This looks shocking. But are things as bad as they look? Has Temasek been such fools throwing away Singapore's reserves?

The figure was obtained by assuming that Temasek has now acquired 2.91 billion shares (said to be 96.12% of Shin Corp shares). They would have been bought at 49.25 baht apiece, but a few days ago, the stock was trading at a 4-month low of only 37 baht per share.

The price drop of 12.25 baht, multiplied by 2.91 billion shares would indicate a paper loss of 36.6 billion baht, which is about S$1.5 billion.

* * * * *

All mega-deals in business are fiendishly complicated; this one is no exception. Very often, they get mired in politics too. You only have to recall Dubai-owned DP World's attempt to buy 6 US ports, and Mittal Steel's offer for Arcelor. Again, the Temasek-Shin Corp deal is no exception.

And when a deal is structured in complicated ways, such as this one, various opponents can make political hay of specific parts of it. The result is a very confusing picture.

Add to that Thailand's political crisis, and the picture gets depressing too. PM Thaksin's opponents are using the Shin Corp deal to beat him with. A boycott has been called against products and services of Shin Corp and Singapore companies in general.

I would also add that Singapore's media have not been doing their job. They have been largely relying on official statements by Temasek rather than going out to investigate the issues for themselves. I have the feeling that reporters and editors, seeing the political heat on the Thai side, are too fearful about inadvertently saying something that might pour fuel onto the fire, so they have largely kept away from the subject. The lack of intelligent discussion leaves room for feverish speculation.

Singaporeans may be bewildered how a deal like this turned sour so easily, and some may be quick to say how incompetent Temasek has been. A headline like "Temasek's paper loss $1.49B" becomes a convenient soundbite.

Let's keep our cool. How bad is it, really?

I won't pretend that I have any special insight, but an afternoon's websearch can reveal a lot.

Let's tell the story from the beginning.

* * * * *

In December 2005, before speculation gained momentum about a sale, Shin Corp shares were generally trading in the range of 40 - 43 baht per share. One could say, this price level would be the fair price for the stock.

Now, take-over deals, especially one that brings with it a controlling share, are usually transacted at a premium, and so the final price agreed between Temasek Holdings and the sellers -- the Shinawatra and Damapong families -- 49.25 baht per share, does not look out of line.

This is to say therefore, that even if no political crisis erupted, and the share price slid back to where it had been in December, Temasek would still show a paper loss. In the short term, this should not be a big concern.

How was the deal structured?

 
Initial purchase

In a public announcement on 23 January 2006, Temasek described two Thai-incorporated vehicles:

• Aspen Holdings Ltd, an indirect wholly-owned subsidiary of Temasek, would buy 329.2 million shares of Shin Corp (11.0%); 
   
• Cedar Holdings Ltd, in which Temasek had a 49% stake, would buy 1,158.5 million shares of Shin Corp (38.6%).

Siam Commercial Bank had 9.9% of Cedar Holdings, while the balance of 41.1% would be held by Thai-incorporated Kularb Kaew Pcl. Temasek had 49% of the latter and two other Thai individuals, Pong Sarasin and Supadej Poonpipat, would hold 51%.

The Temasek-led consortium paid a total of 73.3 billion baht for 1,487.7 million shares, representing 49.6% of Shin Corp. At that point in time -- and bear in mind, it would change within 6 weeks -- there were 2,999.8 million Shin Corp shares issued.

By middle March 2006,  two further changes had taken place with respect to the shareholding structure of Shin Corp -- the general offer and the restructuring of Kularb Kaew.

 
General offer

Temasek's Aspen and Cedar Holdings made a general offer for Shin Corp shares they did not already own. As with standard practice, the general offer was made at 49.25 baht per share.

This also applied to the 24 million employee share options (ESOPs) outstanding at the time.

There were also 159.4 million warrants outstanding, and the Temasek vehicles offered 28.75 baht per warrant. These warrants (1 warrant: 1 share) had an exercise price of 20.5 baht.

On 14 March 2006, after the general offer closed, Shin Corp announced that the total number of shares had increased to 3,023.3 million, as almost all the ESOPs had been tendered and converted into new shares.

Aspen and Cedar's offer was accepted by 1,418.1 other shareholders of Shin Corp, with the result that these Temasek vehicles ended up owning a total of 2,905.9 million shares, or 96.12% of the company.

Shareholdings by Temasek vehicles before and after the general offer

-- Figures from a formal statement issued by Shin Corp
 to the Stock Exchange of Thailand (Form 256-2)
15 March 2006

To keep its listing on the Stock Exchange of Thailand, Shin Corp cannot remain 96.12% owned by Temasek. There must be a  free float of at least 85%. It will be interesting to see how this is going to be achieved, especially with the traded price falling as low as it has, over 20% below the original purchase price of 49.25 baht per share.

At 49.25 baht a share, Aspen and Cedar had spent 143.1 billion baht, acquiring the 96.12% from the initial purchase and the general offer.

Another 4.6 billion baht was spent for the convertible warrants. Almost all of them -- 159.1 million out of 159.4 million outstanding -- were tendered by their holders and accepted by Cedar Holdings. Aspen did not take up any warrants.

 
Entry of Surin Upatkoon

The other big change occurred on the sidelines. Temasek and the two Thai individuals who together owned Kularb Kaew sold 68% of Kularb Kaew to Surin Upatkoon. Surin is a Thai national who is based in Malaysia. The details revealed from this transaction would illuminate much more about the financing of the entire Shin Corp deal. More about this later.

With these two big changes, the ownership of Shin Corp as at 17 March 2006 was like this:

From the chart above, you can see that Temasek's effective ownership of Shin Corp can be estimated to be about 79%.

* * * * *

 
The above understanding of Shin Corp's new shareholding structure is necessary to understand the impact on Shin subsidiaries and affiliates. There are 4 of them which are significant businesses, and all of them are subject to foreign ownership rules.

It is this aspect that business analysts in Thailand have commented upon as being potential trouble-spots. Naturally, Thaksin's opponents have seized on them for political mileage, saying they were violations of Thai law. How true is this?

Let's take them one at a time.

 
Advanced Info Services (AIS)

This is the leading mobile phone operator in Thailand. Shin Corp owns 42.86% of AIS. Singtel owns 19.26%, (Stock Exchange of Thailand website, accessed 22 March 2006). The Government of Singapore Investment Corp owns another 0.76%. Shin and Singtel are the largest and second-largest shareholders in AIS respectively.

Since Temasek has an estimated 79% effective interest in Shin Corp, this means that Singapore interests together own about 54% of AIS. [2]

It is not clear how many of the other shareholders of AIS are also foreign; most of the leading ones appear to be nominees.

Regardless, foreign interest in AIS clearly exceeds the 49% limit imposed by Thai law on telecommunication companies. Does this mean that Shin Corp must now sell off part of its stake? Can it get a good price when it has to sell under regulatory insistence?

On the other hand, the 49% limit seems not to have been observed for another well-known mobile operator, DTAC. This is owned by Total Access Communications (TAC) which is listed on the Singapore Stock Exchange.

For about a year now, Telenor Asia Pacific of Norway has owned 29.94% of TAC directly. Through nominee United Communication Industry Plc, Telenor owns another 41.64% indirectly, making a total stake of 71.58%. All this is public information available from the Singapore Stock Exchange site.

Why is this not controversial?

I came across a commentary webpage that said that Thai authorities have generally treated nominees at face value, that is to say, if the nominee company is incorporated in Thailand, it is treated as Thai.

For example, many foreigners buy landed bungalows in Thailand using Thai front nominees and seldom does the government object. Foreigners aren't allowed to directly own land in Thailand.

I'm not sure how true this is, but if so, this practice may explain how DTAC can be majority-owned by Telenor without controversy. It may also mean that Temasek might have expected its ownership of AIS to be treated with the same unconcern.

But now that the political spotlight has fallen on foreign ownership of Shin Corp and AIS, how can one expect the regulators to look the other way anymore?

Another interesting point I came across is one made by David Fulbrook in Asia Times. He said,

Was Temasek planning to put some part of its shareholding in nominees' names until December, then appearing to buy them out in 2007?

Critics' claims that the other shareholders in Cedar Holdings, and even Surin Upatkoon, were really nominees of Temasek may well be right. After all, Singapore's Business Times, mentioned in passing in an article 17 March 2006, that Kularb Kaew received "a 20 billion baht (S$820 million) loan from Temasek to buy its Shin shares." See section 'Kularb Kaew is 8 times leveraged' below.

Was Temasek caught by surprise that its use of nominees (if any) would prove controversial? Must Temasek now really sell down its Shin stake in AIS to meet the 49% rule? If so, this would be a most inconvenient time, as a consumer survey has just reported that 11% of AIS subscribers have terminated their subscription with another 10% planning to do so. Many of these could be doing so in sympathy with the anti-Thaksin protests.

Mobile phone users tend to be middle-class, and it's the middle-class that is driving the revolt against Thaksin.

However, the share price of AIS is so far holding up. In December, it was generally traded in the range of 100 - 112 baht per share. It is currently in the 90 - 100 baht range, so the market may not believe that the damage to AIS' turnover from the protests is as bad as it looks.

Perhaps, Temasek needs only to be able to hold on for a while and the worst will blow over for AIS. Then again, there may be more pain to come. Much depends on how the anti-Thaksin campaign plays out. If it drags on, or if an anti-Thaksin government takes over, then Temasek, Shin Corp and AIS may find themselves in deep "fertiliser".

 
Shin Satellite

Shin Corp owns 42% of Shin Satellite [3] which operates the telecommunications satellite Ipstar that is able to provide broadband Internet across Asia. The 49% rule has not yet been breached, but protestors say that the satellite is a national asset, and a national security issue, and so effective control should not pass to foreign hands.

Like AIS, the controversy may pass with a little time. In fact, with synergies from Singtel, better utilisation of the satellite may result. But like the question of AIS, it's too early to say how long the controversy will last.

Furthermore, the national security question, if it persists, may prove hard to resolve.

 
iTV

Shin Corp owns 53% of iTV, the country's only private television station. This too violates Thai Law in that foreigners are not supposed to have majority control of a TV station. In addition, the concession contract under which the Thai government gave iTV its waveband rights, specified that foreign shareholding should not exceed 25%.

However, Temasek may not be interested in iTV anyway, and so a sale may have been in the original plans.

 
Thai Air Asia

Temasek may also be uninterested in holding on to this too. Shin Corp had 50% of this joint venture with Kuala Lumpur-listed Air Asia.

Since the Malaysian 49% is clearly a foreign shareholding, if the Shin stake is now treated as foreign too, the airline would clearly exceed the maximum 49% foreign rule.

Temasek-controlled Shin Corp would obviously need to put its Thai Air Asia holdings into Thai hands to keep the airline flying.

With little fanfare, a resolution might have been made. A report dated 16 Feb 2006 on TmcNet said that

Who is Sittichai Veerathumnoon? Another nominee? Will Asia Aviation now be considered a Thai company, meaning Thai Air Asia will also be considered majority Thai? Or will this move prove insufficient, requiring a real sell-off?

Moreover, as The Edge, a business weekly, noted on 6 February 2006, under the shareholder agreement, "AirAsia has the pre-emptive right to purchase Shin Corp’s shares in Thai AirAsia and subsequently sell to another Thai company or individual if it cannot work with any new shareholder proposed by Shin Corp."

Would Temasek be screwed by Tony Fernandes, the founder of Air Asia?

* * * * *

 
Perhaps it had been the plan all along that after the big purchase, Temasek would tidy up the shareholdings one by one, to comply with Thai law. Now however, the anti-Thaksin protests have made the tidying up harder to do, what with the glare of publicity.

But this doesn't mean that the plans must be scuttled. Perhaps, they will take longer, that's all. That's the optimistic scenario.

The more pessimistic one would include a prolonged crisis. The protests depress the cash flow and profits of AIS (which provides about 90% of the income of Shin Corp) and the obtainable price for any parts that Temasek sells.

The cashflow from AIS must be critically important. We get a glimpse of this in the Kularb Kaew deal (see below). But it must also be important forTemasek to get its free float in Shin up to at least 15% (to stay listed), without major losses. How does one get more shareholders on board, and at a price like 49.25 baht per share (that Temasek originally paid) when AIS' (and therefore Shin Corp's) cashflow is suffering politically? Why would anyone pay 49.6 baht when, albeit on thin volumes, it is trading closer to 37 baht?

An even darker scenario would be that of an anti-Thaksin government taking over and going out of its way to screw the Temasek deal.

 
Kularb Kaew is 8 times leveraged

When Surin Upatkoon bought his 68% stake in Kularb Kaew, Temasek announced that he paid US$70 million of it. The Nation newspaper reported on 16 March 2006 that "Kularb Kaew raised its capital to Bt4 billion on March 13, up from Bt164 million last month and Bt100,000 when it was established on January 19."

The US$70 million that Surin paid would be about 2,720 million baht, representing 68% of the new paid-up capital of 4 billion baht.

Yet, as Kularb Kaew has an effective stake of 22% in Shin Corp, that stake would have cost an estimated 35 billion baht. Where did the extra 31 billion baht come from? Loans, almost surely. Note, it was mentioned earlier that 20 billion baht came as a loan from Temasek.

Assuming the collateral for the loan was the shares of Shin Corp that Kularb Kaew indirectly owned (through Cedar Holdings), this may present the uncomfortable prospect of Temasek being unable to exercise its rights should Kularb Kaew default. Temasek is not supposed to own even more of Shin Corp. Does that leave Temasek too exposed to risk?

Is a default far fetched? That depends. Is Kulard Kaew looking to cashflow from AIS to retire the loan? What if the political crisis drags on, or an anti-Thaksin government comes out of this present mess? Will AIS suffer badly?

* * * * *

 
Conclusion