After SMC telco buyout, PLDT-Globe duopoly continues

Two is still the magic number in the local telecommunications space after Philippine Long Distance Telephone Co. (PLDT) and Globe Telecom on Monday sealed a massive deal to acquire a budding rival’s telco business.

The buyout squashed near-term prospects for a third telco player, but the blow was softened by promises that newly-bought assets will translate into faster mobile Internet services before next Christmas even as both PLDT and Globe gave no assurance that prices would come down.

The PLDT-Globe duopoly was bolstered after both jointly acquired the telco unit of conglomerate San Miguel Corp. in negotiations that spanned mere weeks. SMC had plans to launch this year a mobile high-speed Internet service, seen as the hottest business in the industry since text messaging in the late 1990s.

PLDT and Globe officials said in separate briefings Monday they bought SMC’s Vega Telecom Inc. for P69.1 billion, bulk of which will be paid in a staggered basis over a period of three years. The two also jointly bought out New Century Telecoms and eTelco Inc., which have links to SMC, bringing the total deal size to about P70 billion.

READ: PLDT, Globe buy SMC telco for P69B

PLDT and Globe’s target this time: SMC’s valuable radio frequencies, the lifeblood of modern telecommunications, including the coveted 700 Megahertz spectrum the diversified conglomerate controls.

The 700 MHz was ideal for coverage across wide spaces and inside buildings, and would help PLDT and Globe go around permitting bottlenecks hindering the building of new cell sites.

Both telcos said they will co-use the assets of SMC via a 50-50 arrangement, and the coming weeks will be spent assessing how to integrate the latter’s assets into either player’s existing network infrastructure.

That also included looking into SMC’s cell sites and its less than 1,000 employees under its telco units, whose fate remained uncertain, PLDT and Globe officials said Monday.

Some units, like Vega’s Eastern Telecommunications, which had active operations and produced revenues of P1.5 billion annually, would be maintained. Others, like Tori Spectrum Telecommunications (formerly wi-Tribe), may be discontinued.

As a sweetener to regulators and lawmakers overlooking the transaction, both PLDT and Globe promised to return some of the acquired frequencies to the government. Parts of these were in the 700 MHz, 850 MHz, 2500 MHz, 3500 MHz bands, which the telcos claimed were enough for a third player to enter.

The joint PLDT-Globe announcement Monday caught most observers off-guard and followed the collapse of talks last March between SMC and Australia’s Telstra Corp. Ltd. for a potential venture.

READ: SMC, Telstra end talks for telco partnership

It also comes amid a government transition into the Duterte administration, which signalled it would launch a crackdown on slow internet the way it promised to do with crime and corruption.

READ: Rody tells telcos: Shape up or face new competition

The telco opportunity in the digital age remained significant in the Philippines even if it is considered a “mature” market.

The country has over 100 million people, with just 40 percent owning a smartphone last year. That would jump to 70 percent in just two years, according to a study by Ericsson, increasing demand for mobile internet services like movie streaming, social media and games.

For PLDT and Globe, it is important the deal sails through any opposition.

Their lawyers Monday expressed confidence there would be no roadblocks from the government— the deal was sealed before the newly-formed Philippine Competition Commission’s issues its implementing rules this June.

Moreover, it could pass even the requirements of the National Telecommunications Commission on a technicality since what was being acquired was a telco holding company and not the telco units themselves.

NTC deputy commissioner Edgardo Cabarios said in an interview Monday they were still reviewing the transaction and that a recommendation could be out next week.

In the meantime, PLDT and Globe are free to co-use frequencies held by Vega’s units since the NTC already approved this last week, citing a clear benefit to the public, Cabarios said.

For PLDT chair and CEO Manuel V. Pangilinan, the deal was a “win-win” for all involved, since this would boost mobile internet capacity and coverage.

It also meant avoiding time-consuming legal action aimed at redistributing SMC’s frequencies that were unused.

“This is a very friendly way of settling the issue,” Pangilinan said.

Globe CEO Ernest Cu said the main objective was to “free up” the 700 MHz.

“Whatever it took to do that we were willing to do that. And knowing it could take time, we felt that this was the best solution,” Cu said.

SMC president Ramon Ang said the decision to sell was a “sacrifice” that was made to avoid tying up the assets in the possible event of litigation.

“Moving forward, we expect to fully recover what we have invested over the past six years building our network. But more importantly, the public should expect to get faster, affordable Internet access very soon with this deal,” Ang said in a statement.

That improvement in mobile internet browsing speed for PLDT’s Smart Communications, Sun and TNT as well as Globe and its Touch Mobile brand could come anytime starting three to six months from today, both telcos said.

But even with the added frequencies, consumers should not expect prices to come down soon.

Globe’s Cu said mobile browsing rates are already at par with the region, while PLDT’s Pangilinan said they would keep prices “affordable.”

Prices can go down in the near-term if the administration assists in removing certain fees imposed by local government units like so-called tower fees and social acceptability feeds, Cu said.

Nevertheless, some industry observers remained wary the buyout deal meant the industry status quo was only strengthened.

“Basically there is no real competition here,” Winthrop Yu, chair of the Internet Society- Philippines Chapter, said in an interview Monday.

“In real competition, subscribers have a choice of going to a better, cheaper service. What is happening is subscribers are just moving from one telco to another,” he said. “There is a difference between churn and competition. A promo is not competition.”

Monday’s telco deal also has large financial implications for SMC, PLDT and Globe.

The deal was the biggest in the industry since PLDT in 2011 acquired the Gokongwei family’s Digital Telecommunications Philippines Inc., which operates Sun, in a P74 billion swap deal.

Pangilinan said capital spending for PLDT, whose shareholders include Japan’s NTT DoCoMo and Gokongwei-led JG Summit Holdings, will increase by about P4 billion to P5 billion on top of the P43 billion announced for 2016.

He said the SMC acquisition will be partly funded by the sale of shares in Manila Electric Co., helping boost profit this year to P30 billion from P28 billion projected earlier.

Globe, backed by Ayala Corp. and Singapore Telecommunicaitions, plans to borrow about 98 percent of the requirements to finance their acquisition. Capital spending, still pegged at $750 million in 2016, will continue as part of the company’s goal to reach 20,000 barangays (villages) and two million homes by 2020.

For SMC, the added funds will boost its war chest as it continues its diversification into infrastructure and power apart from its traditional food and beverage businesses.

Even as other markets seek to invite new competition, Cu said keeping the country’s telecommunications sector “healthy” meant two players were enough.

The Philippines, he said, was different from other markets given its combination of huge capital spending, bureaucratic red tape dealing with local government units and the need to maintain profit margins all while consumers demand lower prices.

“Scale is important. This has always been the challenge to any entrant given how mature it is and that is what we’ve been saying all along, that the solution to preserving competition is actually not bring in a third player,” he said.