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When Singapore’s state-run investment arm Temasek Holdings bought Thailand’s Shin Corp telecommunications conglomerate in 2006, its 73 billion baht (US$2.2 billion) acquisition of Shin Satellite was a strategic afterthought.
Temasek was known to have purchased Shin Corp from company founder and then Thai premier Thaksin Shinawatra for its exposure to Thailand’s fast-growing mobile telecom market.
The politically charged transaction came just months before Thaksin was ousted in a military coup. After Temasek’s purchase, a military appointed government de facto nationalized Shin Corp’s iTV on charges the television subsidiary had violated its state operating concession. Now, Shin Satellite is indirectly embroiled in a closely watched court case that threatens to seize permanently US$2.3 billion of the now exiled Thaksin’s frozen assets on corruption charges.
The charges include allegations that Thaksin’s government illegally granted Shin Satellite a preferential eight-year tax holiday on its foreign operations, a policy that prosecutors have claimed cost the state over 16 billion baht in lost revenues. The decision in the case is due on February 26, and according to analysts it’s unclear what legal implications a guilty verdict would have on the Temasek-owned company’s finances and state concession agreement.
Temasek’s investment in Shin Corp’s mobile telecom arm, Advanced Info Services, has been profitable and promises new revenue streams with the belated launch of third-generation, or 3G, services in Thailand. Yet as political risks rise, there have been reports in the Thai media suggesting that Temasek may try to unload its 41% majority stake in Shin Satellite, which it recently re-branded as Thaicom, apparently to disassociate the company from its past links to Thaksin. Market analysts have suggested that Thailand’s Samart might be interested in the stake, but there is no indication that a transaction is either feasible or imminent.
While revenues have grown, Thaicom has not turned a profit in years and its regional outlook dimmed substantially amid the global economic downturn. According to Thomson Reuters, the sale of bonds worth 7 billion baht in November will help Thaicom repay debts and issue a dividend to shareholders this year – the first paid out since 2004. While official figures have not been released, analysts estimate the company’s net loss was around 349 million baht in 2009.
Thaicom executives remain bullish about the company’s 2010 prospects despite the fact its older satellites, Thaicom 1 and Thaicom 2, are coming to the end of their service lifetimes and it is not clear the company has a coherent plan to deal with the lost capacity. Meanwhile, sales for its $300 million Asia-wide iPStar broadband satellite remain sluggish, with only 10% to 15% of its total capacity leased.
According to Paris-based Euroconsult, a telecommunications consulting firm, Thaicom’s “fixed satellite service-based revenues are expected to have stagnated or slightly decreased in 2009”. It said that because both the Thaicom 1 and Thaicom 2 satellites are set to be phased out, the company will soon be unable to serve all of its existing customers.
Last year “Thaicom management proposed launching a new satellite to its board and shareholders, a request which was rejected,” said Euroconsult. “Thaicom was asked to maximize the capacity of existing satellites while pursuing other options. The company is negotiating with the Thai government to have a better concession in order to buy a new satellite. Otherwise the company will have to rent a satellite for three to four years.”
With the court case against Thaksin, it seems unlikely negotiations with the government will yield a better concession deal. Many had hoped that Singapore’s takeover would have given the Thai-founded company a more global outlook and approach. According to Peter Evans, senior analyst for Southeast Asia at Australia-based BuddeComm, “Thaicom still seems to be a very ‘Thai’ company, with no indication that Temasek has put any special stamp – Singaporean or otherwise – on it.”
Since the 2006 coup, political considerations have substantially raised Thaicom’s risk profile. While the company’s alleged preferential tax treatment is at the center of the latest corruption charges being heard against the exiled former premier, another future court case is expected to be filed over a loan by the government-owned Export-Import Bank of Thailand to Myanmar’s government to purchase Shin Satellite services.
According to analyst Evans, a further political complication for Thaicom involves its mobile phone and satellite businesses in Cambodia. A simmering border dispute between Thailand and Cambodia has been a growing concern for Thai businesses in Cambodia, including Thaicom’s subsidiary, Cambodia Shinawatra Co, which still bears Thaksin’s family’s name despite Temasek’s ownership. It’s unclear if Thaksin’s recent controversial appointment as an advisor to the Cambodian government will mitigate those risks.
Most significantly, Thaicom’s iPStar broadband satellite has failed to achieve its full commercial promise. Company executives said before its launch that the newfangled bird would revolutionize the regional satellite business by bringing cheap broadband services to the consumer level in remote rural areas.
“Shin Satellite is in a unique position,” said former company chairman Dumrong Kasemset in late 2002. “We are now the world’s pioneer in creating a truly integrated solution for satellite broadband.’
It hasn’t exactly played out that way. The company earlier estimated that it needed 250,000 broadband subscribers, or to sell 15% of iPStar’s total 45 gigabit capacity to customers other than broadband subscribers, to break even. According to Euroconsult, the last publicly available iPStar subscriber figure was 184,000 at the end of last year’s second quarter, the majority of which were in Australia, New Zealand and Thailand. Customers other than broadband users represented only 2% of iPStar total revenues.
As of last year, iPStar accounted for roughly half of Thaicom’s total satellite revenue. Nevertheless, iPStar’s business is not profitable, according to Euroconsult, and resulted in an operating loss in last year’s third quarter due to high costs associated with gateway and user terminal expenses. According to Evans, iPStar has yet to turn the commercial corner, and while Thaicom executives continue to talk up the satellite’s progress “it is doubtful that they have achieved widespread acceptance of the iPStar service in the marketplace”.
That said, the company has achieved progress in selling capacity in a few developed regional markets, including Australia and New Zealand, where under-serviced rural customers have seemed to embrace iPStar’s broadband services. But iPStar’s two main regional targets, China and India, have seen slower than anticipated uptake, primarily because of regulatory issues.
“Penetration in these two huge markets was delayed by complex regulatory issues, though it seems this hurdle will soon be cleared,” said Euroconsult. “However, market acceptance of iPStar in China has so far been very low, as terrestrial telecommunication infrastructure has been much improved in recent years.”
“The company in its 2009 quarterly reports makes an effort to feature its market expansion activities and the positive financials such as the increasing revenue for its iPStar services, but it is not clear from the quarterly reports that it is on a path to achieving overall profitability,” said Evans.
Analysts say Temasek’s apparent efforts to sell its Thaicom controlling stake is not a sign that Singapore Inc has soured on the regional satellite market. To the contrary, Singapore has kept relative pace with the region’s two prime movers, China and Japan. Apart from its ownership of Thaicom, Temasek-controlled SingTel operates the successful Optus satellite fleet in Australia and enjoys a long-running joint venture with Chunghwa Telecom in Taiwan. (Thaicom intends to launch a new ST-2 satellite with Chunghwa early next year with an aim to serve the entire Asia Pacific region.)
SingTel has also developed a budding relationship with Bermuda-based Asia Broadcast Satellite (ABS), which offers satellite services in Asia, Africa and the Middle East. Last year, SingTel spent $80 million to lease capacity on the company’s new ABS-2 satellite.
According to Patrick French, senior analyst and head of the Singapore office of NSR, a US-based telecom consulting group, it is not yet possible to quantify iPStar as a ringing success, but the company continues to see steady improvements.
“2010 should be interesting for iPStar and possibly telling when it can finally go full force into the Indian market,” said French. “All of the regulatory hurdles have been overcome – at least as far as can be expected for India – and the services should start soon actually. Indian iPStar gateways are still being built and iPStar has been working to sign capacity clients, too.”
According to satellite industry consultant Roger Rusch, president of California-based TelAstra, iPStar has always been an ambitious initiative given the sheer scale of the project. He ventures that the company has struggled to find the right business model for the technology as the market it has targeted – rural Asia – still has an extremely low per capita gross domestic product.
Combined with the global economic downturn, that’s made for a volatile product mix. Rusch estimates that Thaicom is still on a somewhat stronger financial footing than the global satellite radio service WorldSpace and Asia-based satellite service provider Protostar, which both recently declared bankruptcy. Even so “I suspect that iPStar will continue to struggle for some time to become profitable,” said Rusch.