TM International Partners with Tune Talk

· Celcom enters into agreement with Tune Talk
Celcom, a wholly owned subsidiary of TMI, entered into a Subscription Agreement and Shareholders’ Agreement with Tune Talk, whereby Celcom will subscribe for 2,625,000 ordinary shares of RM1.00 each of the enlarged issued and paid-up share capital of Tune Talk for a cash
consideration of RM2,625,000. In addition, Celcom will have a call option of 16% of the issued and paidup share capital of Tune Talk exercisable after 3 years from commercial launch or upon Tune Talk achieving 1.5m active subscribers continuously for 3 months, whichever is earlier. The price of the call option depends on Tune Talk’s profitability, and will be based on multiples of the audited EPS or NTA of Tune Talk.
· About Tune Talk
Tune Talk plans to offer mobile communications services as a mobile virtual network operator (MVNO). Tune Talk has an authorised share capital of RM5,000,000 comprising 5,000,000 ordinary shares of RM1,00 each of which 2,650,800 shares have been issued and paid-up.
Therefore, Celcom will presumably have 49.8% control of Tune Talk. Tune Talk’s majority shareholder is Tune Ventures, which is owned by Datuk Seri Tony Fernandes (40%), Datuk Kamarudin Meranun (30%), Dennis Melka (25%) and Tune Strategic Investments (5%).
· No change to earnings estimates
We make no change to our earnings estimates at this juncture as we believe that MVNOs face a difficult challenge to acquire and more importantly maintain subscribers in the long run. Without a mobile network, MVNOs are simply at a core disadvantage against mobile operators who have spent significant amounts on capex to build and establish their networks. In an unlikely event of a price war, MVNOs simply cannot compete on the same playing field as the mobile operators.
We note that Celcom has been the most aggressive mobile operator in allowing MVNOs to leverage upon its extensive network. These MVNOs are to capture specific segments of the markets where Celcom had not been very successful. However, we do believe that Celcom could also run into the risk of cannibalization by the very same MVNOs.
· Maintain BUY call, target price unchanged at RM5.95
We maintain our BUY call on TMI with an unchanged target price of RM5.95 based on sum-of-parts valuation. Risks include (1) lower than expected subscriber growth and consumer spending due to global credit crunch and (2) margin compression due to mobile number portability.