Telekom Malaysia slims down, awaits suitors

KUALA LUMPUR, Oct 3 (Reuters) State-controlled Telekom Malaysia has spun off its sluggish fixed-line business, but may promise more than it can deliver to potential stakeholders such as Britain's Vodafone Group Plc .

Telekom says a number of foreign telecoms and private equity firms have courted it, keen to get into a business that has interests in mobile telecoms companies in nine Asian countries, including Sri Lanka, Indonesia, Cambodia, Singapore and India.

Under a recent demerger, Telekom's lacklustre fixed line and broadband businesses will be hived off, and the group's Asian mobile businesses will be listed in Malaysia as Telekom International.

But the makeover may flatter to deceive, as Telekom's interests in Asia's biggest overseas growth markets are already listed and available to buy -- from PT Excelcomindo Pratama in Jakarta, Spice Communications in Mumbai and Dialog Telekom in Sri Lanka.

''I'm not sure what's so exciting about Telekom International,'' said Chan Chee Kin, analyst at TA Securities.

''You can directly buy Spice, Dialog or Excelcomindo. It's all a big question mark for me.'' Telekom's investment bankers, CIMB and UBS , will need to show investors why it's worth buying into a government-controlled firm in which they will never own a majority. And even if they do buy, they will own shares in a currency that is not traded outside Malaysia.

In May, Malaysian tycoon Ananda Krishnan led a .7 billion buyout for the country's largest mobile firm, Maxis Communications . Industry watchers said Krishnan did not think the domestic market valued the company highly enough.

As far as potential Telekom suitors go, Vodafone, the world's No.2 mobile group, already has a branding deal with Telekom, making the step up to an equity deal a possibility.

Shares in Telekom jumped as much as 14 percent following the demerger news, partly on hopes that a big player may buy a stake and also because the spin-off means analysts can value the company without the cumbersome fixed-line business.

However, investors may recall an earlier foreign deal that went sour.

The Malaysian government ignored the objections of Deutsche Telekom AG , which owned 8 percent of local mobile company Celcom, when it took the unit private.

The German telecoms group took its case to the International Court of Arbitration, which ruled against the Malaysian firm. But it left a bitter taste for Deutsche and other foreign firms looking to invest in the country.

STODGY FIXED LINE The prospects for the domestic fixed line and broadband company, for now, are limited to a 15.2 billion ringgit (.48 billion) government-awarded project to wire the nation's homes.

Citigroup analyst Karen Ang doesn't think this is enough.

''The concern is that the fixed line business could be an orphan stock,'' she said. ''FixedCo could derate further given it's a pure domestic fixed-line play with little to no growth prospects.'' Customers will pay for faster Internet connections, but will they stump up for a combined package of broadband, voice telephony and several dozen TV channels vaunted by the government, when content is still a fledgling concept? Other analysts were uninspired by the demerger.

''We are not impressed by the perceived value creation,'' said CLSA's Marcus Chan. ''The deal is a zero-sum game. Any valuation pick up from the higher growth mobile business will be mitigated by a corresponding decline in the fixed line business.'' So far this year Telekom is flat for the year, compared to a 22 percent gain for Singapore Telecommunications , Southeast Asia's largest telecoms company. Telekom trades on a multiple of around 16.7 times earnings, according to Reuters' data, just a shade below Singtel's.

''The problem with Telekom Malaysia, like a lot of government-owned companies, is that they say a lot but don't deliver,'' said Hong Kong-based Alan Richardson, who manages 0 million in Southeast Asian assets at Allianz Dresdner Asset Management.

''Everything is always 'buy on expectations', but time and time the expectation is not met. They are not really meeting consensus earnings expectations. For me as an investor, that's my KPI (key performance indicator)'' Richardson does not own Telekom shares.

REUTERS SR RS1714