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COMPANIES

Time dotCom's Watershed IPO

Malaysia's largest initial public offer since 1997 is unique for being fully underwritten and could be a bell-wether for other corporate debt-workouts

By S. Jayasankaran/KUALA LUMPUR

Issue cover-dated February 8, 2001

HALIM SAAD may have more cards up his sleeve than a conjuror. Over the last six months, Malaysia's infrastructure baron has rejigged restructuring plans for his debt-plagued Renong group three times and bought extra time to keep a 3.1 billion ringgit ($815 million) commitment to another Renong affiliate outstanding for three years. The market's reaction has been uniformly hostile: The prices of his various listed companies have dropped 30%-50% since August.

But despite poor market sentiment, Halim is pressing ahead. In what is billed as Malaysia's biggest listing since the Asian financial crisis, next month Renong's telecommunications unit, Time dotCom, will sell and privately place 22% of its shares to investors for 1.89 billion-ringgit. It's a deal that could create a company worth 8.5 billion ringgit and ranking among Malaysia's top 10.

With creditors baying at his heels, Halim may have had little choice--the listing had been delayed three times already. Nevertheless, it is being carefully scrutinized as a bell-wether for corporate restructuring in Malaysia as it has implications for future asset listings by indebted conglomerates--including Halim's Renong, which plans another giant listing later this year.

It also presages more competition in the crowded telecoms business, which already has five big players. And finally, it will remove one huge headache for bankers: Together with the listing proceeds and other sources, close to 4 billion ringgit in debt owed by Time Engineering, Time dotCom's parent, will be paid off.

Analysts are bracing themselves for a disappointment. An unenthusiastic public reception that pushes the share price below its offer price could spell trouble for other asset listings contemplated by companies seeking to prune debt. It would certainly affect Plus, a toll-highway operator that is Renong's only cash cow. Its listing, expected later this year, is slated to raise 4 billion-5 billion ringgit that would go toward retiring more group debt, estimated at more than 25 billion ringgit.

Analysts maintain that such an outcome would make underwriters leery of participating in future listings by indebted companies. Indeed, a lacklustre performance by Time dotCom would entail potential losses to its underwriters, the banks and sundry government agencies. That could provoke a selldown of banking stocks which, in turn, would further depress sentiment on a bourse that's dropped almost 20% over 2000.

To be sure, Halim has no immediate worries. In November, 10 banks led by Commerce International Merchant Bank fully underwrote the issue. It was the biggest such agreement in Malaysian corporate history which says much for Halim's clout. But it also means the businessman will, indeed, raise the 1.89 billion ringgit whether or not the shares have takers. That has implications for the telecoms industry as a whole. After its listing, Time dotCom will be Malaysia's only telecoms unit with zero debt and "at least 900 million ringgit in cash," according to Halim. The clean balance sheet will allow Time to embark on a price war to gain market share that could prove bruising to the industry.

It's a war that's already begun: Time dotCom has begun offering subscribers 50% discounts, while investors in its shares have been promised 80% discounts. "In 1999, we had about 400,000 customers," says Halim. "The [share] valuations were done on the basis of 850,000 customers. Right now, we have 1.6 million. We're growing exponentially."

In fairness, Time dotCom has one major asset that none of its competitors possesses--5,200 kilometres of fibre-optic cable that wires most of Peninsular Malaysia. It's only about 15% utilized, which means Time dotCom can wholesale bandwidth, or capacity, to other telcos, or phone companies. Most Malaysian telcos piggyback on either Telekom Malaysia, which has a mainly copper wire grid, or Time.

Listing will mean the network will be paid for completely, which for Halim translates into a "tremendous competitive advantage." Time dotCom's business model is simple: aggressive customer acquisition and the provision of new services. "The future is all about data transmission, not the voice business," says Halim. "With our network, we can promise greater speeds, more broadband access. And a network is 70% of costs. We don't have to borrow or spend as much as the others to deliver the same services." Michael Greenall, research head at BNP Paribas Peregrine in Kuala Lumpur agrees: "Without debt, they can compete effectively on cost. They can afford to undercut."

Time dotCom's position owes largely to the help given by the government to Halim, a protégé of Finance Minister Daim Zainuddin and a favoured son of the ruling United Malays National Organization. When Mahathir axed Singapore Telecommunication's bid to buy a stake in Time dotCom, Khazanah Nasional, the federal government's investment arm, stepped in as partner. Post-listing, Khazanah will own 30% of Time dotCom's enlarged capital for 2.1 billion ringgit. That, together with 1.3 billion ringgit from the listing proceeds and another 850 ringgit term loan from a bank, will clear close to 4 billion ringgit in overdue loans owed by Time Engineering.

CAUSE FOR CONCERN

Meanwhile, Time dotCom will garner close to 500 million ringgit from the listing proceeds. That's in addition to the 250 million ringgit it has in retained earnings. Finally, it is owed over 150 million ringgit by another, unrelated, company--which makes up the 900 million ringgit Halim says it will have at the end of the day. That's quite remarkable for a Malaysian telco; most have debt ranging from 500 million ringgit to 10 billion ringgit. Indeed, an October 2000 report by independent consultants Arthur D. Little concluded that Time dotCom's business model was "feasible." An earlier report by Rothschilds concluded similarly.

Why then the unease? It stems from Halim's aggressive revenue projections for a company that expects to lose 2.6 million ringgit for the year ended December 2000. In essence, the businessman insists that he can do in six years what took Telekom Malaysia, the country's national utility, more than 25 years. In its prospectus released on January 22, Time dotCom forecasts a net profit of 151 million ringgit for 2001 and sharply escalating figures thereafter--376.4 million ringgit for 2002, 523 million ringgit for 2003 and 1.14 billion ringgit by 2007.

Moreover, the shares are being offered at 3.30 ringgit apiece. That values the shares at over 50 times 2001's projected earnings, compared with Telekom Malaysia's 27-28 ringgit. Moreover, 3.30 ringgit was determined in early 2000 when the tech-heavy Nasdaq composite index was moving within a range of 3,000-4000. It was also the price SingTel, the republic's national utility, had agreed to buy into Time dotCom. Indeed, SingTel's bid boosted Halim's credibility no end.

But the Nasdaq has since corrected downward by more than 40% and telco prices globally have come off. That's why firms like KAF Seagroatt Campbell in Kuala Lumpur actually advised investors not to subscribe to the listing. "If he could get a credible strategic partner like SingTel, there would be no problem," says Amar Gill, the head of CLSA Securities in Kuala Lumpur. "Investors are looking at technology and management expertise."

"Wait and see," Halim told the REVIEW in an interview, implying there was, indeed, a strategic partner in the offing. For all that, however, the businessman's biggest bugbear may be what analysts now call the "Halim factor"--his lack of market credibility that translates into poor share prices. For example, United Engineers Malaysia, a Renong affiliate once an institutional favourite, trades at a 60%-70% discount to its net asset value. What if Time dotCom tanks on listing? "OK, fine, then investors can expect dividends," says Halim. "I assure you they will get good dividends."