's acceptance of its
offer to form a business alliance. The alliance with Time dotCom
also gives DiGi access to the former's fiberoptic network and WiMax
capacity. The company plans to roll out 3G services by the second
half of next year. However, Minister Lim Keng Yaik told the press

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that the license was not transferable. Time dotCom would have to
request special permission to transfer the license and, as far as he
knew, to date no request had been made.



6. (SBU) Comment: The DiGi-Time dotcom tie-up is a perfect example
of how business often is conducted in Malaysia's service sector.
Malaysian companies owned either by cronies or by the government are
awarded coveted licenses in closed deals, enabling them to engage in
rent-seeking behavior while letting others do the work. Time
dotcom, which has incurred losses for years, has done nothing with
the 3G license it obtained in March 2006. Now it is flipping that
license for the tidy sum of RM 682 million ($ 203.6 million),giving
the company a new lease of life. Innovative companies like Telenor
are left to wheel and deal their way through the Malaysian
bureaucratic mess and still somehow manage to make a buck.
KEITH