When news broke a couple of days ago on Simba’s buyout of larger rival M1, it must have caught quite a few market observers by surprise.
Rumours of M1 being put up for sale by asset manager Keppel have been going for a while now and StarHub, Singapore’s number two telecom operator, had been long expected to put in a bid.
After all, StarHub and M1 had jointly bid for a 5G licence back in 2020. The unprecedented joint venture was a reflection of the intense competition in the Singapore mobile market, as telcos sought to manage costs.
Now that Simba, or rather its Australia-listed parent Tuas, has swooped in to buy up its larger rival (by market share), the consolidation will drastically impact M1. It will also affect how telcos compete in Singapore in the coming few years.
For starters, despite all the stiff competition – 10Gbps broadband now goes for under S$30 a month in Singapore and 4G mobile services start from under S$10 – none of the big telcos in Singapore are in danger of going under.
M1, despite being taken off the mainboard in Singapore in 2019, has earnings before interest, tax and amortisation (EBITA) of S$190 million in the past 12 months.
Ironically, it is Tuas – Simba’s parent – that has only just posted its first half-year net profit in March. Its EBITA for the past 12 months is slightly over S$60 million.
So, how does a company that has already spent millions of dollars in setting up 4G, then hurriedly push out 5G (Simba is still rolling it out islandwide), stump up the S$1.43 billion to buy over its larger rival M1? Don’t forget this includes S$1 billion in cash that it is handing over to Keppel as well.
First, Tuas is bringing the money by raising equity of around A$416 million (S$348 million) from institutional investors and through a share purchase plan (sold at a discount).
Second, the company is also borrowing from the banks, to the tune of S$1.1 billion, which is fully underwritten. This is the important part because banks will be looking at M1 as a safe bet so they can manage the risks of lending the money for Tuas or Simba to buy over its rival.
How will it pay off the debt? Notably, Tuas has said that it will “rapidly de-lever as synergies are realised and through continued operational discipline”.
Of all the commentary you’ve been reading, this is the part that needs to be emphasised. If you look at how Simba has been run, it doesn’t have a huge margin for profit and certainly none for any fat in its operations.
It is run, if you take a consumer’s view, as if it’s a virtual operator because its prices are certainly like that of a lightweight operator without any costly infrastructure to maintain.
This means M1 can expect operations to be streamlined and costs to be cut so that Tuas reduces its debt incurred in the takeover. Possibly, like with any merger or takeover, employees might lose their jobs as well.
Cost cutting and streamlining appear the easiest ways forward in Singapore’s intensely competitive market. There is no new network service – like a 6G – to appear in the horizon for telcos to charge consumers more. Plus, there isn’t anything beyond 10Gbps fibre broadband, either.
So it’s difficult for Simba to raise prices in the near term. More likely, M1 will have to follow Simba’s lead and drop prices even further as the merged entity seeks to gain market share.
There has been talk that a merged M1-Simba entity would challenge Singtel or StarHub with their combined market share in mobile and broadband services.
This is premature because market share is only one part of the equation – if you keep selling mobile services at S$10 or lower and throw in hundreds of gigabytes of roaming data, like Simba, the margins get tougher over time.
Note too that Tuas and Simba have not bought the probably more lucrative parts of M1 – the corporate business and data centre units – and only eyed the low-cost consumer segment. This is the toughest segment, as Singtel and StarHub will also tell you.
What Tuas and Simba do get is M1’s subscriber base – in the important post-paid mobile market, Simba will add M1’s 23.9 per cent share to its 14.4 per cent. This means 38.3 per cent of the market, just under Singtel’s 38.9 per cent and significantly above StarHub’s 22.8 per cent.
Perhaps even more importantly, Simba would be able to tap on M1’s already-built 5G network, so it may not need to spend more to continue building out its 5G network in Singapore, which is a costly exercise.
This is subject to the government regulator’s approval, of course. Remember Simba is obliged to roll out its 5G network by next year. There’s been precedent of licence obligations being met through mergers, of course – see when StarHub bought over Singapore Cable Vision in 2001).
For Simba, an acquisition of M1 will no doubt be a big win. As the newest telco to join the fray in Singapore (first as TPG back in 2016), it always had to catch up to its larger rivals. However, with M1, it will enjoy a large market share in mobile services and has a ready-built mobile network to start monetising.
The big challenge would be paying off its debt incurred in buying over a rival. Cost pressures will be intense from Day One of a merger.
As for competition, there should not be a drastic change in prices for consumers in the short term, but there won’t be a surprise if Simba pares down the operations at M1 to make it run as leanly as an upstart challenger.
All this has to make sense ultimately for the investors funding this takeover. That will be clearer in the coming year or so. For now, it’s still early days and many things are in flux.
First, Tuas or Simba has to be able to raise the equity to help fund this. The loan it is taking from banks will add pressure on it to turn things around quickly in an already-tough market, so the new M1-Simba entity won’t have an easy ride.
That said, if it manages to run fast enough while winning a lot more share at low profit margins, then it has a way forward. Consumers might even benefit from possibly lower prices in the long term.
