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The problem with the SMC telco deal

/ 12:12 AM June 07, 2016

President-elect Rodrigo R. Duterte is aware his overall economic goals demand no less than making the nation’s communications infrastructure fast, reliable and affordable—reminiscent of the time when President Fidel V. Ramos, upon his ascendancy to the presidency in 1992, deregulated the telco industry for the same very urgent reason.

Duterte did not even wait until June 30 to issue a warning to publicly listed Philippine Long Distance & Telephone Company (PLDT) and Globe Telecom, the two biggest companies controlling the industry, to improve the speed of internet service in the Philippines, one of the slowest and most expensive in the world.

But that aspiration may have faded with the sale of San Miguel Corp.’s (SMC) 700-megahertz (MHz) service band to the major players in a P70 billion buyout deal.

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Salient points 

PLDT and Globe would each acquire 50 percent of SMC’s telecom assets.  The deal involved the sale of San Miguel’s holdings in Vega Telecom Inc., Bow Arken Holdings Co. Inc. and Brightshare Holdings Corp.

Based on disclosures to the bourse last Tuesday, half of the deal was paid the previous day—a significant event questioned by some market watchers since it was not disclosed immediately. The neglect of which, following disclosure procedures, constitutes a violation against the investing public’s right for fair and timely information.

At any rate, another 25 percent would be paid on Dec. 1 while the balance would be delivered on May 16, 2017.

PLDT and Globe would also have to give up some of its acquired frequencies. These would come partly from the 850, 2500 and 3500 MHz bands.

Together with the radio frequencies already held by the National Telecommunications Commission (NTC), they asserted these would already be sufficient to allow for a third-party operator to enter the market.

Ray Espinosa, PLDT head of regulatory affairs, said the transaction would not need the approval of Congress.  It was very likely, however, PLDT and Globe would actually seek exemption from review from the newly-formed Philippine Competition Commission (PCC) for anti-trust violations.

Industry situation

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The Philippine telco industry is supposedly a deregulated market with the existence of two competing players. Yet, since the industry’s deregulation in 1992, internet service has not adjusted in terms of quality—exposing the weakness of the duopoly.

Adding insult to injury, the recent deal seemed to have no outright guarantee of a fast, reliable and affordable service except it would definitely reinforce the two companies’ grip on the market and, most significantly, make it hard for a third player to compete.

Bottom line spin

Operating mobile-internet service through the 700 MHz spectrum is said to be cheaper and more efficient.  The 700 MHz band is able to penetrate walls and larger geographic areas.

SMC president Ramon Ang told reporters on the sidelines of the company’s recent stockholders’ meeting he and the entire management was “very, very sad” with the decision to part with the telco assets. He also claimed the sale barely allowed SMC to “save a little” in interest expenses. He said the sale price was just enough for the company to recover its investment costs and did not make a profit.

Ang dignified SMC’s decision with a statement it was a disservice to make the people unnecessarily wait any further for foreign technical partners to come in after the joint venture negotiation with Australia’s biggest telco company, Telstra Corp., failed.

With SMC’s appetite for value and growth, one can’t help but wonder why the firm has to part with a prized asset. The clue can be found in what newspapers simply cited as “some issues” to explain why the Telstra talks failed.

These “some issues”, I believe, are the same issues that led to the Gokongwei group’s decision to sell their telco company, Digitel Mobile Philippines Inc., to PLDT not long ago.  The company was in an impossible situation whereby interconnecting with the two major players was aggravated by faulty government control and guidance.

Our President-elect Rodrigo Duterte, the PCC and the NTC should give the state’s frequency allocation policy and interconnection system a closer look to remove the “cartel” enjoyed by the two major players.

(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at marketrider@inquirer.com.ph, densomera@msn.com or at www.kapitaltek.com.)

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TAGS: Business, economy, Globe telecom, News, Philippine Long Distance Telephone Company, PLDT, President-elect Rodrigo R. Duterte, San Miguel Corp., SMC
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