Corruption in Phl ‘culprit’ in aborted Telstra-SMC deal

By Luis Leoncio 

Perceptions of pervasive corruption continue to haunt the Philippines in the international community, which is why the business community in Australia is reported to have felt generally relieved that the planned telecommunications venture between local conglomerate San Miguel Corp. (SMC) and Australian giant Telstra has been aborted. 

Telstra has cited the lack of an acceptable “risk-reward balance” as reason for abandoning its negotiations with SMC.

David Ramli, Sydney-based analyst for the Sydney Morning Herald newspaper, said the elephant in the room for the botched deal was the “widespread corruption in the Philippines.”

“Doing business on the archipelago is certainly getting better. But corruption remains a constant problem that has reached the highest levels of government,” Ramli said.

Ironically, one of the biggest scandals in recent years involved the construction of a national broadband network in 2008 and accusations of interference by the husband of the country’s then-President Gloria Macapagal-Arroyo, he added.

Last week, SMC President and COO Ramon Ang said that, while both SMC and Telstra worked hard to come up with an acceptable resolution on contentious issues, both decided not to push through with the talks.

“I believe this is best for all parties,” he said.

Telstra CEO Andre Penn also confirmed the news.

“Despite an enormous amount of effort and goodwill on all sides, we were simply unable to come to commercial arrangements that would have enabled us all to proceed,” Penn said in a statement.

Telstra has planned to invest up to $1 billion in the partnership had the deal pushed through.

Ramli said Telstra’s last taste of working with corrupt businesses took place when it acquired a Chinese technology company named Octave Group that turned out to be a beneficiary of bribes paid to China Mobile officials by the previous owner.

Telstra never knew of the bribes and paid no kickbacks, so revenue promptly fell off a cliff, $302 million was eventually written off, he said.

SMC said that, despite the deal’s falling through, it will still “switch on as scheduled” its new telecommunications network, which it promised will provide high-speed Internet service.

Ang said Telstra has offered to continue technical work design and construction consultancy support to the conglomerate.

“What’s important is that we give Filipinos a third and better choice that they have been deprived of for the longest time,” Ang said.

“SMC’s entry in the telecom market will definitely be a game changer. When we launch, consumers will benefit from better, cheaper service,” he added.

Penn has said the Philippines was ideal for the entry of another major player in the telco market.

“Frankly, let’s face it. Go to the Philippines, experience for yourself the sort of lousy service you get from the incumbent operators, and you will see that the opportunity there for a new operator to provide a much better quality service over an LTE (long-term evolution) network, over a better spectrum,” he said.

Telstra has cited the lack of an acceptable “risk-reward balance” as reason for abandoning negotiations with SMC.

On the surface, it was a killer deal—Telstra would spend a relative pittance to roll out high-speed mobile broadband to the country’s rising middle class.

The two existing players, Globe Telecom and the Philippine Long Distance Telephone Co. (PLDT) are a duopoly enjoying strong profit margins despite providing a relatively poor service.

Australia’s Fairfax Media visited the country earlier this year on a three-week fact-finding tour amid the SMC-Telstra negotiations, and saw the clear need for better services.

Both Globe and PLDT offered wide coverage for low prices, but this is largely limited to phone and text message services.

Among Fairfax Media’s findings was that Filipinos cannot order an Uber car service because their smartphones struggle to get data connections in crowded places.

As a result of a slow Internet, local teachers on one island have to rise at 5 a.m. to download resources since the rest of the day means unusable Internet speeds.

Ramli said two obvious hurdles for Telstra were the existing service providers, Globe and PLDT.Globe President and CEO Ernest L. Cu and other local telco executives spoke of their plans for fighting Telstra, “techniques that would make an Australian Competition and Consumer commissioner’s head explode,” Ramli said.

Stores that rely on the foot traffic and income generated by selling Globe and PLDT SIM cards would be banned if they dared to stock San Miguel’s telco products, he noted.

Cell tower sites and backhaul would be locked up for use, preventing any sharing of resources while district governments lobbied against letting the new players in, he said.

SMC going on its own, however, may mean a slower progress for its telecommunications unit.

“We note that the incumbents control towers and fiber infrastructure in the Philippines, and higher interconnect rates are another hurdle to gaining market share,” wrote Morgan Stanley on its assessment on the local telecommunications sector.

Also, Telstra would have provided access to capital and technical expertise.

Morgan Stanley’s Navin Killa said “competition remains intense, but Globe has managed to convert its network headstart into steady market share gains and data revenue growth. With the stock’s correction from peak, we believe 2016e P/E of 16x and dividend yield of 4.6 percent make valuation attractive, especially given the outlook for sustainable high-single-digit revenue/earnings before interest, taxes, depreciation and amortization (Ebitda) growth.”