US embassy cable - 05BANGKOK6901

UNCLAS SECTION 01 OF 04 BANGKOK 006901 
 
SIPDIS 
 
STATE FOR EB/CIP, EAP/MLS 
USTR FOR WEISEL, MCHALE 
JUSTICE FOR CHEMTOB 
COMMERCE FOR JKELLY AND JBENDER 
TREASURY FOR OASIA 
STATE PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ETRD, ECPS, EINV, ECON, TH 
SUBJECT: THAI TELECOM SECTOR: NORWAY'S TELENOR BUYS OUT 
UCOM AND TAC 
 
REF: N/A 
 
1.  (U) SUMMARY: On October 20, 2005, Norway's Telenor 
announced an indirect takeover of Thailand's UCOM and its 
mobile phone subsidiary Total Access Communications (TAC). 
The complex transaction paves the way for Telenor control of 
Thailand's second-largest mobile phone operator.  The 
National Telecommunications Commission is reviewing the deal, 
but appears unlikely to block it.  If allowed, the buyout 
promises to strengthen competition in the mobile telephone 
services market, which will benefit consumers and the 
nation's infrastructure.  The deal will not likely open the 
door to future cross-border buyouts in the telecom sector 
anytime soon, however, because of the pervasive economic 
nationalism within both the government and industry. END 
SUMMARY 
 
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THE DEAL 
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2.  (U) The Norwegian telecom company Telenor ASA entered the 
Thai telecom market in 2000, investing 30 billion baht (about 
$720 million at the time) in United Telecommunications 
Industry PCL (UCOM), one of Thailand's oldest telecom firms. 
The Thai-Norwegian company has since made dramatic strides in 
revitalizing its market and financial positions.  Then, in 
November 2004, Telenor's Singapore unit, Telenor Asia Pte Ltd 
(Telenor Asia), set up a company named Borelo Ltd (Borelo) in 
Thailand with a registered capital of 10 million baht. 
Borelo is 48.98 percent owned by Telenor Asia.  Telenor 
Mobile Holding and Telenor Mobile Communication also jointly 
own a combined stake of 0.02 percent in Borelo, with the 
remaining 51 percent held by Thai nationals. 
 
3.  (U) Telenor's effort to enter the Thai market culminated 
in the October 20, 2005 announcement that it was buying out 
the founding Bencharongkul family and taking effective 
control of both UCOM and its subsidiary, the mobile phone 
operator Total Access Communications (TAC).  TAC is the 
country's second largest mobile phone provider, which markets 
its services under the DTAC brand.  Structured in a manner to 
work around Thailand's restrictions on foreign ownership of 
businesses, the series of transactions comprising the deal 
basically enable Telenor to become the majority shareholder 
in both UCOM and TAC, when direct and indirect holdings are 
combined. 
 
4.  (U) The cornerstone of the deal is the holding company 
Thai Telco Holdings Limited (Thai Telco), a 49 percent-owned 
subsidiary of Telenor Asia in which Borelo also has a 24 
percent stake.  Under the terms of the deal, Thai Telco 
purchased a 39.88 percent stake in UCOM (173.3 million 
shares) from the Bencharongkul family at 53 baht per share 
for a total of 9.18 billion baht (about $229.5 million). 
Telenor Asia already holds a 24.85 percent stake in UCOM and 
a 29.9 percent direct stake in TAC.  UCOM currently owns a 
41-percent stake in TAC. 
 
5.  (U) Thus, when direct and indirect holdings are combined, 
Telenor and its subsidiaries will own 64.73 percent of UCOM 
and 70.9 percent of TAC, thereby obtaining effective control 
of both companies.  Telenor will consolidate the financial 
results of UCOM and TAC into its financial results.  Thai 
Telco Holdings will also submit a tender offer for the 35.27 
percent of UCOM and all outstanding shares of TAC not already 
controlled by UCOM or Telenor and its subsidiaries.  If all 
outstanding shares tendered in UCOM and TAC are accepted (at 
the projected price of 53 baht per share), the total cost to 
Telenor is estimated at 34 billion baht (about $850 million). 
 
 
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REGULATORY APPROVAL LIKELY 
-------------------------- 
6.  (U) Precisely because the deal barely complies with the 
letter let alone the spirit of Thai restrictions on foreign 
ownership, some Thai observers have criticized the deal.  Why 
should what is essentially a foreign company be allowed to 
gain control of a domestic one, particularly in a sector as 
critical for both economic development and national security 
as telecommunications?  (Note:  Under current law, foreign 
ownership in the telecommunications sector is capped at 25 
percent.  Parliament has passed an amendment to the law that 
would raise the limit to 49 percent.  The amendment has 
already been approved by the Cabinet and the Council of 
State.  It is expected to become effective at the end of the 
current session of Parliament in December 2005. End note.) 
 
7.  (U) Industry observers do not expect the NTC to block the 
deal outright, especially if the Securities and Exchange 
Commission is on board as it appears to be.  As one 
securities analyst who has long followed the sector explained 
to the Embassy, the industry regulator is in the spotlight as 
a result of the deal, and postponing a decision will be 
difficult because a foreign entity is involved and because 
the NTC is still in the process of establishing itself and 
the scope of its authority.  On October 24, the NTC announced 
that it would examine whether Telenor's takover of UCOM would 
hurt market competition and consumers, but it has not given 
any indication of either its view or likely decision. One 
industry lawyer familiar with the deal told the Embassy that 
the NTC is unlikely to interfere with the deal itself, 
because TAC can make the argument that the business it 
operates under the concession with state-owned CAT Telecom 
Pcl (CAT Telecom) is protected under constitutional 
provisions to safeguard concessionaires. 
 
8.  (U) The same observers nevertheless doubt that Thai 
regulatory authorities would permit similar foreign buyouts 
of the telcos.  Even this transaction is expected to face 
difficulties as the purchase goes forward.  The 
above-mentioned securities analyst immediately downgraded 
TAC.  &Blocking the deal would not be very Thai,8 he 
explained, &TAC will more likely run into other barriers 
that will make doing business difficult.8  The industry 
lawyer agreed, explaining that when TAC applies for a 3G 
license from the NTC, for example, it may encounter 
difficulties.  Consistent with his prediction, the NTC has 
announced that it may delay issuance of any 3G license until 
the amendment raising the cap on foreign ownership from 25 to 
49 percent becomes effective.  The NTC is in the process of 
drafting competition codes to prevent market abuse by giant 
operators, and has not yet announced the specific provisions 
of such codes.  Widespread concern among industry players 
that the regulatory regime allows local businesses to compete 
with foreign companies &on a level playing field8 will 
ensure that whatever the NTC does will be closely watched. 
 
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WHY NOW? 
-------- 
 
9.  (U) Although the buyout surprised the industry and those 
who follow it, including observers expecting closer 
cooperation between TAC and Telenor, the deal appears to have 
come together in part because the Bencharongkakul family was 
willing to sell out. Boonchai Bencharongkakul, TAC Chairman, 
has publicly said, &during the past sixteen years working 
with DTAC, I have not been happy for a single day; we have 
suffered discrimination by the government.8  Indeed, the 
terms of DTAC's concesssion with the state-owned CAT Telecom 
to operate are less favorable than the terms of the market 
leader Advanced  Info Service Public Company Limited (AIS), 
which is a member of the Shin Corp group founded by Prime 
Minister Thaksin Shinawatra (Shin Corporation Public Company 
Limited).  In addition to the revenue sharing fees under the 
CAT Telecom concession, DTAC must pay an access fee to the 
state-owned TOT PCL (formerly Telephone Organization of 
Thailand PCL) of 200 baht per month per number.  Industry 
observers suggest that, after going head-to-head with AIS for 
years, Boonchai and Vichai Bencharongkakul are now throwing 
in the towel. 
 
10.  (U) Several securities analysts have also suggested that 
now is an opportune time for the Bencharongkakul family to 
exit because of the capital expenditure that will be required 
for the rollout of third generation wireless technology (3G), 
which will bring higher data transmission speeds and Internet 
Protocol (IP) based services.  According to a well-placed 
source at a local securities firm, TAC needed an infusion of 
capital as soon as possible because it has bonds coming due. 
Shin Corp CEO Boonklee Plangsiri indirectly confirmed this 
point in recent interviews with the press in which he has 
emphasized that AIS has sufficient financial resources to 
develop a 3G business on its own. 
 
11.  (U) Another likely reason for the deal is that the 
competitive environment in the mobile services market has 
reached the point where some consolidation among the four 
major providers (AIS, DTAC, TA Orange, and Hutch) is 
inevitable.  After several years of rapid increases in number 
of subscribers, growth has leveled off and the four major 
providers have targeted each others' customers.  Revenue per 
subscriber has fallen during the past year, in part as a 
result of a fierce price war in early 2005.  According to 
company insiders, TAC initially sought to merge with TA 
Orange (TA Orange Company Limited), and turned to Telenor 
only after such deal failed to come together.  According to 
one financial analyst, the family's acceptance of the 
surprisingly low selling price of 53 baht per share may be 
realistic because they understand the real value of the firm 
in a segment of the market about to undergo consolidation. 
The same analyst also suggested the possibility that 
disagreement among management prompted the Bencharongkakul 
family to sell out. 
 
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TAKEOVER WOULD BENEFIT CONSUMERS AND INFRASTRUCTURE 
--------------------------------------------- ------ 
 
12.  (U) In their public statements, executives insist that 
both UCOM and TAC will remain Thai firms.  Telenor Asia will 
achieve only an &enhanced operational role in mobile 
operator DTAC.8  Similarly, all parties emphasize that the 
transaction complies with all &relevant stock market 
regulations in Thailand and Singapore.8  In effect, however, 
the deal makes both UCOM and TAC subsidiaries of Telenor. 
Current plans call for UCOM to focus on broadband internet 
services and TAC to maintain its focus on mobile telephone 
services.  Sigve Breeke, currently CEO of TAC, will also 
become CEO of UCOM. 
 
13. (U) The deal is expected to increase the competitive 
pressures in Thailand's market for mobile phone services. 
TAC (commonly referred to by its brand name DTAC) is the 
number two mobile phone operator in Thailand.  TAC reported a 
subscriber base of 8.2 million at the end of August.  It has 
a 28 percent share of the mobile market, compared with 54 
percent for market leader AIS.  Telenor executives see 
additional upside to the business from continued growth. 
Analysts estimate that about 45 percent of the population has 
mobile phone access.  Expectations regarding future growth 
vary widely.  Optimists expect the number of Thais with 
mobile access to rise to about 75 percent by the end of the 
decade.  More conservative observers see growth in new 
subscribers occurring more slowly, and at the bottom of the 
value chain for the most affordable services on offer.  All 
industry observers expect that Telenor and TAC will likewise 
attempting to compete for market share on the basis of higher 
quality and innovations in service.  The same observers 
generally welcomed stronger competition for the market leader 
AIS, adding that Thai consumers care little about foreign 
ownership in comparison to the value their money buys. 
 
----------------------------------------- 
INTEREST IN ADDITIONAL CROSS-BORDER DEALS 
----------------------------------------- 
 
14.  (U) Owing in part to existing foreign investment in the 
mobile phone operators, and in part to the capital investment 
required for buildout of 3G services, there exists 
considerable interest both within Thailand and abroad in 
other cross-border deals.  Singapore Telecom already owns a 
21.5 percent stake in AIS.  In July 2005, TOT president 
Teerawit Charuwat announced that the Singapore Telecom 
subsidiary National Computer Systems Pte Ltd (NCS) was 
interested in buying a 50 percent stake in a TOT concern 
expected to handle e-government projects.  Since the 
announcement of the Telenor deal, True Corp, which offers 
mobile services through its subsidiary TA Orange, has said 
that the company would seek a foreign partner with telecom 
expertise.  The NTC has reported that several European and 
Asian telecom operators have sought details on investment 
guidelines and regulations.  One local newspaper also 
reported that the Shinawatra family might sell out its 
controlling stake in Shin Corp to China's biggest fixed-line 
phone company, China Telecom.  Shin Corp has denied the 
report, however.  Estimates of the speed with which the 
rollout of 3G will occur vary, but there is no question that 
Thailand is moving forward.  The NTC will begin hearings in 
advance of issuing 3G licenses on November 7, 2005. 
 
15.  (U) Despite such interest in foreign investment in 
Thailand,s telecom sector, the domestic legal framework 
remains comparatively restrictive.  The most fundamental 
restriction is the cap on foreign investment that limits 
non-Thai investors to a minority stake in telecom concerns. 
In the view of Dr. Somkiat Tangkitvanich, Research Director 
of the Thailand Development Research Institute, for example, 
foreign ownership restrictions will remain a barrier to 
cross-border mergers and acquisitions for some time to come. 
 
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COMMENT 
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16.  (U) We view Telenor's buyout of UCOM and TAC as being a 
positive development for Thai consumers, who have seen 
considerable improvement in both the quality and price of 
mobile services on offer as a result of heightened 
competition in recent years.  We do not expect that the NTC 
or other regulators will block the takeover, and we think 
that over time foreign investment in the sector will 
increase.  We nevertheless concur with the more cautious 
industry observers who expect that the new entity may 
encounter barriers to doing business, such as a delay in 
obtaining a 3G license, thereby detracting from the 
takeover's appeal as a model for future deals.  Economic 
nationalism pervades both the telecommunications industry and 
the Royal Thai Government, and the Telenor buyout was too 
much of a shock to the industry for there not to be some sort 
of reaction to it.  Besides regulatory concerns, in view of 
the considerable investment needed for the rollout of 3G 
networks, we also think that the deal is more likely to 
confirm the trend toward consolidation in the mobile phone 
market rather than open it up to new operators. 
 
17.  (U) Thus, we do not expect the climate for foreign 
investment in the Thai telecom sector to become either more 
encouraging or more transparent in the immediate term, 
particularly for US companies.  When we asked the head of 
research at a leading Thai securities firm what the reaction 
would be if the company attempting to buyout UCOM were an 
American firm, he responded with surprise: &An American 
firm? That is different.8  While we are not aware of any US 
company seeking to buy into Thailand,s retail telecom market 
in the same manner as Telenor, we understand that American 
firms are interested in other segments of the market and that 
existing caps on foreign ownership constitute a significant 
barrier to investment.  Without obtaining a special 
dispensation regarding ownership restrictions for American 
firms in the Thai-US Free Trade Agreement, we see the little 
likelihood of American companies being allowed to own a 
majority stake in any Thai telecommunications concern. 
 
BOYCE